<PAGE> 1
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1993 in connection with
Registration No. 333-34043
[IMAGYN LOGO]
September 8, 1997
Dear Stockholders:
You are cordially invited to attend a special meeting (the "Imagyn Special
Meeting") of stockholders of Imagyn Medical, Inc. ("Imagyn"), to be held on
September 29, 1997, at the Sutton Place Hotel, 4500 MacArthur Boulevard, Newport
Beach, California 92660, commencing at 8:00 a.m., local time.
At the Imagyn Special Meeting, stockholders will be asked to consider and
vote upon a proposal to approve the Agreement and Plan of Merger dated as of
April 19, 1997, as amended (the "Merger Agreement"), among Urohealth Systems,
Inc., a Delaware corporation ("Urohealth"), Urohealth Acquisition Corporation, a
Delaware corporation and wholly owned subsidiary of Urohealth ("Urohealth Sub"),
and Imagyn, pursuant to which (i) Urohealth Sub will merge with and into Imagyn
(the "Merger"), (ii) each outstanding share of Common Stock, $.001 par value, of
Imagyn ("Imagyn Common Stock") will be converted into 1.40 shares of Common
Stock, $.001 par value, of Urohealth ("Urohealth Common Stock"), and (iii) each
outstanding option to purchase Imagyn Common Stock will be deemed to constitute
the right to acquire on the same terms and conditions a number of shares of
Urohealth Common Stock based on the merger exchange ratio for the underlying
Imagyn Common Stock.
Approval of the Merger Agreement, and thereby the Merger, requires the
affirmative vote of the holders of a majority of the voting power of all shares
of Imagyn Common Stock entitled to vote. Therefore, stockholders will be asked
to vote upon the Merger Agreement at the Imagyn Special Meeting.
The terms and conditions of the Merger Agreement are described in the
accompanying Proxy Statement/Prospectus. The complete text of the Merger
Agreement is attached as Appendix A to the Proxy Statement/Prospectus.
After careful consideration, your Board of Directors believes that the
Merger is fair and reasonable to, and in the best interests of, Imagyn and its
stockholders. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED
MERGER AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER AT THE
IMAGYN SPECIAL MEETING.
Please plan to attend the Imagyn Special Meeting. Management will comment
on the transaction at the Imagyn Special Meeting and will be available to answer
your questions.
We look forward to seeing you on September 29, 1997.
Sincerely,
[SIGNATURE]
Franklin D. Brown
President and Chief Executive Officer
<PAGE> 2
IMAGYN MEDICAL, INC.
27651 LA PAZ ROAD
LAGUNA NIGUEL, CALIFORNIA 92677
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 29, 1997
To the Stockholders of Imagyn:
NOTICE IS HEREBY GIVEN that a special meeting (the "Imagyn Special
Meeting") of the stockholders of Imagyn Medical, Inc., a Delaware corporation
("Imagyn"), will be held on September 29, 1997, at the Sutton Place Hotel, 4500
MacArthur Boulevard, Newport Beach, California 92660 commencing at 8:00 a.m.,
for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger dated as of April 19, 1997, as amended (the "Merger
Agreement"), among Urohealth Systems, Inc., a Delaware corporation
("Urohealth"), Urohealth Acquisition Corporation, a Delaware corporation
and wholly owned subsidiary of Urohealth ("Urohealth Sub"), and Imagyn,
pursuant to which (i) Urohealth Sub will merge with and into Imagyn (the
"Merger"), (ii) each outstanding share of Common Stock, $.001 par value,
of Imagyn ("Imagyn Common Stock") will be converted into 1.40 shares of
Common Stock, $.001 par value, of Urohealth ("Urohealth Common Stock"),
and (iii) each outstanding option to purchase Imagyn Common Stock will
be deemed to constitute the right to acquire on the same terms and
conditions a number of shares of Urohealth Common Stock based on the
merger exchange ratio for the underlying Imagyn Common Stock. A copy of
the Merger Agreement is attached as Appendix A to the accompanying Proxy
Statement/Prospectus.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on July 31, 1997, as
the record date for the determination of stockholders entitled to notice of and
to vote at the Imagyn Special Meeting or any adjournment thereof. Imagyn's
stockholders on the record date are entitled to one vote per share on any matter
that may properly come before the Imagyn Special Meeting.
Approval of the Merger Agreement, and thereby the Merger, requires the
affirmative vote of the holders of a majority of the voting power of all shares
of Imagyn Common Stock entitled to vote. Certain stockholders of Imagyn, owning
in the aggregate approximately 31% of the issued and outstanding Imagyn Common
Stock, have agreed to vote their shares in favor of the Merger.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE IMAGYN
SPECIAL MEETING. Proxies are revocable at any time prior to the time they are
voted, and stockholders who are present at the meeting may withdraw their
proxies and vote in person if they so desire.
Laguna Niguel, California
September 8, 1997
By Order of the Board of Directors
[SIGNATURE]
J. Casey McGlynn
Secretary
<PAGE> 3
UROHEALTH SYSTEMS, INC.
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 668-5858
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders (the
"Urohealth Annual Meeting") of Urohealth Systems, Inc. ("Urohealth") to be held
on September 29, 1997, at the Hyatt Newporter, 1107 Jamboree Road, Newport
Beach, California 92660, commencing at 8:00 a.m., local time.
At the Urohealth Annual Meeting, stockholders will be asked to consider and
vote upon seven proposals.
Proposal No. 1 is to consider and vote upon a proposal to adopt and approve
an amendment to Urohealth's Bylaws to provide for the classification of the
Urohealth Board of Directors into three classes (the "Board Classification
Proposal").
Proposal No. 2 is the election of a Board of Directors to serve until the
next annual meeting of stockholders, or if the Board Classification Proposal is
approved until expiration of the term of the class to which each director is
elected, or in each case until their successors are duly elected and qualified.
Proposal No. 3 is to consider and vote upon the approval of the Agreement
and Plan of Merger dated as of April 19, 1997, as amended (the "Merger
Agreement"), among Urohealth, Urohealth Acquisition Corporation, a Delaware
corporation ("Urohealth Sub"), and Imagyn Medical, Inc., a Delaware corporation
("Imagyn"), and the issuance of additional shares of Common Stock, $.001 par
value, of Urohealth ("Urohealth Common Stock") pursuant to the terms thereof
(the "Merger Proposal"). Pursuant to the Merger Agreement (i) Urohealth Sub, a
wholly-owned subsidiary of Urohealth, will merge with and into Imagyn (the
"Merger"), (ii) each outstanding share of Common Stock, $.001 par value, of
Imagyn ("Imagyn Common Stock") will be converted into 1.40 shares of Urohealth
Common Stock, (iii) each outstanding option to purchase Imagyn Common Stock will
be deemed to constitute the right to acquire on the same terms and conditions a
number of shares of Urohealth Common Stock based on the merger exchange ratio
for the underlying Imagyn Common Stock, and (iv) each outstanding share of
common stock, $.01 par value, of Urohealth Sub will be converted into one share
of Imagyn Common Stock.
Proposal No. 4 is ratification of the selection of Ernst & Young LLP as the
independent auditors of Urohealth for the fiscal year ending March 31, 1998 (the
"Accountants Proposal").
Proposal No. 5 is to consider and vote upon a proposal to amend the
Urohealth Certificate of Incorporation to increase the authorized number of
shares of Common Stock from 50 million to 100 million shares (the "Authorized
Stock Proposal").
Proposal No. 6 is to consider and vote upon a proposal to adopt and approve
an amendment to Urohealth's Certificate of Incorporation that would change the
name of Urohealth, subject to approval and consummation of the Merger, to Imagyn
Medical Technologies, Inc. (the "Name Change Proposal").
Proposal No. 7 is to consider and vote upon a proposal to amend Urohealth's
Certificate of Incorporation to require that any action of Urohealth
stockholders be taken at an annual or special meeting and not by written consent
(the "Written Consent Proposal").
The affirmative vote of the holders of a majority of the outstanding shares
of Urohealth Common Stock (and Convertible Debentures which vote on an "as
converted" basis) (collectively, "Voting Stock") represented and voted at the
Urohealth Annual Meeting is required to approve the Merger Proposal and the
Accountants Proposal. The affirmative vote of holders of a majority of the
issued and outstanding Voting Stock is required to approve the Board
Classification Proposal, the Authorized Stock Proposal, the Name Change Proposal
and the Written Consent Proposal. Subject to the rights of the holders of
Urohealth's Convertible Debentures, directors are elected by a plurality of the
Voting Stock represented and voting at the meeting. Therefore, stockholders will
be asked to vote upon each of these proposals.
<PAGE> 4
The terms and conditions of the Merger Agreement and the other proposals
are described in the accompanying Proxy Statement/Prospectus. The complete text
of the Merger Agreement is attached as Appendix A to the Proxy
Statement/Prospectus.
After careful consideration, your Board of Directors believes that the
Board Classification Proposal, the Merger Proposal, the Accountant's Proposal,
the Authorized Stock Proposal, the Name Change Proposal and the Written Consent
Proposal are fair and reasonable to, and in the best interests of, Urohealth and
its stockholders. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSALS
SET FORTH ABOVE AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH OF THE
PROPOSALS AT THE UROHEALTH ANNUAL MEETING.
It is important that your shares be voted at the Urohealth Annual Meeting,
regardless of the number of shares you hold. THEREFORE, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN
TO ATTEND THE UROHEALTH ANNUAL MEETING. This will not prevent you from voting
your shares in person if you do attend.
We look forward to seeing you on September 29, 1997.
Sincerely,
[SIGNATURE]
Charles A. Laverty,
President and Chief Executive Officer
<PAGE> 5
UROHEALTH SYSTEMS, INC.
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 668-5858
To the Stockholders of
Urohealth Systems, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the
"Urohealth Annual Meeting") of Urohealth Systems, Inc. ("Urohealth") will be
held on September 29, 1997, at the Hyatt Newporter, 1107 Jamboree Road, Newport
Beach, California 92660, commencing at 8:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to adopt and approve an amendment
to Urohealth's Bylaws to provide for the classification of the Urohealth
Board of Directors into three classes (the "Board Classification
Proposal").
2. To elect a Board of Directors to serve until the next annual meeting of
stockholders, or if the Board Classification Proposal is approved until
expiration of the term of the class to which each director is elected,
or in each case until their successors are duly elected and qualified.
3. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger dated as of April 19, 1997, as amended (the "Merger
Agreement"), among Urohealth, Urohealth Acquisition Corporation, a
Delaware corporation ("Urohealth Sub"), and Imagyn Medical, Inc., a
Delaware corporation ("Imagyn"), and the issuance of additional shares
of Urohealth Common Stock, pursuant to the terms thereof (the "Merger
Proposal"). Pursuant to the Merger Agreement (i) Urohealth Sub, a
wholly-owned subsidiary of Urohealth, will merge with and into Imagyn
(the "Merger"), (ii) each outstanding share of Common Stock, $.001 par
value, of Imagyn ("Imagyn Common Stock") will be converted into 1.40
shares of Urohealth Common Stock, (iii) each outstanding option to
purchase Imagyn Common Stock will be deemed to constitute the right to
acquire on the same terms and conditions a number of shares of Urohealth
Common Stock based on the merger exchange ratio for the underlying
Imagyn Common Stock, and (iv) each outstanding share of common stock,
$.01 par value, of Urohealth Sub will be converted into one share of
Imagyn Common Stock. A copy of the Merger Agreement is attached as
Appendix A to the accompanying Proxy Statement/Prospectus.
4. To ratify the selection of Ernst & Young LLP as the independent auditors
of Urohealth for the fiscal year ending March 31, 1998 (the "Accountants
Proposal").
5. To consider and vote upon a proposal to amend the Urohealth Certificate
of Incorporation to increase the authorized number of shares of Common
Stock from 50 million to 100 million shares (the Authorized Stock
Proposal").
6. To consider and vote upon a proposal to adopt and approve an amendment
to Urohealth's Certificate of Incorporation that would change the name
of Urohealth, subject to approval of the Merger Proposal and
consummation of the Merger, to Imagyn Medical Technologies, Inc. (the
"Name Change Proposal").
7. To consider and vote upon a proposal to amend Urohealth's Certificate of
Incorporation to require that any action of Urohealth stockholders be
taken at an annual or special meeting and not by written consent (the
"Written Consent Proposal").
8. To transact such other business as may properly come before the
Urohealth Annual Meeting or any adjournment thereof.
Only those stockholders of record at the close of business on July 31, 1997
will be entitled to notice of and to vote at the Urohealth Annual Meeting or any
adjournment thereof.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE
UROHEALTH ANNUAL MEETING. Proxies are revocable at any time prior to the time
they are voted, and stockholders who are present at the meeting may withdraw
their proxies and vote in person if they so desire.
Newport Beach, California
September 8, 1997 By Order of the Board of Directors
[SIGNATURE]
Kevin M. Higgins
Secretary
<PAGE> 6
UROHEALTH SYSTEMS, INC.
PROXY STATEMENT/PROSPECTUS
AND
IMAGYN MEDICAL, INC.
PROXY STATEMENT
FOR
MEETINGS OF STOCKHOLDERS
OF UROHEALTH SYSTEMS, INC.
TO BE HELD SEPTEMBER 29, 1997
AND
OF IMAGYN MEDICAL, INC.
TO BE HELD SEPTEMBER 29, 1997
This Proxy Statement/Prospectus of Urohealth Systems, Inc. ("Urohealth") and
Proxy Statement of Imagyn Medical, Inc. ("Imagyn") is furnished in connection
with the solicitation by the Board of Directors of Urohealth of proxies from
holders of Common Stock of Urohealth and of Convertible Debentures which vote
with the Common Stock on an "as converted" basis (collectively, "Urohealth
Voting Stock") for use at the annual meeting of Urohealth stockholders to be
held September 29, 1997 (the "Urohealth Annual Meeting") and in connection with
the solicitation by the Board of Directors of Imagyn of proxies from holders of
Common Stock of Imagyn ("Imagyn Common Stock") for use at the special meeting of
Imagyn stockholders to be held September 29, 1997 (the "Imagyn Special
Meeting"). This Proxy Statement/Prospectus relates to the merger of Urohealth
Acquisition Corporation, a Delaware corporation ("Urohealth Sub"), with and into
Imagyn (the "Merger") pursuant to the Agreement and Plan of Merger dated as of
April 19, 1997, as amended (the "Merger Agreement"), among Urohealth, Urohealth
Sub, a wholly-owned subsidiary of Urohealth, and Imagyn. In addition, at the
Urohealth Annual Meeting the holders of Urohealth Voting Stock will also be
asked to vote upon: (i) a proposal to classify the Urohealth Board of Directors
into three classes (the "Board Classification Proposal"); (ii) the election of a
Board of Directors to serve until the next annual meeting of stockholders, or if
the Board Classification Proposal is approved until expiration of the term of
each class to which a director is elected; (iii) the ratification of the
selection of Ernst & Young LLP as independent auditors of Urohealth for the
fiscal year ending March 31, 1998 (the "Accountants Proposal"); (iv) a proposal
to amend Urohealth's Certificate of Incorporation to increase the authorized
number of shares of Common Stock from 50 million to 100 million shares (the
"Authorized Stock Proposal"); (v) a proposal to amend Urohealth's Certificate of
Incorporation to change the name of Urohealth to Imagyn Medical Technologies,
Inc., subject to approval and consummation of the Merger (the "Name Change
Proposal"); and (vi) a proposal to amend Urohealth's Certificate of
Incorporation to require that any action of Urohealth stockholders be taken at
an annual or special meeting and not by written consent (the "Written Consent
Proposal").
This Proxy Statement/Prospectus of Urohealth also serves as a prospectus
under the Securities Act of 1933, as amended (the "Securities Act"), for (i) the
issuance of the shares and options to purchase shares of Urohealth Common Stock
into which shares of Imagyn Common Stock and options to purchase Imagyn Common
Stock (the "Imagyn Options") will be converted upon consummation of the Merger,
and (ii) the issuance of shares of Urohealth Common Stock upon exercise of
outstanding Imagyn Options.
If the Merger Agreement is approved by the stockholders of Imagyn and
Urohealth at their respective meetings, and if the other conditions specified in
the Merger Agreement are satisfied or waived, Imagyn will become a wholly-owned
subsidiary of Urohealth as a result of the Merger. Each outstanding share of
Imagyn Common Stock held by Imagyn stockholders will be converted into 1.40
shares of Urohealth Common Stock (the "Exchange Ratio"). Cash will be paid in
lieu of fractional shares. In addition, each outstanding option to purchase
Imagyn Common Stock will be deemed to constitute the right to acquire on the
same terms and conditions a number of shares of Urohealth Common Stock based on
the Exchange Ratio.
Urohealth Common Stock is traded on The Nasdaq National Market ("Nasdaq").
On April 18, 1997, the last trading day before the public announcement of the
proposed Merger, the closing price per share for Urohealth Common Stock was
$8.25 and the closing price per share for Imagyn Common Stock was $9.125.
Stockholders are encouraged to obtain current quotations for the market price of
Urohealth Common Stock and Imagyn Common Stock before voting on the Merger.
All information in this Proxy Statement/Prospectus concerning Urohealth and
its affiliates has been furnished by Urohealth and all information concerning
Imagyn and its affiliates has been furnished by Imagyn. The approximate date of
mailing of this Proxy Statement/Prospectus of Urohealth and Proxy Statement of
Imagyn is September 8, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 8, 1997
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. 3
SUMMARY............................................................................... 4
SUMMARY PRO FORMA SELECTED FINANCIAL DATA............................................. 8
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA.......................................... 9
MARKET PRICES......................................................................... 11
COMPARATIVE PER SHARE FINANCIAL INFORMATION........................................... 12
RISK FACTORS.......................................................................... 13
THE UROHEALTH ANNUAL MEETING.......................................................... 22
THE IMAGYN SPECIAL MEETING............................................................ 23
THE MERGER............................................................................ 25
CONDITIONS AND TERMS OF THE MERGER AGREEMENT.......................................... 42
PRICE RANGE OF COMMON STOCK AND DIVIDENDS............................................. 48
UROHEALTH SELECTED CONSOLIDATED FINANCIAL DATA........................................ 49
UROHEALTH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 50
IMAGYN SELECTED CONSOLIDATED FINANCIAL DATA........................................... 56
IMAGYN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 57
BUSINESS OF UROHEALTH................................................................. 62
MANAGEMENT OF UROHEALTH............................................................... 76
PRINCIPAL UROHEALTH STOCKHOLDERS...................................................... 79
COMPENSATION OF UROHEALTH DIRECTORS AND EXECUTIVE OFFICERS AND OTHER INFORMATION...... 81
PROPOSAL NO. 1 -- CLASSIFICATION OF THE BOARD OF DIRECTORS............................ 90
PROPOSAL NO. 2 -- ELECTION OF UROHEALTH DIRECTORS..................................... 91
PROPOSAL NO. 3 -- APPROVAL OF THE IMAGYN MERGER....................................... 93
PROPOSAL NO. 4 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS................. 93
PROPOSAL NO. 5 -- APPROVAL OF AN INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK............................................................... 94
PROPOSAL NO. 6 -- NAME CHANGE PROPOSAL................................................ 95
PROPOSAL NO. 7 -- WRITTEN CONSENT PROPOSAL............................................ 95
DESCRIPTION OF UROHEALTH CAPITAL STOCK................................................ 96
BUSINESS OF IMAGYN.................................................................... 100
MANAGEMENT OF IMAGYN.................................................................. 122
PRINCIPAL IMAGYN STOCKHOLDERS......................................................... 125
DESCRIPTION OF IMAGYN CAPITAL STOCK................................................... 127
LEGAL MATTERS......................................................................... 129
EXPERTS............................................................................... 129
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
APPENDIX A -- Agreement and Plan of Merger............................................ A-1
APPENDIX B -- Piper Jaffray Inc. Opinion.............................................. B-1
APPENDIX C -- Dillon, Read & Co. Inc. Opinion......................................... C-1
APPENDIX D -- Urohealth Bylaw Amendments.............................................. D-1
</TABLE>
2
<PAGE> 8
AVAILABLE INFORMATION
Urohealth and Imagyn are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by Urohealth and Imagyn can be inspected and copied at the
public reference facilities maintained by the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices of the
Commission: Midwest Regional Office: Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office: 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock of
Urohealth is listed on The Nasdaq National Market ("Nasdaq") under the symbol
"UROH." The Common Stock of Imagyn is listed on the Nasdaq under the symbol
"IGYN." In addition, the Commission maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including Urohealth and Imagyn, that
file electronically with the Commission.
Urohealth has filed a Registration Statement on Form S-4 under the
Securities Act with the Commission covering the Urohealth Common Stock to be
issued pursuant to the Merger Agreement. As permitted by the rules and
regulations of the Commission, this Proxy Statement/Prospectus does not contain
all information set forth in the Registration Statement and exhibits thereto,
all of which are available for inspection as set forth above. For further
information, please refer to the Registration Statement, including the exhibits
thereto. Statements contained in this Proxy Statement/Prospectus relating to the
contents of any contract or other document referred to herein are not
necessarily complete, and reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
All information in this Proxy Statement/Prospectus concerning Urohealth and
its affiliates has been furnished by Urohealth and all information concerning
Imagyn and its affiliates has been furnished by Imagyn. No person is authorized
to give any information or make any representation not contained in this Proxy
Statement/Prospectus and if given or made such information must not be relied
upon as having been authorized. This Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered hereby, or the solicitation of a proxy, in any jurisdiction
in which, or to any person to whom, it is unlawful to make such offer or
solicitation. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of shares of Urohealth Common Stock made hereunder shall, under any
circumstances, create any implication that there has not been any change in the
affairs of Urohealth, Urohealth Sub or Imagyn as of any time subsequent to the
date hereof.
3
<PAGE> 9
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. Certain capitalized terms are defined elsewhere
in this Proxy Statement/Prospectus. This summary is qualified in its entirety by
the more detailed information contained in this Proxy Statement/Prospectus and
the Appendices hereto.
THE COMPANIES
Urohealth Systems, Inc. Urohealth is a developer, manufacturer and
distributor of products for the urology, minimally invasive and general surgery,
and gynecology markets. Urohealth has a broad offering of products used by
healthcare professionals for patients suffering from impotence, incontinence and
other gynecological and urological disorders, and other conditions requiring
minimally invasive and general surgery. The principal executive offices of
Urohealth are located at 5 Civic Plaza, Suite 100, Newport Beach, California
92660, and Urohealth's telephone number is (714) 668-5858.
Urohealth Acquisition Corporation. Urohealth Sub is a wholly-owned
subsidiary of Urohealth formed solely for the purpose of merging with and into
Imagyn in the Merger.
Imagyn Medical, Inc. Imagyn designs, develops and markets micro-invasive
devices for diagnosis and treatment of gynecological and reproductive disorders.
Imagyn's proprietary technology, based on micro-optics and micro-access devices,
provides physicians with the ability to access and visualize the abdominal
cavity, the uterus and the fallopian tubes. The principal executive offices of
Imagyn are located at 27651 La Paz Road, Laguna Niguel, California 92677, and
Imagyn's telephone number is (714) 362-2500.
MEETINGS OF THE STOCKHOLDERS OF UROHEALTH AND IMAGYN
The Urohealth Annual Meeting will be held at 8:00 a.m., local time, on
September 29, 1997, at the Hyatt Newporter, 1107 Jamboree Road, Newport Beach,
California 92660.
The Imagyn Special Meeting will be held at 8:00 a.m., local time, on
September 29, 1997, at the Sutton Place Hotel, 4500 MacArthur Boulevard, Newport
Beach, California 92660.
At the Urohealth Annual Meeting and Imagyn Special Meeting, stockholders of
the respective corporations will be asked to consider and vote upon, among other
matters, a proposal to approve the Merger Agreement, a copy of which is attached
to this Proxy Statement/Prospectus as Appendix A including, in the case of
Urohealth, the issuance of the shares of Urohealth Common Stock under the Merger
Agreement (the "Merger Proposal"). In addition at the Urohealth Annual Meeting,
the holders of Urohealth Voting Stock will be asked to vote upon: (i) a proposal
to classify the Urohealth Board of Directors into three classes (the "Board
Classification Proposal"); (ii) the election of nine nominees to the Urohealth
Board of Directors to serve until the next annual meeting of stockholders, or if
the Board Classification Proposal is approved until expiration of the term for
the class to which each director is elected, or in each case until their
successors are duly elected and qualified (the "Directors Proposal"); (iii) a
proposal to ratify the appointment of Ernst & Young LLP as independent auditors
of Urohealth for the fiscal year ending March 31, 1998 (the "Accountants
Proposal"); (iv) a proposal to adopt and approve an amendment to Urohealth's
Certificate of Incorporation to increase the number of authorized shares of
Urohealth Common Stock from 50 million to 100 million shares (the "Authorized
Stock Proposal"); (v) a proposal to amend Urohealth's Certificate of
Incorporation to change the name of Urohealth to Imagyn Medical Technologies,
Inc., subject to approval and consummation of the Merger (the "Name Change
Proposal"); and (vi) a proposal to amend Urohealth's Certificate of
Incorporation to require that any action of Urohealth stockholders be taken at
an annual or special meeting and not by written consent (the "Written Consent
Proposal").
All shares of Urohealth Voting Stock and Imagyn Common Stock represented by
properly executed proxies will be voted at the respective Urohealth Annual
Meeting and Imagyn Special Meeting in accordance with the directions on the
proxies, unless such proxies have been previously revoked. If no direction is
indicated, in the case of Urohealth, the shares will be voted FOR the Merger
Proposal, the Board Classification Proposal, the Directors Proposal, the
Accountants Proposal, the Authorized Stock Proposal, the
4
<PAGE> 10
Name Change Proposal and the Written Consent Proposal. If no direction is
indicated, in the case of Imagyn, the shares will be voted FOR the Merger
Proposal. Any Urohealth or Imagyn stockholder giving a proxy may revoke his or
her proxy at any time before its exercise at the Urohealth Annual Meeting or the
Imagyn Special Meeting, as the case may be, by (1) filing written notice of such
revocation with the Secretary of Urohealth or Imagyn, as the case may be, or (2)
signing and delivering to such Secretary a proxy bearing a later date. However,
the mere presence at the Urohealth Annual Meeting or Imagyn Special Meeting of a
Urohealth or Imagyn stockholder who has delivered a valid proxy will not of
itself revoke that proxy. See "The Urohealth Annual Meeting -- Proxies: Voting
and Revocation" and "The Imagyn Special Meeting -- Proxies: Voting and
Revocation."
RECORD DATE AND VOTE REQUIRED
The record date for stockholders of Urohealth and Imagyn entitled to vote
at the meetings is July 31, 1997. Under the rules and regulations of the Nasdaq,
approval is required of the issuance of the shares of Urohealth Common Stock
under the Merger Agreement by the holders of a majority of the outstanding
shares of Urohealth Voting Stock represented at the Urohealth Annual Meeting in
person or by proxy. The affirmative vote of the holders of a majority of the
issued and outstanding shares of Urohealth Voting Stock is required to approve
the Board Classification Proposal, the Authorized Stock Proposal, the Name
Change Proposal and the Written Consent Proposal and the affirmative vote of the
holders of a majority of the Urohealth Voting Stock represented and voted at the
Urohealth Annual Meeting is required to approve the Accountants Proposal and the
Merger Proposal. Directors are elected by a plurality of the shares represented
and voting at the meeting, subject to the rights of the holders of Convertible
Debentures to elect two directors. In addition, the General Corporation Law of
the State of Delaware (the "DGCL") requires approval of the Merger Agreement by
the affirmative vote of the holders of a majority of the outstanding shares of
Imagyn Common Stock.
The DGCL also requires approval of the Merger Agreement by the affirmative
vote of the holders of a majority of the outstanding shares of Urohealth Sub
common stock. Urohealth, as owner of all such stock, has voted such shares for
approval of the Merger Agreement.
As of their respective record dates, the directors and officers of
Urohealth, and their affiliates, beneficially owned 9,167,890 shares of
Urohealth Voting Stock, representing approximately 28.8% of the outstanding
voting power of Urohealth and the directors and officers of Imagyn beneficially
owned 2,887,445 shares of Imagyn Common Stock, representing approximately 34.7%
of the outstanding shares of Imagyn Common Stock. Certain directors and officers
of Urohealth, and their affiliates, owning in the aggregate approximately 28% of
the outstanding voting power of Urohealth as of July 31, 1997 have agreed to
vote in favor of the Merger. Certain directors and officers of Imagyn, and their
affiliates, owning in the aggregate approximately 31% of the outstanding Common
Stock of Imagyn as of July 31, 1997 have agreed to vote in favor of the Merger.
TERMS OF THE MERGER
Under the terms of the Merger Agreement, (i) Urohealth Sub will merge with
and into Imagyn, (ii) each outstanding share of Imagyn Common Stock will be
converted into 1.40 shares of Urohealth Common Stock, (iii) each outstanding
option to purchase Imagyn Common Stock will be deemed to constitute the right to
acquire a number of shares of Urohealth Common Stock based on the exchange ratio
for the underlying Imagyn Common Stock, and (iv) each outstanding share of
common stock, $.01 par value, of Urohealth Sub will be converted into one share
of Imagyn Common Stock.
Based upon the number of outstanding shares of Urohealth Common Stock and
Imagyn Common Stock as of the record dates established for the meetings,
assuming that no cash is paid in lieu of fractional shares and without regard to
options or warrants to purchase, or securities convertible into, Urohealth or
Imagyn Common Stock, approximately 35.2 million shares of Urohealth Common Stock
will be outstanding upon consummation of the Merger, of which approximately 32%
of the total, will be held by former Imagyn stockholders.
5
<PAGE> 11
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Urohealth will enter into a non-competition agreement with Franklin D.
Brown, President and Chief Executive Officer of Imagyn, and will enter into
employment agreements with seven other management employees of Imagyn
concurrently with the consummation of the Merger. See "Conditions and Terms of
the Merger -- Interests of Certain Persons" and "-- Operation and Management of
Imagyn After the Merger" below.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware (the "Effective Time"),
which will occur on or after the date of the "closing." It is anticipated that
the certificate of merger will be filed promptly after the conditions to the
Merger are satisfied or waived, including obtaining the necessary approvals of
the Urohealth stockholders and the Imagyn stockholders. For more information,
see "Conditions and Terms of the Merger Agreement -- Closing and Effective Time
of the Merger" below.
CONDITIONS OF THE MERGER AND TERMINATION
In addition to approval of the Merger by the stockholders of Urohealth and
Imagyn, the consummation of the Merger is subject to a number of other
conditions which, if not fulfilled or waived, permit termination of the Merger
Agreement. The Merger Agreement may also be terminated at any time prior to
consummation of the Merger by mutual consent, and may be terminated by either
party if the Merger has not been consummated on or before September 30, 1997.
See "Conditions and Terms of the Merger Agreement -- Conditions of the Merger
Agreement" and "-- Termination of the Merger Agreement."
RECOMMENDATION OF THE BOARDS OF DIRECTORS OF UROHEALTH AND IMAGYN
The Boards of Directors of Urohealth and Imagyn have each unanimously
approved the Merger Agreement and the transactions contemplated thereby and
separately determined that the Merger is fair to and in the best interests of
their respective stockholders. ACCORDINGLY, THE BOARDS OF DIRECTORS OF UROHEALTH
AND IMAGYN UNANIMOUSLY RECOMMEND APPROVAL OF THE MERGER BY THEIR RESPECTIVE
STOCKHOLDERS. For a discussion of the reasons considered by the Boards of
Directors of Urohealth and Imagyn in approving the Merger Agreement, see "The
Merger -- Urohealth's Reasons for the Merger and Board of Directors'
Recommendation" and "-- Imagyn's Reasons for the Merger and Board of Directors'
Recommendation."
In addition, the Urohealth Board of Directors has unanimously approved the
Board Classification Proposal, the Accountants Proposal, the Authorized Stock
Proposal, the Name Change Proposal, the Written Consent Proposal and the
election of those persons nominated to serve on the Urohealth Board of
Directors. ACCORDINGLY, THE UROHEALTH BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
APPROVAL OF THESE PROPOSALS AND THE ELECTION TO THE BOARD OF DIRECTORS OF EACH
OF THE NOMINEES.
OPINION OF FINANCIAL ADVISORS
Piper Jaffray Inc. ("Piper Jaffray") delivered to the Board of Directors of
Urohealth its written opinion, dated July 16, 1997, to the effect that, as of
the date of such opinion and based upon and subject to certain matters stated
therein, the aggregate consideration proposed to be paid by Urohealth in the
Merger was fair, from a financial point of view, to Urohealth. A copy of Piper
Jaffray's opinion, which sets forth the assumptions made, matters considered and
limits on the review undertaken, is attached to this Proxy Statement/Prospectus
as Appendix B and should be read by Urohealth stockholders carefully in its
entirety. See "The Merger -- Opinion of Urohealth's Financial Advisor."
Dillon, Read & Co. Inc. ("Dillon Read") has delivered to the Board of
Directors of Imagyn its written opinion, dated July 16, 1997, to the effect
that, as of the date of such opinion and based upon and subject to
6
<PAGE> 12
certain matters stated therein, the Merger consideration to be received by the
holders of Imagyn Common Stock is fair to such holders from a financial point of
view. A copy of Dillon Read's opinion, which sets forth the assumptions made,
matters considered and limits on the review undertaken, is attached to this
Proxy Statement/Prospectus as Appendix C and should be read by Imagyn
stockholders carefully in its entirety. See "The Merger -- Opinion of Imagyn's
Financial Advisor."
Neither of the financial advisors intends to update its opinion as of any
date subsequent to the dates of their respective opinions included as Appendices
hereto.
EXCHANGE OF STOCK CERTIFICATES
Promptly after consummation of the Merger, American Stock Transfer and
Trust Company, or such other bank or trust company designated by Urohealth and
reasonably acceptable to Imagyn (the "Exchange Agent"), will mail written
transmittal materials concerning exchange of stock certificates to each record
holder of outstanding shares of Imagyn Common Stock. The transmittal materials
will contain instructions with respect to the proper method of surrender of
certificates formerly representing shares of Imagyn Common Stock in exchange for
certificates representing shares of Urohealth Common Stock. Upon surrender to
the Exchange Agent of certificates formerly representing shares of Imagyn Common
Stock for cancellation, together with properly completed transmittal materials,
an Imagyn stockholder will be entitled to receive a certificate representing the
number of whole shares of Urohealth Common Stock into which the stockholder's
shares of Imagyn Common Stock have been converted and a check for cash in lieu
of the issuance of any fractional share of Urohealth Common Stock. Imagyn
stockholders will not be entitled to receive interest on any such cash to be
received in the Merger. See "Conditions and Terms of the Merger Agreement --
Exchange of Stock Certificates."
FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a reorganization for United States federal
income tax purposes, and consummation of the Merger is conditioned upon the
receipt of opinions of counsel to Urohealth and Imagyn as described in
"Conditions and Terms of the Merger Agreement -- United States Federal Income
Tax Consequences." Subject to the limitations set forth therein, stockholders of
Imagyn are generally expected to recognize no gain or loss for United States
federal income tax purposes as a result of their exchange of Imagyn Common Stock
for Urohealth Common Stock in the Merger, except to the extent that Imagyn
stockholders receive cash in lieu of fractional shares.
ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a pooling-of-interests.
NO RIGHT TO DISSENT FROM THE MERGER
Under the General Corporation Law of the State of Delaware, neither holders
of Imagyn Common Stock nor holders of Urohealth Common Stock will be entitled to
rights of appraisal in connection with the Merger. See "Conditions and Terms of
the Merger Agreement -- Stockholders' Right to Dissent."
DELISTING OF IMAGYN STOCK
If the Merger is consummated, Imagyn Common Stock will cease to be traded
on the Nasdaq. In such event, Urohealth intends to apply to the Commission for
the deregistration of the Imagyn Common Stock under the Exchange Act.
RISK FACTORS
In considering whether to approve the Merger, Urohealth and Imagyn
stockholders should carefully review and consider the information below under
the caption "Risk Factors" beginning on page 13.
7
<PAGE> 13
SUMMARY PRO FORMA SELECTED FINANCIAL DATA
On April 19, 1997, Urohealth entered into an agreement to acquire Imagyn
Medical, Inc. by merger (the "Merger") of a wholly owned subsidiary of Urohealth
into Imagyn.
The following unaudited pro forma condensed consolidated balance sheet data
at June 30, 1997 reflects the historical consolidated balance sheets of
Urohealth and Imagyn, adjusted to give effect to the acquisition, as if such
acquisition had occurred at June 30, 1997.
The following unaudited pro forma condensed consolidated statement of
operations are presented to reflect the acquisition of Imagyn as if such
acquisition had occurred on April 1, 1996 for the year ended March 31, 1997 and
on April 1, 1997 for the three months ended June 30, 1997. The Imagyn
acquisition is probable and will be accounted for as a pooling of interests.
The following unaudited summary pro forma condensed consolidated financial
data are provided for comparative purposes only and should be read in
conjunction with the Unaudited Pro Forma Condensed Consolidated Financial
Statements beginning on page F-85 and the financial statements and notes thereto
of Urohealth and Imagyn included elsewhere herein. The following unaudited
summary pro forma condensed consolidated financial data do not purport to be
indicative of the results that would have occurred if the transactions described
above had been consummated on the dates indicated or that may be obtained in the
future.
UROHEALTH SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................... $108,493 $ 26,345
Loss from operations.................................... $(84,186) $ (8,965)
Loss before extraordinary item.......................... $(91,519) $(12,952)
Loss before extraordinary item attributable to common
stockholders......................................... $(91,917) $(12,952)
Loss per share before extraordinary item................ $ (2.92) $ (0.36)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
BALANCE SHEET DATA:
Working capital....................................................... $ 64,844
Total assets.......................................................... $226,833
Long-term liabilities, minority interest in subsidiary and redeemable
convertible preferred stock........................................ $167,109
Stockholders' equity.................................................. $ 16,478
</TABLE>
8
<PAGE> 14
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
Urohealth
The following summary selected consolidated financial data of Urohealth
have been derived from the financial statements of Urohealth which have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP"). The following data should be read in conjunction with
"Urohealth Selected Consolidated Financial Data," "Urohealth Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of Urohealth included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED 12-MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,(1) ENDED YEAR ENDED JUNE 30,
------------------------------ ------------------- MARCH 31, MARCH 31, ------------------
1993 1994 1995 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- ---------- ---------- ------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales................ $ 32,666 $ 39,376 $ 49,250 $ 34,467 $ 42,953 $ 56,630 $ 90,695 $17,318 $ 25,237
Gross profit............. 20,008 24,341 30,721 22,026 27,989 36,793 49,612 11,198 13,535
Selling, general and
administrative......... 26,298 36,114 41,057 28,839 37,056 47,977 57,691 10,685 16,863
Research and
development............ 6,332 11,480 5,406 4,752 2,777 3,881 4,997 800 1,665
Restructuring, direct
acquisition and other
costs(2)............... 563 1,000 7,663 6,812 9,688 10,539 62,832 -- --
-------- -------- -------- -------- -------- -------- -------- ------- --------
Loss from operations..... (13,185) (24,253) (23,405) (18,377) (21,532) (25,604) (75,908) (287) (4,993)
Interest expense......... 325 406 367 254 1,059 1,165 8,143 1,044 5,433
Loss before extraordinary
item................... (13,441) (24,804) (24,837) (19,299) (23,024) (27,527) (83,510) (1,290) (9,591)
Extraordinary item....... -- -- -- -- -- -- (2,973) (2,973) (1,823)
-------- -------- -------- -------- -------- -------- -------- ------- --------
Net loss................. $(13,441) $(24,804) $(24,837) $ 19,299 $(23,024) $(27,527) $(86,483) $(4,263) $(11,414)
Loss per share before
extraordinary item..... $ (1.04) $ (1.90) $ (1.70) $ (1.39) $ (1.58) $ (1.85) $ (4.31) $ (0.10) $ (0.40)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------------------- ------------------ JUNE 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents....................................... $10,161 $ 7,065 $ 2,857 $ 3,345 $ 2,591 $ 5,750
Working capital (deficit).................................. 17,307 12,784 5,909 (3,330) 1,714 30,508
Total assets............................................... 32,954 31,473 31,082 33,355 137,159 179,689
Short-term debt............................................ -- -- 1,689 9,549 14,518 5,268
Current portion of long-term debt.......................... 1,568 2,025 822 546 3,328 3,216
Long-term debt............................................. 1,475 1,529 2,674 8,272 98,292 53,269
Senior subordinated notes, net of discount................. -- -- -- -- -- 108,340
Redeemable convertible preferred stock..................... -- -- 1,143 3,554 -- --
Common stockholders' equity (deficiency)................... 23,825 19,537 12,941 (4,575) (14,511) (23,976)
</TABLE>
- ---------------
(1) During 1996, Urohealth 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.
9
<PAGE> 15
Imagyn
The following summary selected consolidated financial data of Imagyn have
been derived from the financial statements of Imagyn which have been prepared in
accordance with GAAP. The following data should be read in conjunction with
"Imagyn Selected Consolidated Financial Data," Imagyn Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of Imagyn included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales................................. $ 1,238 $ 1,047 $ 1,005 $ 2,243 $ 9,371 $ 3,972 $ 1,925
Cost of sales............................. 702 1,006 1,268 1,811 6,579 2,811 1,443
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)....................... 536 41 (263) 432 2,792 1,161 482
Costs and expenses:
Sales and marketing..................... 1,665 2,397 2,317 3,296 4,039 1,375 3,004
Research and development................ 1,917 1,917 1,797 1,811 2,708 1,421 2,119
General and administrative.............. 1,360 904 1,108 1,253 2,277 880 1,737
------- ------- ------- ------- ------- ------- -------
Total costs and expenses.............. 4,942 5,218 5,222 6,360 9,024 3,676 6,860
------- ------- ------- ------- ------- ------- -------
Other operating income.................... 1,000 -- -- 3,500 -- -- --
------- ------- ------- ------- ------- ------- -------
Loss from operations.................. (3,406) (5,177) (5,485) (2,428) (6,232) (2,515) (6,377)
------- ------- ------- ------- ------- ------- -------
Interest income (expense), net............ 178 337 175 (217) 1,826 340 1,225
------- ------- ------- ------- ------- ------- -------
Net loss.................................. $(3,228) $(4,840) $(5,311) $(2,645) $(4,408) $(2,179) $(5,155)
======= ======= ======= ======= ======= ======= =======
Net loss per share(l)..................... $ (0.76) $ (1.16) $ (1.26) $ (0.59) $ (0.61) $ (0.38) $ (0.59)
======= ======= ======= ======= ======= ======= =======
Shares used in computing net loss per
share(1)................................ 4,233 4,240 4,263 4,573 7,196 5,804 8,782
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996 JUNE 30, 1997
------- -------- -------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and cash
investments............................ $12,859 $ 7,269 $ 2,021 $ 9,340 $ 41,353 $ 33,647
Working capital.......................... 12,897 7,763 2,672 10,431 44,010 37,836
Total assets............................. 14,287 9,388 4,174 12,024 51,956 47,145
Convertible redeemable preferred stock... 19,950 20,030 20,122 9,936 -- --
Accumulated deficit...................... (7,527) (12,447) (17,838) (20,543) (24,951) (30,106)
Stockholders' equity (deficit)........... (7,524) (12,525) (17,912) (97) 48,889 43,954
</TABLE>
- ---------------
(1) See Note 17 of Notes to Consolidated Financial Statements of Imagyn for
information concerning the computation of net loss per share and pro forma
net loss per share.
10
<PAGE> 16
MARKET PRICES
Urohealth Common Stock
Urohealth's Common Stock is traded on the Nasdaq under the symbol "UROH."
Prior to November 26, 1996, Urohealth'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. For current price information, stockholders are encouraged to
consult publicly available sources. See "Price Range of Common Stock and
Dividends."
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996:
First quarter........................................ $13-7/8 $ 9
Second quarter....................................... $ 9-3/8 $ 6-3/16
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
Second quarter (through September 4, 1997)........... $ 6 $ 4
</TABLE>
Imagyn Common Stock
Imagyn Common Stock is traded on the Nasdaq National Market under the
symbol "IGYN." Prior to May 30, 1996, Imagyn's Common Stock was not publicly
traded. The following table sets forth the high and low sales prices per share
for the periods indicated. See "Price Range of Common Stock and Dividends."
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
Second quarter (from May 30, 1996)................... $17 $10-3/4
Third quarter........................................ $11-1/8 $ 7
Fourth quarter....................................... $10-7/8 $ 6-7/8
1997:
First quarter........................................ $10-1/8 $ 6-1/8
Second quarter....................................... $ 9-7/8 $ 6-7/8
Third quarter (through September 4, 1997)............ $ 6-7/8 $ 5-3/8
</TABLE>
11
<PAGE> 17
COMPARATIVE PER SHARE FINANCIAL INFORMATION
The following tables present selected historical per common share data for
Urohealth and Imagyn, pro forma data per share of Urohealth Common Stock and
equivalent pro forma data per share of Imagyn Common Stock. The Urohealth and
Imagyn data are derived from the respective consolidated financial statements of
Urohealth and Imagyn. The pro forma consolidated per share data and the Imagyn
pro forma equivalent per share data are derived from the Unaudited Pro Forma
Condensed Consolidated Financial Statements, included elsewhere herein, which
reflect the Merger accounted for as a pooling of interests. Additionally, the
unaudited pro forma condensed consolidated statements of operations for the
three months ended June 30, 1997, the year ended March 31, 1997, the nine month
period ended March 31, 1996 and for the year ended June 30, 1995 reflect the
results of operations of Urohealth combined with the results of operations of
Imagyn as if such merger had occurred at the beginning of each period. The
Imagyn Pro Forma Equivalent data are based on the respective pro forma amounts
per share of Urohealth Common Stock multiplied by 1.40, the number of shares of
Urohealth Common Stock issuable in exchange for one share of Imagyn Common Stock
in the Merger. All common share data have been restated to reflect stock splits
and stock dividends during the periods presented. This data should be read in
conjunction with the consolidated financial statements of Urohealth and Imagyn
and the Unaudited Pro Forma Condensed Consolidated Financial Statements included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
JUNE 30, 1995 MARCH 31, 1996 MARCH 31, 1997 JUNE 30, 1997
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
UROHEALTH
Net loss per share attributable to common
stockholders............................. $ (1.70) $(1.58) $(4.47) $ (0.48)
Book value of common stock................. $ 0.89 $(0.30) $(0.61) $ (1.01)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
----------------------------------------------- ENDED
1994 1995 1996 JUNE 30, 1997
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
IMAGYN
Net income (loss) per common share......... $ (1.26) $(0.59) $(0.61) $ (0.38)
Book value of common stock................. $(50.70) $(0.05) $ 6.16 $ 5.45
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
JUNE 30, 1995 MARCH 31, 1996 MARCH 31, 1997 JUNE 30, 1997
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
PRO FORMA CONSOLIDATED(1):
Net loss attributable to common
stockholders.......................... $ (1.31) $(1.12) $(2.92) $ (0.36)
Book value of common stock............... $ 0.88 $ 0.47
IMAGYN PRO FORMA EQUIVALENT(2):
Net loss attributable to common
stockholders.......................... $ (1.83) $(1.57) $(4.09) $ (0.50)
Book value of common stock............... $ 1.23 $ 0.66
</TABLE>
- ---------------
(1) Based on combined data for Urohealth and Imagyn after giving effect at the
beginning of each of the respective periods to the conversion of each share
of each such company's Common Stock into Urohealth Common Stock, at the
exchange rate.
(2) Represents the pro forma equivalent of one share of Imagyn Common Stock
calculated by multiplying pro forma combined data by the exchange ratio of
1.40.
12
<PAGE> 18
RISK FACTORS
The following factors, in addition to those discussed elsewhere herein,
should be carefully considered in evaluating the Merger and the receipt by
Imagyn stockholders of Urohealth Common Stock thereunder.
Significant Leverage. Urohealth has substantial indebtedness and
significant debt service obligations. At June 30, 1997, Urohealth had
approximately $170.1 million of indebtedness outstanding, approximately $179.7
million of total assets, approximately $121.0 million of total tangible assets
and approximately $(24.0) million of stockholders' equity. Urohealth's annual
debt service obligations are approximately $19 million per year.
Urohealth's ability to pay interest on its 12 1/2% Senior Subordinated
Notes (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 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. The Company was not in compliance
with certain financial covenants under its Credit Facility for the quarter ended
June 30, 1997, and has been granted a waiver through September 15, 1997 by its
senior lender that permits borrowings equal to the lesser of $15 million and 80%
of eligible accounts receivable under the facility. After giving effect to the
waiver, Urohealth's borrowing eligibility under the Credit Facility was
approximately $13.4 million. Subsequent to June 30, 1997, Urohealth borrowed
$13.3 million under the Credit Facility. In the absence of such financing,
including financing under the Credit Facility, Urohealth's ability to absorb
adverse operating results or to fund capital expenditures or research and
development, to respond to changing business and economic conditions and to make
future acquisitions may be adversely affected. 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, and a net loss of $11.4 million for the
three months ended June 30, 1997. Imagyn reported net losses for its fiscal
years ended December 31, 1994, 1995 and 1996 of $5.3 million, $2.6 million and
$4.4 million, respectively, and a net loss of $5.2 million for the six months
ended June 30, 1997. There can be no assurance that Urohealth or, after the
Merger, Urohealth and Imagyn (the "combined companies") will be profitable in
any future period. Urohealth has historically experienced negative cash flow
from operations. 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, and $22.9 million for the three months
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ended June 30, 1997. There can be no assurance that the operating activities of
the combined companies will generate sufficient cash flow to meet their
liquidity needs in any future period. The future capital requirements of the
combined companies will depend upon many factors, including the success of its
sales and marketing efforts, new product development, and future acquisitions of
companies and products. Urohealth believes that the net proceeds from the sale
of the Notes (the "Note Offering"), together with borrowings under the Credit
Facility (see "Significant Leverage"), cash and cash equivalents of Imagyn and
funds expected to be generated from operations will be adequate to fund
operations of the combined companies for the next 12 months. There can be no
assurance, however, that Urohealth or the combined companies 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, Urohealth 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, 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 combined companies will be dependent upon their 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 combined companies will also be dependent,
therefore, upon their ability to develop or acquire new products that are
competitive in the markets they serve. Product acceptance will depend upon many
factors, including the continued demonstration of the utility and
cost-effectiveness of products of the combined companies, 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
or Imagyn'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
combined companies. 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
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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 June 30, 1997, Urohealth had a total of $4.1 million of accounts
receivable on extended payment terms with Integrated Medical Resources, Inc.
("IMR") for sales of Urohealth's Rigiscan product pursuant to terms under which
the payments are due over 15-36 months. During the year ended March 31, 1997,
Urohealth sold approximately $5.8 million of products to IMR on extended payment
terms. IMR is a public company traded on the Nasdaq under the symbol "IMRI." For
its most recent fiscal year ended December 31, 1996, IMR reported a loss of $6.5
million. Bruce Hazuka, Chief Operating Officer of 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 or Imagyn's products and other medical devices, generally rely on
third-party payors, including private health insurance plans and federal
Medicare and state Medicaid, to reimburse all or part of the cost of the
procedure in which the medical device is being used. Reimbursement has
traditionally been available in the United States for vacuum erection devices
manufactured by Urohealth and sold by prescription to patients under a specific
reimbursement code. The majority of the remaining Urohealth products are used in
procedures for which reimbursement is generally available; however, there are no
specific reimbursement codes for Urohealth's products. Reimbursement for
traditional laparoscopy and hysteroscopy procedures performed using devices that
have received FDA approval has generally been available in the United States.
Nevertheless, there are no specific reimbursement codes for microlaparoscopy or
microhysteroscopy procedures. There can be no assurance that reimbursement will
be available for procedures performed using Urohealth's or Imagyn'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. Because
infertility procedures have not historically been reimbursed by health care
payors, Imagyn believes that it will be very difficult, if not impossible, to
obtain reimbursement for procedures performed using its Ovation systems in the
United States. 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 and Imagyn are
unable to predict what changes will be made in the reimbursement methods
utilized by third-party health care payors, and Urohealth and Imagyn 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 their respective products are used.
Failure by physicians, hospitals and other users of Imagyn's and 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 and Imagyn's
business, financial condition and results of operations.
Market acceptance of Urohealth's and Imagyn'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 and
Imagyn's products in international markets and therefore could have a material
adverse effect on Urohealth's and Imagyn's business, financial condition and
results of operations. See "Business of Imagyn -- Third-Party Reimbursement."
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
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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
Corporation and Microsurge, Inc. Urohealth has integrated the operations of
those acquired entities with its own operations. In addition, Urohealth will be
required to integrate the operation of Imagyn with Urohealth's operations upon
consummation of the Merger. No assurance can be given that the benefits expected
from such integration will be realized. In particular, there can be no assurance
that the strategic benefits derived from any particular acquisition will equal
or exceed the consideration paid. Furthermore, future acquisitions may involve
large one-time write-offs or ongoing charges for amortization of goodwill. Such
write-offs or charges could have a material adverse effect on Urohealth's
results of operations for the periods in which such charges are recorded. 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 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 and Imagyn will depend, in part, on their
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 their respective products. Urohealth and Imagyn own or have authority to
use United States and foreign patent rights with respect to some of their
respective medical products and have filed, and expect in the future to file,
additional patent applications. It is uncertain whether any third party patents
will require Urohealth or Imagyn to develop alternative technology or to alter
their products or processes, obtain licenses or cease certain activities. If
such licenses are required, there can be no assurance that Urohealth or Imagyn
will be able to obtain such licenses on commercially favorable terms, if at all.
Failure by Urohealth or Imagyn to obtain a license to any technology that it may
require to commercialize its products could have a material adverse effect on
the combined companies. Urohealth acquired X-Cardia and its cardiac output
monitoring technology and recently received approval of its patents filed with
respect to the technology. In addition, Imagyn is licensed under certain United
States and international patents and patent applications, holds certain United
States and international patents and has filed certain United States and
international patent applications. 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
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allow it to compete with large medical products companies. There can be no
assurance that Urohealth or Imagyn 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 or Imagyn will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide it with competitive advantages. In addition, Urohealth and Imagyn
could incur substantial costs in defending their 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 by 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 and Imagyn'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 combined
companies 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 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 and Imagyn'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 or
Imagyn sell their respective 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 or Imagyn. 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
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resources. Noncompliance with applicable requirements may have a material
adverse effect on Urohealth and Imagyn 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 or Imagyn 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 and Imagyn'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 or
Imagyn's determination regarding its 510(k)s. If the FDA were to disallow a
510(k) marketing clearance for any device, Urohealth or Imagyn 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 or Imagyn will obtain timely
regulatory approval for its future products, or that existing approvals will not
be withdrawn. Moreover, regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed.
Competition and Technological Change. The markets in which Urohealth and
Imagyn operate 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 combined
companies. In addition, biotechnology or pharmaceutical companies could
introduce drug-based solutions for medical conditions addressed by Urohealth's
products, which could have a material adverse effect on the competitive position
of certain of Urohealth's products. 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 and Imagyn will depend
on their 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 (solely
payable to Urohealth) on the life of Mr. Laverty in the amount of $5.0 million;
however, there can be no assurance that
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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 or Imagyn enter the market, the combined companies 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.
Potential Impact of Pending Legal Proceedings. In July 1997, several
complaints were filed against Urohealth, certain its officers and directors and,
in certain complaints, the lead underwriters of Urohealth's November 1996 public
offering, requesting certification of a class action, alleging various
violations of Federal securities laws and seeking unspecified compensatory
damages. The suits were filed in the United States District Court for the
Central District of California. All of the suits are based on substantially the
same facts and have been brought on behalf of purchasers of Common Stock of
Urohealth during various periods between July 18, 1996 and July 1, 1997. No
proceedings have taken place in any of the suits. There can be no assurance that
any of these suits will not result in an outcome unfavorable to Urohealth or
that the outcome of any of these suits will not have material adverse effect on
Urohealth's business, results of operations or financial condition.
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 Urohealth
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. In addition, the consummation of the Merger will likely result in an
additional ownership change.
Shares Eligible for Future Sale. As of result of the Merger, it is
anticipated that Urohealth will issue approximately 11.2 million shares of
Urohealth Common Stock (and approximately 280,000 shares of Urohealth Common
Stock will be issuable upon the exercise of the assumed Imagyn stock options).
In general, these shares will be freely tradeable following the Merger, subject
to certain resale restrictions for
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affiliates of Urohealth or Imagyn pursuant to Rules 144 and/or 145 under the
Securities Act. An aggregate of approximately 3,500,000 of the shares issued in
the Merger will be beneficially owned by affiliates of Imagyn and, therefore,
subject to the resale restrictions.
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 $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. See "Price Range of Common Stock and
Dividends."
In addition, the market price of Imagyn's Common Stock has experienced
significant volatility and may experience such volatility in the future. Factors
such as fluctuations in Imagyn's results of operations, failure of such results
of operations to meet the expectations of public market analysts and investors,
announcements of technological innovations or new products by Imagyn or its
competitors, FDA and international regulatory actions, actions with respect to
reimbursement matters, developments with respect to patents or proprietary
rights, public concern as to the safety of products developed by Imagyn or
others, changes in health care policy in the United States and internationally,
changes in stock market analyst recommendations regarding Imagyn, other medical
device companies or the medical device industry generally, and general market
conditions can, individually or in the aggregate, have a significant adverse
effect on the market price of Imagyn's Common Stock.
Risks Associated with Fixed Exchange Ratio. As a result of the Merger, each
outstanding share of Imagyn Common Stock will be converted into the right to
receive 1.40 shares of Urohealth Common Stock. The Merger Agreement does not
provide for adjustment of the Exchange Ratio based on fluctuations in the price
of Urohealth Common Stock. Because the Exchange Ratio is fixed and will not
increase or decrease due to fluctuations in the market price of either Urohealth
Common Stock or Imagyn Common Stock, Imagyn stockholders will not be compensated
for decreases in the market price of Urohealth Common Stock which could occur
before the Effective Time. In the event that the market price of Urohealth
Common Stock decreases or increases prior to the Effective Time, the market
value at the Effective Time of the Urohealth Common Stock to be received by
Imagyn stockholders in the Merger would correspondingly decrease or increase.
The market prices of Urohealth Common Stock and Imagyn Common Stock as of a
recent date are set forth herein under 'Summary -- Market Prices," and Imagyn
Stockholders are advised to obtain recent market quotations for Urohealth Common
Stock and Imagyn Common Stock. The Urohealth Common Stock
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<PAGE> 26
and the Imagyn Common Stock historically have been subject to substantial price
volatility. No assurance can be given as to the market prices of Urohealth
Common Stock or Imagyn Common Stock at any time before the Effective Time or as
to the market price of Urohealth Common Stock at any time thereafter.
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 and preferred stock of a subsidiary of Urohealth. See "Price Range of
Common Stock and Dividends."
Dilution. Holders of Imagyn Common Stock, who will receive Urohealth Common
Stock in the Merger, will incur immediate and substantial book value dilution.
See "Summary -- Comparative Per Share Financial Information."
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, Imagyn 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, prospective Urohealth and Imagyn stockholders are cautioned not
to place undue reliance on such forward-looking statements.
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THE UROHEALTH ANNUAL MEETING
TIME, DATE AND PLACE OF UROHEALTH ANNUAL MEETING
The Urohealth Annual Meeting will be held at 8:00 a.m., local time, on
September 29, 1997, at the Hyatt Newporter, 1107 Jamboree Road, Newport Beach,
California 92660.
BUSINESS TO BE CONDUCTED AT UROHEALTH ANNUAL MEETING
Each copy of this Proxy Statement/Prospectus mailed to Urohealth
stockholders is accompanied by a form of proxy solicited by the Board of
Directors of Urohealth for use at the Urohealth Annual Meeting and at any
adjournment thereof. At the Urohealth Annual Meeting, the Urohealth stockholders
will vote upon a proposal to approve the Merger Agreement and the issuance of
shares of Urohealth Common Stock thereunder (the "Merger Proposal"). See "The
Merger." In addition at the Urohealth Annual Meeting, the holders of the
Urohealth Voting Stock will be asked to vote upon: (i) a proposal to classify
the Urohealth Board of Directors into three classes (the "Board Classification
Proposal"); (ii) the election of nine nominees to the Urohealth Board of
Directors to serve until the next annual meeting of stockholders, or if the
Board Classification Proposal is approved until expiration of the term for the
class to which each director is elected, or in each case until their successors
are duly elected and qualified (the "Directors Proposal"); (iii) a proposal to
ratify the appointment of Ernst & Young LLP as independent auditors of Urohealth
for the fiscal year ending March 31, 1998 (the "Accountants Proposal"); (iv) a
proposal to adopt and approve an amendment to Urohealth's Certificate of
Incorporation to increase the number of authorized shares of Urohealth Common
Stock from 50 million to 100 million shares (the "Authorized Stock Proposal");
(v) a proposal to amend Urohealth's Certificate of Incorporation to change the
name of Urohealth to Imagyn Medical Technologies, Inc., subject to approval and
consummation of the Merger (the "Name Change Proposal"); and (vi) a proposal to
amend Urohealth's Certificate of Incorporation to require that any action of
Urohealth stockholders be taken at an annual or special meeting and not by
written consent (the "Written Consent Proposal"). See "The Merger," Proposal No.
1, Proposal No. 2, Proposal No. 3, Proposal No. 4, Proposal No. 5, Proposal No.
6 and Proposal No. 7.
PROXIES: VOTING AND REVOCATION
When a Urohealth proxy is properly executed and returned, the shares of
Urohealth Voting Stock it represents will be voted in accordance with the
directions indicated on the proxy, or if no directions are indicated, the shares
will be voted FOR the Merger Proposal, the Classified Board Proposal, the
Directors Proposal, the Accountants Proposal, the Authorized Stock Proposal, the
Name Change Proposal and the Written Consent Proposal. Any Urohealth stockholder
giving a proxy may revoke his or her proxy at any time before its exercise at
the Urohealth Annual Meeting by (1) giving written notice of such revocation to
Kevin M. Higgins, Secretary, Urohealth Systems, Inc., 5 Civic Plaza, Suite 100,
Newport Beach, California 92660, or (2) signing and delivering to Mr. Higgins a
proxy bearing a later date. However, the mere presence at the Urohealth Annual
Meeting of a Urohealth stockholder who has delivered a valid proxy will not of
itself revoke that proxy.
UROHEALTH STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO UROHEALTH IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE UROHEALTH ANNUAL
MEETING.
PROXY SOLICITATION
Urohealth will bear the cost of soliciting proxies from its stockholders.
Proxies will be solicited by personnel of Urohealth in person, by telephone or
through other forms of communication without payment of additional compensation
to such personnel. Additionally, arrangements will be made with brokerage houses
and other custodians, nominees and fiduciaries for the forwarding of proxy
solicitation materials to beneficial owners of Urohealth Common Stock held of
record by such custodians, nominees and fiduciaries, and for payment of
reasonable expenses incurred in connection therewith. Urohealth may retain a
proxy solicitation
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<PAGE> 28
firm to aid in soliciting proxies from its stockholders. The fees of such firm
are estimated not to exceed $5,000, plus reimbursement of out of pocket
expenses.
VOTE REQUIRED
The rules and regulations of the Nasdaq require approval of the issuance of
the shares of Urohealth Common Stock under the Merger Agreement by holders of a
majority of the shares of Urohealth Voting Stock represented at the Urohealth
Annual Meeting in person or by proxy. The affirmative vote of the holders of a
majority of the outstanding Voting Stock represented and voted at the Urohealth
Annual Meeting is required to approve the Accountants Proposal. The affirmative
vote of holders of a majority of the issued and outstanding Voting Stock is
required to approve the Board Classification Proposal, the Authorized Stock
Proposal, the Name Change Proposal and the Written Consent Proposal. Subject to
the rights of the holders of the Convertible Debentures, directors are elected
by a plurality of the Voting Stock represented and voting at the meeting and
cumulative voting in the election of directors is not permitted.
Only holders of record of Urohealth Voting Stock at the close of business
on July 31, 1997, are entitled to receive notice of, and to vote at, the
Urohealth Annual Meeting. At that date, there were 28,453,366 shares of
Urohealth Voting Stock outstanding and entitled to vote and 1,256 holders of
record thereof. As of that date, the directors and executive officers of
Urohealth, together with their affiliates, beneficially held an aggregate of
9,167,890 shares (and voting equivalents) of Urohealth Voting Stock
(representing approximately 28.8% of the outstanding voting power of Urohealth).
The holders of Urohealth Common Stock are entitled to one vote per share on each
matter submitted to a vote of the stockholders.
The holders of a majority of the voting power of Urohealth present in
person or by proxy, will constitute a quorum for the transaction of business at
the Urohealth Annual Meeting or any adjournment thereof. Abstentions are
included in the determination of the number of shares present and voting, are
counted in determining the number of shares voted on the proposals submitted to
stockholders (other than the election of directors) and will have the same
effect as a no vote on such proposals, whereas broker non-votes are not counted.
Directors are elected by a plurality of the votes of the shares of Voting Stock
represented and voted at the meeting and abstentions and broker non-voters will
have no effect on the outcome of the election of directors.
OTHER MATTERS
Urohealth is not presently aware of any other business to be brought before
the Urohealth Annual Meeting. If any matters come before the Urohealth Annual
Meeting which are not directly referred to in this Proxy Statement/Prospectus or
the enclosed proxy, including matters incident to the conduct of the Urohealth
Annual Meeting, the proxy holders will vote the shares represented by the
proxies in accordance with the recommendations of Urohealth management.
Representatives of Ernst & Young LLP, Urohealth's independent auditors, are
expected to be present at the Urohealth Annual Meeting and available to respond
to appropriate questions and to make a statement should they desire to do so.
THE IMAGYN SPECIAL MEETING
TIME, DATE AND PLACE OF IMAGYN SPECIAL MEETING
The Imagyn Special Meeting will be held at 8:00 a.m., local time, on
September 29, 1997, at the Sutton Place Hotel, 4500 MacArthur Boulevard, Newport
Beach, California 92660.
In the event that the Merger is not consummated, Imagyn will cause a 1997
annual meeting of stockholders to be held prior to December 31, 1997.
BUSINESS TO BE CONDUCTED AT IMAGYN SPECIAL MEETING
At the Imagyn Special Meeting, the Imagyn stockholders will vote upon a
proposal to approve the Merger Agreement. See "The Merger."
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<PAGE> 29
PROXIES: VOTING AND REVOCATION
When an Imagyn proxy is properly executed and returned, the shares of
Imagyn Common Stock it represents will be voted in accordance with the
directions indicated on the proxy, or if no directions are indicated, the shares
will be voted FOR the Merger Proposal. Any Imagyn stockholder giving a proxy may
revoke his or her proxy at any time before its exercise at the Imagyn Special
Meeting by (1) giving written notice of such revocation to J.C. MacRae, Imagyn
Medical, Inc., 27651 La Paz Road, Laguna Niguel, California 92677; (2) or
signing and delivering to Mr. MacRae a proxy bearing a later date. However, the
mere presence at the Imagyn Special Meeting of an Imagyn stockholder who has
delivered a valid proxy will not of itself revoke that proxy.
IMAGYN STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO IMAGYN IN THE ENCLOSED POSTAGE-PAID
ENVELOPE, EVEN IF YOU ARE PLANNING TO ATTEND THE IMAGYN SPECIAL MEETING.
PROXY SOLICITATION
Imagyn will bear the cost of soliciting proxies from its stockholders.
Proxies will be solicited by personnel of Imagyn in person, by telephone or
through other forms of communication without payment of additional compensation
to such personnel. Additionally, arrangements will be made with brokerage houses
and other custodians, nominees and fiduciaries for the forwarding of proxy
solicitation materials to beneficial owners of Imagyn Common Stock held of
record by such custodians, nominees and fiduciaries, and for payment of
reasonable expenses incurred in connection therewith. Imagyn may retain a proxy
solicitation firm to aid in soliciting proxies from its stockholders. The fees
of such firm are estimated not to exceed $5,000, plus reimbursement of out of
pocket expenses.
VOTE REQUIRED
Under the Delaware General Corporation Law, the holders of a majority of
the outstanding shares of Imagyn Common Stock must approve of the Merger
Agreement.
Only holders of record of Imagyn Common Stock at the close of business on
July 31, 1997, are entitled to receive notice of, and to vote at, the Imagyn
Special Meeting. As of the record date, there were 8,061,999 shares of Imagyn
Common Stock outstanding and entitled to vote, with each such share entitled to
one vote, and 88 holders of record thereof. As of the record date for the Imagyn
Special Meeting, the directors and executive officers of Imagyn, together with
their affiliates, beneficially held an aggregate of 2,887,445 shares of Imagyn
Common Stock (representing approximately 34.7% of the outstanding shares of
Imagyn Common Stock).
The holders of a majority of the outstanding Common Stock of Imagyn present
in person or by proxy, will constitute a quorum for the transaction of business
at the Imagyn Special Meeting or any adjournment thereof. Abstentions are
included in the determination of the number of shares present and voting, are
counted in determining the number of shares voted on the proposals submitted to
stockholders and will have the same effect as a no vote on such proposals,
whereas broker non-votes are not counted.
Certain stockholders of Imagyn owning in the aggregate 2,485,323 shares of
Imagyn Common Stock (approximately 31% of the outstanding shares of Imagyn
Common Stock) have agreed to vote in favor of the Merger.
OTHER MATTERS
Imagyn is not presently aware of any other business to be brought before
the Imagyn Special Meeting.
The firm of Coopers & Lybrand L.L.P., independent accountants, audited the
books, records and accounts of Imagyn for each of the years in the three year
period ended December 31, 1996. A representative of Coopers & Lybrand L.L.P.
will be present at the Imagyn Special Meeting. The representative will have an
opportunity to make a statement if he or she desires to do so and will be
available to respond to appropriate questions from stockholders.
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THE MERGER
GENERAL
The descriptions in this Proxy Statement/Prospectus of the terms and
conditions of the Merger and the Merger Agreement are qualified in their
entirety by reference to the copy of the Merger Agreement attached as Appendix A
hereto, and to each of the other Appendices hereto. Stockholders are encouraged
to read the Merger Agreement in its entirety.
The Merger Agreement provides for the acquisition of Imagyn by Urohealth
through the merger of Urohealth Sub with and into Imagyn, provided that all
conditions to consummation of the Merger are satisfied or waived. Imagyn will be
the surviving corporation in the Merger and, as a consequence thereof, will
become a wholly-owned subsidiary of Urohealth. It is contemplated that the
Effective Time for the Merger will occur as soon as practicable after the
Urohealth Annual Meeting and the Imagyn Special Meeting, and upon satisfaction
or waiver of all of the other conditions set forth in the Merger Agreement. The
Effective Time is presently anticipated to occur on or before September 30,
1997. See "Conditions and Terms of the Merger Agreement."
While Urohealth is continually in the process of exploring opportunities
for strategic alliances or acquisitions, because of the strategic nature of the
proposed Imagyn acquisition, Urohealth did not solicit any specific alternative
acquisition proposals to the transaction with Imagyn.
BACKGROUND OF THE MERGER
Commencing in late summer 1996, Imagyn's Board of Directors and senior
management commenced an evaluation of the strategies underlying Imagyn's
business plan with a principal focus on competitive trends in the women's health
care products market and the overall impact of trends in the healthcare industry
on Imagyn. The Board considered various strategies for addressing business and
competitive factors being faced by Imagyn, including seeking additional
distribution arrangements for Imagyn's products with other potential commercial
partners as well broadening Imagyn's product line through acquisitions of other
medical device companies, product lines or technologies.
Beginning in late September and early October 1996, Imagyn was engaged in
discussions with Genzyme Corporation concerning a possible distribution
arrangement under which Genzyme would distribute certain of Imagyn's products
that are not covered by Imagyn's existing distribution relationship with United
States Surgical Corporation ("USSC"). During the fall of 1996, the discussions
with Genzyme concerning a potential distribution arrangement progressed to
include discussions relating to the potential acquisition of Imagyn. After an
extensive review of Imagyn's business, Genzyme advised Imagyn in December 1996
that it had decided not to pursue such discussions further.
On October 2, 1996, Imagyn retained Fletcher Spaght, Inc. ("Fletcher") as
an advisor to assist Imagyn in identifying potential acquisition candidates that
could enhance Imagyn's position in the obstetrics and gynecology markets as well
as in the urology and urogynecology markets. In December 1996, Fletcher reported
to Imagyn's Board of Directors on the status of its search. In this report,
Fletcher reviewed its search methodologies and the number of candidates
screened. Representatives of Fletcher noted that although several hundred
candidates had been screened, it was likely that only a small number would fit
Imagyn's acquisition criteria. On February 12, 1997, Fletcher presented the
results of its search to Imagyn. Although several potential candidates were
identified, Imagyn determined that only a few of these candidates should be
approached for further consideration. After contact, none of these candidates
indicated a willingness to enter into discussions or negotiations regarding a
possible acquisition by Imagyn.
During October 1996, Imagyn was approached by the Chief Executive Officer
of Urohealth concerning the possibility of a business combination transaction.
On October 4, 1996, Imagyn retained Dillon Read to advise it with respect to a
possible acquisition of Imagyn. Imagyn's Board of Directors was consulted with
respect to the identities of potential acquirors of Imagyn. A list of potential
acquirors was developed, and several of the directors initiated contact with
such potential acquirors, including Boston Scientific Corporation, Johnson &
Johnson and Pfizer, Inc. The Board discussed potential acquisition candidates at
its October 30,
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1996, meeting. In addition, during this meeting, Urohealth's Chief Executive
Officer, Charles Laverty, provided a report on the business of Urohealth to the
Imagyn Board of Directors. In late November, Urohealth proposed a price which
was considered too low at the time, and that proposal was rejected. However,
discussions with Urohealth's Chief Executive Officer continued over the
following months.
During the fall of 1996 and ensuing winter, discussions with potential
acquirors other than Urohealth continued. Imagyn representatives made a
presentation to Pfizer before the end of the year, and discussions with Pfizer,
as well as due diligence activities by Pfizer in the field, continued into
January and early February. In February 1997, Pfizer notified Imagyn that it had
elected not to continue possible acquisition discussions. After several
conversations between representatives of Imagyn and Boston Scientific, it became
apparent that timely discussions would not take place and the decision was made
to terminate such discussions. Johnson & Johnson elected not to engage in
discussions with Imagyn, primarily due to an existing strategic relationship
with one of Imagyn's competitors.
In mid-January, Urohealth again approached Imagyn with a proposal, but
because Imagyn had not yet informed Urohealth regarding certain factors that
could potentially cause Imagyn's results of operations for the first quarter of
fiscal 1997 to fall below market expectations, Imagyn determined that
Urohealth's proposal was not made with complete information regarding Imagyn.
However, the Imagyn Board discussed a potential transaction with Urohealth at
its January 21, 1997 meeting, as well as discussing various issues relating to
the potential acquisition of Imagyn, including a presentation made by Dillon
Read concerning the potential transaction. Following the meeting,
representatives of Imagyn informed Urohealth's Chief Executive Officer of the
changes in Imagyn's anticipated results of operations for the first quarter of
1997. On January 31, 1997, Urohealth responded with a proposal under which
Urohealth would acquire Imagyn subject to satisfactory completion of due
diligence and other conditions. At Imagyn's February 19, 1997 Board meeting, the
terms of Urohealth's proposal and various other aspects of the acquisition
transaction were reviewed by Imagyn's Board. At that meeting, representatives of
Dillon Read again met with the Board to discuss the financial aspects of the
transaction, and the Board was advised by representatives of Wilson Sonsini
Goodrich & Rosati, Imagyn's legal counsel ("Wilson Sonsini"), concerning the
legal aspects of the transaction, including a review of a draft definitive
Merger Agreement ("the Original Merger Agreement") that had been provided by
Urohealth.
Pursuant to its obligations under its agreements with United States
Surgical Corporation ("USSC"), Imagyn notified USSC that it had received the
offer and was prepared to fulfill its obligations to USSC with respect to USSC's
60-day right of first negotiation. During January and February of 1997, members
of Imagyn's Board met twice with Urohealth's Chief Executive Officer and other
Urohealth representatives to discuss various aspects of a combination
transaction between the companies, and to discuss the potential synergies that
could be achieved by a combined company. During this period, Imagyn and its
representatives conducted a due diligence review of Urohealth and its business,
including a review of several significant transactions recently consummated by
Urohealth.
On March 3, 1997, USSC informed Imagyn that it had elected not to conduct
due diligence investigations of Imagyn's business or pursue further negotiations
with Imagyn regarding a possible acquisition of Imagyn.
In early March 1997, Urohealth advised Imagyn that because of a recently
initiated financing transaction, Urohealth was not in a position to continue its
due diligence of Imagyn or to continue discussions regarding a potential
transaction. After completion of Urohealth's financing transaction in April
1997, Urohealth advised Imagyn that Urohealth was once again in a position to
continue discussions regarding a possible business combination. Urohealth
requested additional due diligence information from Imagyn, and the respective
financial advisors to Urohealth and Imagyn continued discussions regarding the
financial terms of a business combination. A revised draft of the Original
Merger Agreement was circulated, and the parties began negotiation of a
definitive agreement.
At its meeting on April 14, 1997, the Imagyn Board again discussed the
transaction, and received further analysis and advice concerning financial and
legal aspects of the transaction from representatives of Dillon
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Read and Wilson Sonsini. The results of the due diligence review of Urohealth
were also discussed at this meeting.
On April 18, 1997, the Board of Directors of Imagyn met to discuss and
review the terms of the Original Merger Agreement, which provided for an
exchange ratio of 1.0358 shares of Urohealth Common Stock per share of Imagyn
Common Stock. Imagyn's management and advisors made presentations concerning the
terms of the Original Merger Agreement and Dillon Read delivered its oral
opinion to the effect that, as of such date and based upon and subject to
various qualifications and assumptions described in its subsequent written
opinion, the consideration proposed to be received by holders of Imagyn Common
Stock was fair to such holders from a financial point of view. See "Opinion of
Imagyn's Financial Advisor." At such meeting, the Imagyn Board approved the
Original Merger Agreement, including the Exchange Ratio, by a unanimous vote and
recommended that the holders of Imagyn Common Stock vote in favor of the
approval and adoption of the Original Merger Agreement.
On April 19, 1997, Urohealth held a meeting of its Board of Directors.
After discussions among the Board of Directors, Urohealth management and its
advisors, and a review of the terms of the Original Merger Agreement, the Board
of Directors unanimously approved the Original Merger Agreement, including the
exchange ratio, and authorized the senior executive officers of Urohealth to
finalize and execute the Original Merger Agreement.
The Original Merger Agreement was executed by Urohealth and Imagyn on
Saturday, April 19, 1997, and the terms of the Original Merger Agreement were
publicly announced prior to the beginning of trading on Monday, April 21, 1997.
In late June 1997, Urohealth made Imagyn aware of certain accounting issues
raised by Urohealth's independent auditors in the course of their audit of
Urohealth's financial statements for the fiscal year ended March 31, 1997, and
of the fact that Urohealth would restate its results of operations for the first
three fiscal quarters of fiscal 1997. See Note 14 of Notes to Consolidated
Financial Statements of Urohealth. Between June 30 and July 7, 1997, Imagyn and
its financial and legal advisors conducted a due diligence investigation of
these issues, and the Imagyn Board held two specially scheduled meetings to
discuss these issues and their potential effect on Urohealth and on the Merger.
On July 9, 1997, Imagyn received correspondence from USSC containing an
unsolicited offer from USSC to purchase all of the outstanding stock of Imagyn
for an aggregate of $52.5 million in cash or USSC common stock or some
combination of cash and USSC common stock, and certain other provisions. The
USSC offer stated that it was subject to completion of due diligence by USSC and
included a provision for a break-up fee payable by Imagyn. On July 9, 1997, the
Imagyn Board again met to discuss the terms of the Merger in light of the
accounting issues and the unsolicited offer from USSC. At the meeting,
Urohealth's Chief Executive Officer made a presentation to the Imagyn Board
explaining the restatement and the financial position of Urohealth. Imagyn's
management and its financial and legal advisors also made presentations
concerning the terms of the Original Merger Agreement.
On July 10, 1997, representatives of Imagyn and Urohealth met to consider
potential changes in the terms of the Original Merger Agreement. Imagyn's
representatives advised Urohealth's representatives of Imagyn's belief that the
original exchange ratio of 1.0358 should be increased to reflect the current
trading value of the Urohealth Common Stock and in light of the unsolicited
offer received from USSC. Urohealth's representatives advised Imagyn that
Urohealth would consider a modification to the original exchange ratio, provided
the Original Merger Agreement also was amended to make it more likely that the
Merger would be consummated. Between July 10 and July 16, 1997, Imagyn and its
financial and legal advisors and independent auditors continued conducting due
diligence activities concerning the accounting issues and Urohealth's
restatement of its results of operations.
On July 11, 1997, Urohealth and Imagyn and its advisors held a series of
discussions regarding a modification to the original exchange ratio and the
terms of Amendment No. 1 to the Original Merger Agreement ("Amendment No. 1").
Later on July 11, the Urohealth Board approved Amendment No. 1 (including the
increase in the exchange ratio from 1.0358 to 1.40 shares of Urohealth Common
Stock per
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share of Imagyn Common Stock, the increase in the amount of the cancellation fee
payable by Imagyn to Urohealth under certain circumstances from $3,500,000 to
$5,000,000 and the increase in the amount of the expense reimbursement fee
payable by either party to the other under certain other circumstances from
$1,000,000 to $2,000,000).
Also on July 11, Imagyn responded to USSC that it would review USSC's
proposal of July 9 at the Imagyn Board meeting scheduled for Monday, July 14.
On Monday, July 14, 1997, the Imagyn Board met to consider the proposed
Amendment No. 1 and the July 9 unsolicited offer from USSC. In evaluating the
proposed Amendment No. 1 and the USSC offer, the Board discussed the relative
values of the common stock of USSC and Urohealth and the definitive Original
Merger Agreement in place between Imagyn and Urohealth. The Imagyn Board also
discussed the need for an updated fairness opinion from Dillon Read before
reaching a conclusion with respect to entering into Amendment No. 1.
On July 15, 1997, Imagyn received additional correspondence in which USSC
increased its offer from $52.5 million to $57.5 million in cash or USSC Common
Stock or any combination of cash and USSC common stock, and certain other
provisions. The USSC offer stated that it was subject to completion of due
diligence by USSC and included a provision for a break-up fee payable by Imagyn.
USSC publicly announced the terms of its July 15 offer on the morning of July
16, 1997.
On July 16, 1997, the Imagyn Board met to consider the proposed Amendment
No. 1, the July 15 unsolicited offer from USSC and the results of the due
diligence conducted to date by Imagyn's management and financial and legal
advisors. In evaluating the proposed Amendment No. 1 and the USSC offer, the
Board discussed the relative values of the common stock of USSC and Urohealth,
the synergies that could potentially be achieved by combining Imagyn's and
Urohealth's business operations and the greater likelihood that the Merger would
be completed since Urohealth had completed its due diligence review of Imagyn
and since Imagyn and Urohealth had negotiated a definitive agreement. Imagyn's
management and legal and financial advisors made presentations concerning the
amendments to the Original Merger Agreement that would be effected by Amendment
No. 1, as well as outstanding due diligence items. Dillon Read delivered its
oral opinion to the effect that, as of such date and based upon and subject to
various qualifications and assumptions described in its subsequent written
opinion, the consideration proposed to be received by the holders of Imagyn
Common Stock pursuant to Amendment No. 1 was fair to such holders from a
financial point of view. See "Opinion of Imagyn's Financial Advisor." The Imagyn
Board directed Imagyn's management and its independent auditors to continue
their due diligence activities in anticipation of another Imagyn Board meeting
on July 17.
On July 17, 1997, Imagyn received additional correspondence from USSC in
which USSC enhanced its July 15 offer by increasing the purchase price to $61
million, to be reduced by the amount of any cancellation fee that would have to
be paid to Urohealth in the event the Merger Agreement were terminated in order
for Imagyn to accept the USSC offer, and certain other provisions. The offer
provided that it was not negotiable.
On July 17, 1997, the Imagyn Board met to consider the proposed
modification to the original exchange ratio that had been discussed by the
parties and their financial and legal advisors and the other amendments to the
Original Merger Agreement proposed to be effected by Amendment No. 1 thereto,
and to consider the enhanced July 15 unsolicited offer from USSC and the results
of the due diligence conducted by Imagyn's management. Imagyn's management and
legal advisors made presentations concerning the amendments to the Original
Merger Agreement that would be effected by Amendment No. 1, including the
following provisions: (i) the increase in the exchange ratio from 1.0358 to 1.40
shares of Urohealth Common Stock per share of Imagyn Common Stock; (ii) the
increase in the amount of the cancellation fee payable by Imagyn to Urohealth
under certain circumstances from $3,500,000 to $5,000,000; and (iii) the
increase in the amount of the expense reimbursement fee payable by either party
to the other under certain other circumstances from $1,000,000 to $2,000,000. In
evaluating the proposed Amendment No. 1 and the enhanced USSC offer, the Board
discussed the relative values of the common stock of USSC and Urohealth, the
synergies that could potentially be achieved by combining Imagyn's and
Urohealth's business operations and the greater likelihood that the Merger would
be completed since Urohealth had completed its due diligence review of Imagyn
and since Imagyn and Urohealth had negotiated a definitive agreement. At such
meeting the Imagyn Board
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approved Amendment No. 1 (including the increase of the original exchange ratio
from 1.0358 to 1.40 shares of Urohealth Common Stock per share of Imagyn Common
Stock) by a unanimous vote of those directors present and recommended that the
holders of Imagyn Common Stock vote in favor of the approval and adoption of the
Merger Agreement, as amended. The parties executed and delivered Amendment No. 1
as of July 17, 1997, and Urohealth and Imagyn publicly announced the Exchange
Ratio and the execution of Amendment No. 1 prior to the beginning of trading on
July 18, 1997.
CERTAIN INFORMATION CONCERNING UROHEALTH
As a matter of course, Urohealth does not publicly disclose forward-looking
financial information. Nevertheless, in connection with its review of
Urohealth's business, Dillon Read and the management and Board of Directors of
Imagyn, as well as Piper Jaffray and the Board of Directors of Urohealth, were
furnished preliminary financial targets prepared by management of Urohealth.
Revenue growth for Urohealth on a stand-alone basis was projected to increase by
approximately 82.1% in fiscal 1998 and 36.2% in fiscal 1999 due to continued
expansion of direct sales representatives, sales to group purchasing
organizations, implementation of a distributor sales strategy with respect to
Urohealth's surgical project line and acquisitions closed in 1997 which will
operate with Urohealth for the entire 1998 and 1999 fiscal years. Although its
operating income before depreciation and amortization ("EBITDA") was negative
for fiscal 1997, Urohealth was projected to generate operating profit on a
stand-alone basis in fiscal 1998, as a result of the reduction of duplicative
operating expenses relating primarily to acquisitions, and EBITDA growth for
Urohealth on a stand-alone basis was projected to increase by approximately
70.7% in fiscal 1999. The statement regarding Urohealth's preliminary financial
targets constitutes a "forward-looking statement" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act and is subject to
the safe harbors created thereby. These preliminary financial targets were based
on the assumptions that Urohealth would continue to develop and introduce new
products on a timely basis, that competitive conditions within the medical
device industry would not change materially or adversely, that the market for
Urohealth's products would remain strong, and that there would be no material
adverse change in Urohealth's operations or business. Such assumptions involve
judgments with respect to, among other things, future economic, competitive and
regulatory conditions, financial market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Urohealth. While Urohealth believes that
the assumptions underlying the preliminary financial targets are reasonable, any
of the assumptions could prove inaccurate and therefore, there can be no
assurance that the forward-looking financial information will prove to be
accurate. In addition, as disclosed elsewhere in this Proxy Statement/Prospectus
under "Risk Factors," the business and operations of Urohealth are subject to
substantial risks which increase the uncertainty inherent in such preliminary
financial targets. Any of the factors disclosed under "Risk Factors" could cause
the actual earnings of Urohealth to differ materially from the preliminary
financial targets described above. In addition, the preliminary financial
targets do not contemplate the combination of the operations of Urohealth and
Imagyn. Accordingly, for these reasons it is expected that there will be
differences between the actual and targeted results, and actual results may be
materially higher or lower than those indicated above.
In light of the significant uncertainties inherent in forward-looking
financial information of any kind, the inclusion of such information herein
should not be regarded as a representation by Urohealth or any other person that
the preliminary financial targets will be achieved. Investors are cautioned that
these preliminary financial targets should not be regarded as fact and should
not be relied upon as an accurate representation of future results. Further, the
preliminary financial targets furnished by Urohealth were not prepared with a
view to public disclosure or in compliance with the established guidelines
concerning financial projections promulgated by the American Institute of
Certified Public Accountants. In addition, such preliminary financial targets do
not purport to present operations in accordance with generally accepted
accounting principles and have not been audited, compiled or otherwise examined
by Ernst & Young LLP, Urohealth's independent auditors, or by any other
independent auditor or financial advisor. Accordingly, neither Ernst & Young LLP
nor any other independent auditor or financial advisor assumes any
responsibility for the preliminary financial targets disclosed herein. The
preliminary financial targets are being presented solely because they were
furnished to Imagyn, Dillon Read and Piper Jaffray, and they should not be
interpreted as suggesting that Imagyn, Dillon Read or Piper Jaffray relied
solely upon such targets in evaluating any
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proposed transaction. Urohealth has advised Imagyn, Dillon Read and Piper
Jaffray that its preliminary financial targets are, in general, prepared solely
for internal use and capital budgeting and other management decisions, and are
subjective in many respects and thus susceptible to interpretations and periodic
revision based on actual experience and business developments. Urohealth does
not intend publicly to update or otherwise publicly to revise the preliminary
financial targets disclosed above to reflect circumstances existing after the
date hereof.
CERTAIN INFORMATION CONCERNING THE MERGER
In connection with consideration of the Merger, the management of Urohealth
prepared and the Board of Directors of Urohealth and Piper Jaffray were
furnished preliminary estimates of certain cost savings and other synergies that
could result from the Merger. Such estimates indicated approximately $10.9
million and $16.1 million of incremental operating income from cost savings and
other synergies that might be realized from the Merger in fiscal 1998 and 1999,
respectively. The statement regarding estimates of certain cost savings and
other synergies that could result from the Merger constitutes a "forward-looking
statement" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act and is subject to the safe harbors created thereby.
These estimates were based on the assumptions that Urohealth would be able to
combine successfully the operations, product offerings and research and
development and sales and marketing efforts of Urohealth and Imagyn after the
Merger in order to realize the potential benefits of the Merger, that Urohealth
would continue to develop and introduce new products on a timely basis, that
competitive conditions within the medical device industry would not change
materially or adversely, that the market for Urohealth's products would remain
strong, and that there would be no material adverse change in Urohealth's
operations or business. Such assumptions involve judgments with respect to,
among other things, future economic, competitive and regulatory conditions,
financial market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of Urohealth. While Urohealth believes that the assumptions underlying
the preliminary estimates of cost savings and other synergies that could result
from the Merger are reasonable, any of the assumptions could prove inaccurate
and therefore, there can be no assurance that the forward-looking financial
information will prove to be accurate. In addition, as disclosed elsewhere in
this Proxy Statement/Prospectus under "Risk Factors," the anticipated benefits
of the Merger will not be achieved unless the operations of Imagyn are
successfully combined with those of Urohealth in a timely manner. As further
disclosed under "Risk Factors," the business and operations of Urohealth are
subject to substantial risks. These risks increase the uncertainty inherent in
such preliminary estimates. Any of the factors disclosed under "Risk Factors"
could cause the actual cost savings and other synergies that could result from
the Merger to differ materially from the preliminary estimates described above.
Accordingly, for these reasons it is expected that there will be differences
between the actual and estimated results, and actual results may be materially
higher or lower than those indicated above.
In light of the significant uncertainties inherent in forward-looking
financial information of any kind, the inclusion of such information herein
should not be regarded as a representation by Urohealth or any other person that
the preliminary estimates of cost savings and other synergies that could result
from the Merger will be achieved. Investors are cautioned that these preliminary
estimates should not be regarded as fact and should not be relied upon as an
accurate representation of future results. Further, the preliminary estimates
furnished by Urohealth were not prepared with a view to public disclosure or in
compliance with the established guidelines concerning financial projections
promulgated by the American Institute of Certified Public Accountants. In
addition, such preliminary estimates of cost savings and other synergies do not
purport to present information prepared in accordance with generally accepted
accounting principles and have not been audited, compiled or otherwise examined
by Ernst & Young LLP, Urohealth's independent auditors, or by any other
independent auditor or financial advisor. Accordingly, neither Ernst & Young LLP
nor any other independent auditor or financial advisor assumes any
responsibility for the preliminary estimates of cost savings and other synergies
disclosed herein. Such preliminary estimates are being presented solely because
they were furnished to Piper Jaffray, and they should not be interpreted as
suggesting that Piper Jaffray relied solely upon such estimates in evaluating
any proposed transaction. Urohealth has advised Piper Jaffray that its
preliminary estimates of cost savings and other synergies that could result from
the Merger were, in general,
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prepared solely for internal use and budgeting and other management decisions,
and are subjective in many respects and thus susceptible to interpretations and
periodic revision based on actual experience and business developments.
Urohealth does not intend publicly to update or otherwise publicly to revise the
preliminary estimates of cost savings and other synergies that could result from
the Merger disclosed above to reflect circumstances existing after the date
hereof.
UROHEALTH'S REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors of Urohealth believes that the Merger is fair to and
in the best interests of Urohealth and its stockholders and unanimously
recommends that the Urohealth stockholders vote for the approval of the Merger
Agreement and the transactions contemplated thereby.
In evaluating the proposed Merger as originally presented and as amended,
the Board of Directors of Urohealth considered a variety of factors, including
financial and operating information relating to Urohealth and Imagyn, reports
from, and presentations by, its officers, Piper Jaffray and legal counsel. The
factors considered by the Urohealth Board of Directors, all of which were deemed
material but were given varying priorities by individual directors, included the
following: (i) the operational efficiencies and synergies presented by the
compatibility of the core business of Urohealth and Imagyn in the gynecology
market, (ii) the opportunities for Urohealth to substantially enhance its
gynecological product offerings, (iii) the technical expertise, technology and
research and development capabilities of the Imagyn organization, (v) the state
of Urohealth's industry, including current and future competition, and
consolidations within the industry, (vi) the financial condition, results of
operations and prospects of Urohealth and Imagyn, along with the value of the
consideration to be paid in the Merger and (vii) the advice given to the Board
by Piper Jaffray, Urohealth's financial advisor, regarding the Merger
transaction.
Urohealth and Piper Jaffray also were furnished with projections prepared
by the management of Imagyn which related to the business of Imagyn as a
stand-alone entity. These projections were revised materially over time by
Imagyn and were not a material part of the analysis of the Merger by the Board
of Directors of Urohealth.
The Urohealth Board concluded, in light of these factors, that the Merger
is in the best interests of Urohealth and its stockholders. The Board of
Directors of Urohealth did not attempt to weigh the factors considered and no
poll of the directors was taken to determine which of the factors considered
they deemed most important in arriving at their ultimate conclusion. THE BOARD
OF DIRECTORS OF UROHEALTH UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
UROHEALTH APPROVE THE MERGER PROPOSAL.
OPINION OF UROHEALTH'S FINANCIAL ADVISOR
Certain statements contained under this section "Opinion of Urohealth's
Financial Advisor," such as statements concerning the estimates of future
revenues, earnings and cash flows and other statements contained in this section
regarding matters that are not historical facts, are forward-looking statements
(as such term is defined in the rules promulgated pursuant to the Securities Act
of 1933, as amended (the "Securities Act")). Because such forward-looking
statements include risks and uncertainties, actual results may differ materially
from those expressed in or implied by such forward-looking statements. Factors
that could cause actual results to differ materially include, but are not
limited to, those discussed elsewhere herein under "Risk Factors," "Certain
Information Concerning Urohealth" and "Certain Information Concerning the
Merger." None of Urohealth, Imagyn or Piper Jaffray undertakes any obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Piper Jaffray was engaged by Urohealth pursuant to an engagement letter
dated as of December 9, 1996 to act as exclusive financial advisor to Urohealth
in connection with a possible business combination involving Urohealth and
Imagyn. If requested, Piper Jaffray also agreed to render an opinion to the
Board of Directors of Urohealth concerning the fairness, from a financial point
of view, to Urohealth of the aggregate consideration to be paid by Urohealth to
the stockholders of Imagyn in the Merger.
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Piper Jaffray delivered to the Urohealth Board of Directors on April 19,
1997, its written opinion to the effect that, as of the date thereof and based
on and subject to the assumptions, factors and limitations set forth therein,
the aggregate consideration proposed to be paid by Urohealth pursuant to the
Original Merger Agreement in the Merger to the stockholders of Imagyn was fair,
from a financial point of view, to Urohealth. Piper Jaffray delivered to the
Urohealth Board of Directors on July 16, 1997, its written opinion (the "Piper
Opinion"), which reaffirmed as of such date, its earlier opinion with respect to
the Merger pursuant to the Original Merger Agreement, as proposed to be amended
by Amendment No. 1. A copy of the Piper Opinion which sets forth the assumptions
made, factors considered and limits of its review, is attached to this Proxy
Statement/Prospectus as Appendix B and is incorporated herein by reference. The
following summary is qualified in its entirety by reference to the full text of
the Piper Opinion. Urohealth stockholders are urged to read such opinion
carefully and in its entirety.
Piper Jaffray provided financial advice to the management of Urohealth in
connection with the structuring and negotiation of the Merger, but made no
recommendation to the Board of Directors of Urohealth as to the form or amount
of the consideration to be paid by Urohealth in the Merger, which was determined
through negotiations between Urohealth and Imagyn. The Piper Opinion is directed
to the Board of Directors of Urohealth and does not constitute a recommendation
to any Urohealth stockholder as to how such stockholder should vote at the
Urohealth Annual Meeting. The Piper Opinion does not address Urohealth's
underlying business decision to proceed with or effect the Merger.
In arriving at its opinion, Piper Jaffray reviewed, among other things, (i)
the Original Merger Agreement dated April 19, 1997 and a draft dated as of July
16, 1997 of Amendment No. 1, (ii) certain proprietary information relative to
Imagyn, (iii) certain publicly available financial and other information
relative to Imagyn, (iv) internal financial planning information of Imagyn
furnished by the management of Imagyn, (v) to the extent publicly available, the
stock price premiums paid and financial terms of certain acquisition
transactions involving companies operating in industries deemed relevant to
those in which Imagyn operates and selected public companies deemed comparable
to Imagyn, (vi) certain publicly available information relative to Urohealth,
(vii) certain internal financial planning information of Urohealth, Imagyn and
the combined company after the Merger furnished by management of Urohealth, and
(viii) certain financial and securities data of Urohealth. In addition, Piper
Jaffray visited the headquarters of Urohealth, and engaged in discussions with
members of management, accountants and counsel of Urohealth and Imagyn
concerning the respective financial condition, current operating results and
business outlook of Urohealth, Imagyn and the combined company after the Merger.
Piper Jaffray also engaged in discussions with practicing physicians that use
Imagyn's products and competing products.
In delivering its opinion to the Urohealth Board of Directors on July 16,
1997, Piper Jaffray prepared and delivered to the Urohealth Board of Directors
certain written materials containing a summary of various analyses and other
information material to the Piper Opinion. The following is a summary of these
materials:
Overview of the Merger. Piper Jaffray reviewed the principal terms of the
Merger. Piper Jaffray noted that the Merger, if consummated, would benefit
Urohealth by providing (i) an established product platform for Urohealth's
gynecology division, (ii) proprietary products to enhance Urohealth's current
product offerings and maximize the value of Urohealth's contracts with group
purchasing organizations, (iii) an opportunity to generate significant synergies
and expense reductions, and (iv) increased financial flexibility through the
acquisition of the cash and marketable securities of Imagyn (approximately $39.3
million as of June 30, 1997).
Estimated Purchase Price. Piper Jaffray calculated an estimate of the
aggregate purchase price based on the exchange ratio set forth in the Merger
Agreement and the ten day average (as of July 15, 1997) of the closing price of
Urohealth Common Stock on The Nasdaq National Market. Giving effect to such
exchange ratio, which results in an aggregate of 12.1 million shares of
Urohealth Common Stock to be issued to holders of Imagyn Common Stock and Common
Stock Equivalents and a ten day average closing price of $5.46 per share of
Urohealth Common Stock, Piper Jaffray computed an estimated aggregate purchase
price of $65.8 million.
Stock Price Analysis. Piper Jaffray reviewed selected market information
and the trading activity of Urohealth and Imagyn, including share price and
trading volume of Urohealth Common Stock for the period
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May 31, 1996 to July 15, 1997 and Imagyn Common Stock for the period from May
31, 1996 to July 15, 1997. In addition, Piper Jaffray compared the indexed
performance of Imagyn Common Stock for the period May 30, 1996 to July 15, 1997
to both a composite index made up of the Medical Technology Companies and the
Women's Health Group Companies (each as defined below), and the NASDAQ Composite
Index. For purposes of its analysis, Piper Jaffray separated publicly traded
companies engaged in businesses considered by Piper Jaffray to be relevant to
that of Imagyn into two groups: medical technology companies with operating and
financial profiles comparable to Imagyn (the "Medical Technology Companies") and
companies focused on providing new medical technology to address women's health
care issues (the "Women's Health Group Companies"). The Medical Technology
Companies were: Cardiovascular Dynamics, Inc.; General Surgical Innovations;
Rochester Medical Corp.; Innovasive Devices, Inc.; and Eclipse Surgical
Technologies, Inc. The Women's Health Group Companies were: Biofield Corp.;
Conceptus Inc.; Cytyc Corp.; Gynecare, Inc.; FemRx, Inc.; Neopath Inc.; and
Neuromedical Systems Inc. Piper Jaffray noted that the price of Imagyn Common
Stock had underperformed the indexed performance of the Medical Technology
Companies, the Women's Health Group Companies and the NASDAQ Composite for the
period.
Piper Jaffray also computed the historical relationship of the closing
price of Urohealth Common Stock and Imagyn Common Stock for the period from
October 1, 1996 through April 18, 1997 and compared it to the exchange ratio set
forth in the Merger Agreement.
Discounted Cash Flow Analysis. Piper Jaffray estimated the present value
of the projected future cash flows of Imagyn using internal financial planning
data prepared by the management of Imagyn on a stand-alone basis and the
management of Urohealth as combined with Urohealth and giving effect to expected
synergies for the years ending March 31, 1998 through 2001. Using internal
financial planning data for Imagyn on a stand-alone basis as prepared by the
management of Imagyn, Piper Jaffray applied a range of terminal multiples to
projected fiscal year 2001 operating income of 10x to 12x and a range of
discount rates of 25.0% to 35.0%. This analysis yielded a range of estimated
present values of Imagyn equity of approximately $50.3 million to $59.9 million.
Using internal financial planning data provided by the management of Urohealth
for Imagyn on an "as combined" basis with Urohealth and giving effect to
expected synergies, Piper Jaffray applied a range of terminal multiples to
projected fiscal year 2001 operating income of 10x to 14x and a range of
discount rates of 30.0% to 40.0%. This analysis yielded a range of estimated
present values of Imagyn equity of approximately $136.1 million to $212.9
million. These equity value ranges compared to an estimated aggregate purchase
price for Imagyn of $65.8 million calculated by Piper Jaffray as discussed under
"Estimated Purchase Price" above.
Pro Forma Analysis. Piper Jaffray analyzed the potential effect on
projected annual earnings per share of Urohealth Common Stock for the two year
period ending March 31, 1999 resulting from the Merger, based on the pro forma
combined projected results of Urohealth and Imagyn for such periods included in
internal financial planning data provided by management of Urohealth and Imagyn.
This combined company data reflects Urohealth management's estimates of revenue
and operating synergies in a combined company, including operating expense
savings. Piper Jaffray observed that the Merger would be expected to be slightly
dilutive on an earnings per share basis in the years ending March 31, 1998 and
1999.
Contribution Analysis. Piper Jaffray compared the contribution of
Urohealth and Imagyn to projected pro forma combined total revenue, gross
profit, and operating income for the years ending March 31, 1998 and 1999 using
internal financial planning data prepared by management of Urohealth, including
the effect of certain synergies Urohealth might expect to achieve following the
Merger. For such periods, Piper Jaffray noted that Imagyn would contribute 8.3%
and 13.8%, respectively of pro forma combined total revenues, 7.9% and 13.0%,
respectively of pro forma combined gross profit, and 6.2% and 19.2%,
respectively of pro forma combined operating income. Piper Jaffray compared
these projected contribution percentages to 33.6%, the aggregate pro forma
ownership (on a fully diluted basis without giving effect to the conversion of
the Debentures) of the combined company by holders of Imagyn Common Stock
resulting from the Merger, and 13.5%, the aggregate pro forma ownership (on a
fully diluted basis without giving effect to the conversion of the Debentures)
of the combined company by holders of Imagyn Common Stock resulting from the
Merger (excluding for purposes of this analysis, the value of shares of
Urohealth Common Stock equal to the value of the cash and marketable securities
of Imagyn). Piper Jaffray also noted that as a result of the Merger, Imagyn
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would contribute 51.1% of the combined current tangible assets (adjusted for
cash investments and credit lines) based upon financial statements as of March
31, 1997.
Comparable Public Company Analysis. Piper Jaffray compared certain
financial information and valuation ratios relating to Imagyn to corresponding
data and ratios from the Medical Technology Companies and the Women's Health
Care Companies in order to analyze Imagyn's operating performance and market
valuation relative to such companies. This analysis produced multiples of
selected valuation data as follows: (i) company value (market capitalization
less net cash) to latest twelve months ("LTM") revenues for the Medical
Technology Companies ranging from 2.2x to 10.7x, with a mean and median of 6.6x,
and for Imagyn of 2.5x for LTM actual financial statements for and as of March
31, 1997 and 3.6x for LTM estimated financial statements for and as of June 30,
1997; and (ii) equity value to book value for the Medical Technology Companies
ranging from 1.3x to 3.4x, with a mean and median of 2.4x and 2.8x,
respectively, and for Imagyn of 1.3x for LTM actual financial statements as of
March 31, 1997 and 1.5x for LTM estimated financial statements as of June 30,
1997. Given the early stage of development for many of the Women's Health Care
Companies, this analysis did not produce any meaningful data for comparison to
Imagyn.
Comparable Acquisition Analysis. Piper Jaffray reviewed transactions
announced between January 1, 1995 and July 15, 1997, for which information was
publicly available, involving target companies in the medical technology
industry. In addition, these transactions involved a change-in-control and had
transaction values greater than $25 million. This review produced 32
transactions (the "Comparable Transactions"). Piper Jaffray calculated company
value to LTM sales and to LTM operating income and equity value to LTM net
income for each of the Comparable Transactions. Piper Jaffray calculated company
value to net sales for the Comparable Transactions with this multiple ranging
from 0.5x to 24.6x, with a mean and median of 4.4x and 3.0x, respectively, and
for the Merger of 2.5x (based on Imagyn LTM actual financial statements for and
as of March 31, 1997) and 3.6x (based on Imagyn LTM estimated financial
statements for and as of June 30, 1997). No other valuation multiple produced
meaningful data for comparison.
Premiums Paid Analysis. Piper Jaffray analyzed the premium to the closing
price per share of Imagyn Common Stock of the estimated purchase price per share
of Urohealth Common Stock under the Merger Agreement as of one week and four
weeks prior to April 18, 1997 and compared such premiums to the premium
(discount) paid as of one week and four weeks prior to announcement for (i) 27
selected transactions involving medical technology companies, and (ii) 23
selected transactions involving pooling-of-interests treatment for generally
accepted accounting principles. The selected medical technology transactions
included transactions announced between January 1, 1995 and July 15, 1997. The
selected pooling-of-interests transactions involved transactions announced
between January 1, 1996 through July 15, 1997, with an aggregate value between
$50.0 million and $150.0 million, but excluding transactions involving banks and
other financial institutions. For the selected medical technology transactions,
the premiums (discounts) as of one week prior to announcement ranged from
(11.8%) to 60.9%, with a mean of 28.0%. As of four weeks prior to announcement
the premiums ranged from 2.0% to 76.2%, with a mean of 35.5%. For the selected
pooling-of-interests transactions, the premiums (discounts) as of one week prior
to announcement ranged from (4.5%) to 70.6%, with a mean of 29.4%. As of four
weeks prior to announcement the premiums ranged from 0.8% to 146.7%, with a mean
of 35.9%. Piper Jaffray noted that the estimated purchase price per share of
Imagyn Common Stock under the Merger Agreement represented a discount of (8.7%)
and (13.9%) to the market price per share of Imagyn Common Stock as of one week
and four weeks, respectively, prior to April 18, 1997.
In reaching its conclusion as to fairness of the aggregate consideration to
be paid in the Merger pursuant to the Merger Agreement and in its presentation
to the Urohealth Board of Directors, Piper Jaffray did not rely on any single
analysis or factor described above, assign relative weights to the analyses or
factors considered by it, or make any conclusions as to how the results of any
given analysis, taken alone, supported its fairness opinion. The preparation of
a fairness opinion is a complex process and not necessarily susceptible to
partial analysis or summary description. Piper Jaffray believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, would create a misleading view of the processes underlying its
opinions. The analyses of Piper Jaffray are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. Analyses relating to the value of companies do not
purport to be
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appraisals or valuations or necessarily reflect the price at which companies may
actually be sold. No company or transaction used in any comparable analysis as a
comparison was identical to Urohealth, Imagyn or the Merger contemplated by the
Merger Agreement. Accordingly, an analysis of the results is not mathematical,
rather it involves complex considerations and judgments concerning differences
in the various characteristics considered.
For purposes of its opinion, Piper Jaffray relied upon and assumed the
accuracy, completeness and fairness of the financial and other information made
available to it and did not assume responsibility for the independent
verification of such information. Piper Jaffray relied upon the assurances of
the management of Urohealth and Imagyn that the information provided by
Urohealth and Imagyn had a reasonable basis and, with respect to financial
planning data and other business outlook information, reflected the best
available estimates, and that they were not aware of any information or fact
that would make the information provided to Piper Jaffray incomplete or
misleading. In arriving at its opinion, Piper Jaffray did not perform, nor was
it furnished, any appraisal or valuation of specific assets or liabilities of
Urohealth and Imagyn and expressed no opinion regarding the liquidation value of
any entity. Piper Jaffray assumed, with the consent of Urohealth, that (i)
neither Urohealth nor Imagyn is a party to any pending transaction, including
external financial, recapitalizations, acquisitions or merger discussions other
than the Merger or in the ordinary course of business, (ii) the Merger will
qualify as a reorganization within the meaning of Section 368(a) of the Code and
as a pooling-of-interests transaction under generally accepted accounting
principles, (iii) the final form of Amendment No. 1 was substantially similar to
the drafts reviewed by Piper Jaffray, and (iv) that in the course of obtaining
the necessary regulatory approvals for the Merger, no restrictions, including
any divestiture requirements, will be imposed that would have a material adverse
effect on the contemplated benefits of the Merger. No limitations were imposed
by Urohealth on the scope of Piper Jaffray's investigation or the procedures to
be followed in rendering its opinion. Piper Jaffray expressed no opinion as to
the price at which shares of Urohealth Common Stock have traded or may trade at
any future time. The opinion was based upon information available to Piper
Jaffray and the facts and circumstances as they existed were subject to
evaluation on the date of the Piper Opinion. Events occurring after such date
could materially affect the facts and assumptions used in preparing the Piper
Opinion.
Piper Jaffray, as a customary part of its investment banking business, is
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, underwritings and other distributions of securities,
private placements and evaluations for estate, corporate and other purposes. The
Urohealth Board of Directors selected Piper Jaffray because of its experience
with medical device companies generally and familiarity with Urohealth in
particular. Piper Jaffray has provided investment banking services to Urohealth
in the past for which it received customary fees. Piper Jaffray acted as
co-manager of the public offering of Urohealth Common Stock in November 1996.
Piper Jaffray makes a market in the Common Stock of Urohealth and also provides
research coverage of Urohealth. In the ordinary course of its securities
business, Piper Jaffray actively trades Urohealth Common Stock for its own
account or the account of its customers, and accordingly may from time to time
hold a long or short position in such security.
Urohealth agreed to pay Piper Jaffray a fee of $125,000, in cash, upon
rendering the Piper Opinion. This opinion fee is not contingent upon the
consummation of the Merger. For its services to Urohealth in connection with the
Merger, Urohealth also agreed to pay Piper Jaffray a fee of $25,000 on March 31,
1997, and a fee of 1.5% of the total purchase price involved in the Merger (with
the Opinion fee to be credited against such fee) upon consummation of the
Merger. The contingent nature of this fee may have created a potential conflict
of interest in that Urohealth would be unlikely to consummate the Merger unless
it had received the Piper Opinion. Whether or not the Merger is consummated,
Urohealth has agreed to pay the reasonable out-of-pocket expenses of Piper
Jaffray and to indemnify Piper Jaffray against certain liabilities incurred
(including liabilities under the federal securities laws) in connection with the
engagement of Piper Jaffray by Urohealth.
Piper Jaffray will not be updating its opinion either prior to the mailing
of this Proxy Statement/Prospectus or prior to the Urohealth Annual Meeting or
the closing of the Merger.
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IMAGYN'S REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION.
The Imagyn Board has determined that the terms of the Merger Agreement and
the transactions contemplated thereby are fair to, and in the best interests of,
Imagyn's stockholders. Accordingly, the Imagyn Board has approved the Merger
Agreement (by the unanimous vote of all directors present) and recommends that
the stockholders of Imagyn vote for approval and adoption of the Merger
Agreement. In reaching its determination, the Imagyn Board consulted with
Imagyn's management, as well as its legal counsel and financial advisor, and
gave significant consideration to a number of factors, including, without
limitation, the factors referred to below. In view of the wide variety of
factors bearing on its decision, the Imagyn Board did not consider it practical
to, nor did it attempt to, quantify or otherwise assign relative weight to the
factors it considered in reaching its decision.
The factors considered by the Imagyn Board included:
- The effect on Imagyn stockholders of Imagyn continuing as a
stand-alone entity compared to the effect of combining with Urohealth,
in light of the factors summarized below with respect to the financial
condition and prospects of the two companies on a stand-alone basis
and of the combined company. In particular, the Imagyn Board
considered that Imagyn competes in a segment of the medical device
market (women's health products) and has a relatively small, as
compared to Urohealth, direct sales force, and has not consummated,
and does not anticipate consummating, group purchasing organization
agreements, which collectively have resulted in historical volatility
in Imagyn's sales and has increased sales cycles associated with new
product introductions, which factors in turn have contributed to
volatility in the market price of Imagyn Common Stock.
- The view of Imagyn's management that the medical device industry has
recently experienced increased consolidation as participants have
sought to broaden product lines, gain market share, increase
international market penetration and enable bundling and capitation
arrangements with hospitals and managed care organizations (which are
increasingly entering into purchasing arrangements with, and taking
other actions that favor medical device companies offering large and
cost-effective product portfolios).
- The relatively greater manufacturing, personnel and sales and
distribution resources of Urohealth and the likelihood that such
resources would enable Imagyn to accelerate its long-term growth
strategy, to facilitate the introduction of new products with a larger
sales force, and to compete more effectively in its targeted markets.
- The fact that the Merger should result in a number of important
synergies, including (i) potential revenue synergies, including the
ability to market Imagyn's products through Urohealth's existing
distribution channels and to sell Imagyn's products together with
Urohealth's products, and (ii) potential cost synergies to be
realized, through consolidation and integration of certain
administrative, manufacturing, sales and research and development
operations and functions.
- Analyses of the financial performance and condition, businesses and
prospects of Urohealth and Imagyn, including, but not limited to,
information with respect to their respective recent and historic stock
prices and earnings performance. The Imagyn Board also considered the
detailed financial analyses with respect to Urohealth and Imagyn
presented by Dillon Read and Imagyn's management, as well as the
Imagyn Board's own knowledge of Urohealth, Imagyn and their respective
businesses, and the current economic financial and business climate.
- The written opinion of Dillon Read to the effect that, as of July 16,
1997, and based upon and subject to the various qualifications and
assumptions described therein, the consideration to be received by the
holders of Imagyn Common Stock was fair to such holders from a
financial point of view. See "-- Opinion of Imagyn's Financial
Advisor."
- The Exchange Ratio and the other terms of the Merger Agreement. See
"The Merger -- Background of the Merger."
- The expectation that the Merger will be a tax-free transaction to
Imagyn and its stockholders and will be accounted for as a pooling of
interests transaction. See "-- United States Federal Income Tax
Consequences" and "-- Accounting Treatment."
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- The effect of the Merger on Imagyn's other constituencies, including
its senior management and other employees and customers.
- A number of potential risks relating to the Merger, including (i) the
risk that the synergies and other benefits expected from the Merger
would not be fully achieved, (ii) the risk that the Merger would not
be consummated due to the failure of the parties to satisfy conditions
to the Merger, (iii) the risk that the market price of Urohealth
Common Stock might decline between execution of the Merger Agreement
and consummation of the Merger, (iv) the risk that Imagyn's existing
management would no longer manage operations of Imagyn following the
Merger, (v) the risk that certain competitors of Imagyn or Urohealth
may attempt to hinder consummation of the Merger through the
initiation of litigation or by other means, and (vi) the other risks
described above under "Risk Factors."
OPINION OF IMAGYN'S FINANCIAL ADVISOR
On July 16, 1997, the Board of Directors of Imagyn received Dillon Read's
opinion dated July 16, 1997 which provided that, as of such date, the
consideration to be received pursuant to the Merger Agreement was fair to
Imagyn's common stockholders from a financial point of view. A copy of Dillon
Read's written opinion is attached as Appendix C hereto and should be read in
its entirety for a description of the procedures followed, matters considered,
assumptions made and methods employed by Dillon Read.
In arriving at its opinion, Dillon Read, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to Imagyn and Urohealth, (ii) reviewed certain management estimates and
company financial forecasts prepared by the managements of Imagyn and Urohealth,
(iii) reviewed certain financial information and other data provided to Dillon
Read by Imagyn that was not publicly available relating to the business and
prospects of Imagyn, (iv) reviewed certain financial information and other data
provided to Dillon Read by Urohealth that was not publicly available relating to
the business and prospects of Urohealth, (v) conducted discussions with members
of the senior managements of Imagyn and Urohealth with respect to the
operations, financial condition, history and prospects of each company, (vi)
reviewed publicly available financial and stock market data with respect to
certain other companies in lines of business Dillon Read believed to be
generally comparable to those of Imagyn and Urohealth, (vii) considered the pro
forma effects of the Merger on Urohealth's financial statements and reviewed
certain estimates of synergies prepared by the management of Imagyn, (viii)
reviewed the historical market prices and trading volumes of the Imagyn Common
Stock and the Urohealth Common Stock, (ix) compared the financial terms of the
Merger with the financial terms of certain other transactions which Dillon Read
believed to be generally comparable to the Merger, (x) reviewed the Merger
Agreement, and (xi) conducted such other financial studies, analyses, and
investigations, and considered such other information as Dillon Read deemed
necessary or appropriate.
In connection with its review, Dillon Read did not assume any
responsibility for independent verification of any of the foregoing information
and, with Imagyn's consent, relied on such information as being complete and
accurate in all material respects. In addition, Dillon Read did not make any
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of Imagyn and Urohealth. With respect to the financial forecasts, pro
forma effects and estimates of synergies referred to above, Dillon Read assumed,
with Imagyn's consent, that the Imagyn and Urohealth company financial
forecasts, pro forma information and estimates of synergies were prepared
reasonably on a basis reflecting the best currently available estimates and
judgments of the respective managements as to the future financial performance
of their respective companies. Dillon Read's opinion was based on economic,
monetary, and market conditions existing on July 16, 1997. Dillon Read was
authorized to contact only one alternative potential merger partner. Dillon Read
understood that Imagyn contacted several other companies in an effort to solicit
additional third party offers. In rendering its opinion, Dillon Read assumed,
with Imagyn's consent, that the Merger will receive pooling-of-interests
accounting treatment and will qualify as a tax-free reorganization. No other
limits were placed on Dillon Read with respect to the investigations made or
procedures followed by Dillon Read in rendering its opinion.
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In arriving at its opinion, Dillon Read did not assign any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments based on its experience in rendering such opinions and on then
existing economic, monetary and market conditions as to the significance and
relevance of each analysis and factor. Accordingly, Dillon Read believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, Dillon Read made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond Imagyn's or
Urohealth's control. Any estimates contained in Dillon Read's analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of a business or securities
do not purport to be appraisals or to reflect the actual prices at which
businesses or securities might be sold.
In rendering its opinion, Dillon Read expressed no view as to the range of
values at which the Urohealth Common Stock may trade following the consummation
of the Merger, nor did Dillon Read make any recommendations to the Imagyn
stockholders with respect to how such holders should vote on the Merger, or on
the advisability of disposing of or retaining such Urohealth Common Stock
following the Merger.
The following summarizes the material quantitative analyses relating to
Imagyn and Urohealth performed by Dillon Read in arriving at the opinion dated
July 16, 1997 presented to the Imagyn Board of Directors.
IMAGYN VALUATION REVIEW
Summary of Company Financial Forecast. Dillon Read noted that there had
been a significant change in the company financial forecasts for Imagyn from
April 18, 1997 to July 7, 1997, as projected sales and operating income for each
of fiscal 1997, 1998, 1999, and 2000 declined significantly.
Summary of Comparable Companies Analysis. Using publicly available
information, Dillon Read reviewed the stock prices and market multiples of
common stocks of the following companies in the urology and gynecology
businesses: C.R. Bard, Inc., Collagen Corporation, Conceptus, Inc., The Cooper
Companies, Inc., FemRx, Inc., Gynecare, Inc., Mentor Corporation, Rochester
Medical Corporation, UroMed Corporation, UroQuest Medical Corporation, United
States Surgical Corporation, and Vivus, Inc. Dillon Read believed these
companies are engaged in lines of business that are generally comparable to
those of Imagyn.
Dillon Read determined the equity market value and derived an "enterprise
value" (defined as equity market value adjusted by adding total debt and
subtracting cash and cash equivalents) for each of these comparable companies,
and calculated a range of such enterprise values as a multiple of the latest 12
months net sales and as a multiple of calendar year 1997 and 1998 expected net
sales using publicly available analyst financial forecasts. Enterprise value as
a multiple of the latest 12 months net sales at the median was 5.4x and ranged
from 1.6x to 126.9x for these comparable companies. Enterprise value as a
multiple of calendar year 1997 expected net sales at the median was 5.3x and
ranged from 2.0x to 69.9x. Enterprise value as a multiple of calendar year 1998
expected net sales at the median was 2.8x and ranged from 1.1x to 7.3x.
Based on (i) the average closing price of Urohealth Common Stock for the
ten trading days ended July 15, 1997 of $5.46 and (ii) an exchange ratio of 1.4,
the per share merger consideration (the "Merger Consideration") of $7.65 per
share of Imagyn Common Stock, Dillon Read noted that the Merger Consideration
was 2.9x latest 12 months net sales, 4.7x calendar year 1997 forecasted net
sales, and 2.3x calendar year 1998 forecasted net sales. Dillon Read believes
that the calculated multiples supported Dillon Read's view that the Merger
Consideration to be received by Imagyn stockholders is fair, from a financial
point of view, to such stockholders, because the ratios described above were
within the range of selected public comparable multiples.
Summary of Comparable Mergers and Acquisitions Analysis. Using publicly
available information, Dillon Read reviewed the purchase prices and multiples
paid in selected mergers and acquisitions involving selected medical device
companies which Dillon Read deemed relevant in evaluating the Merger. Dillon
Read
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reviewed the proposed acquisition of Circon Corporation by United States
Surgical Corporation; the acquisition of Research Medical Inc. by Baxter
International Inc.; the acquisition of Medex, Inc. by Furon Company; the
acquisition of Vesta Medical Inc. by Pfizer, Inc.; the acquisition of EP
Technologies, Inc. by Boston Scientific Corporation; and the acquisition of
Cabot Medical Corporation by Circon Corporation.
Dillon Read considered multiples of the enterprise value of the
transactions (consideration offered for the equity plus the debt assumed less
the cash and equivalents of the acquired company) to the net sales for the
historic 12 months and to the projected net sales for each of the next two
fiscal years of the businesses to be acquired in such transactions. The
multiples of net sales for the historic 12 months preceding the acquisition
announcement at the median were 2.6x and ranged from 1.5x to 8.3x. The multiples
of expected net sales for the first fiscal year thereafter at the median were
4.0x and ranged from 1.4x to 6.2x. The multiples of expected net sales for the
second fiscal year thereafter at the median were 2.3x and ranged from 1.2x to
3.8x.
The Merger Consideration represented 2.9x Imagyn's net sales for the 12
months preceding the acquisition announcement, 4.7x fiscal year 1997 forecasted
net sales, and 2.3x fiscal year 1998 forecasted net sales. Dillon Read believes
that the calculated multiples supported Dillon Read's view that the Merger
Consideration to be received by Imagyn stockholders is fair, from a financial
point of view, to such stockholders, because the ratios described above were
within the range of selected comparable transaction multiples.
Dillon Read also considered the premiums paid for the acquired businesses
to their respective market closing prices per share one day prior to acquisition
announcement relative to the premium of the Merger consideration of $7.65 per
share of Imagyn Common Stock to the market closing prices per share of Imagyn
Common Stock prior to the announcement of the transaction. The premium paid for
the acquired businesses compared to the market closing price one day prior to
announcement at the median was 28.1%, and ranged from 2.0% to 54.1%. The premium
offered in the Merger Consideration for Imagyn Common Stock compared to the
market closing price one day prior to the announcement of the transaction was
28.8%.
Discounted Cash Flow Analysis for Imagyn. Dillon Read performed a
discounted cash flow analysis of Imagyn using a set of underlying operating
assumptions which were based upon the company financial forecast provided by
Imagyn management. Utilizing the Imagyn financial forecast, Dillon Read
calculated the theoretical discounted present value of equity for Imagyn by
adding together the present value of (i) the future stream of unlevered free
cash flow through the year 2000, (ii) the future value of Imagyn at the end of
the year 2000 (the "Terminal Value"), and (iii) the cash at June 30, 1997. The
Terminal Value was calculated based on multiples of earnings before interest,
taxes, depreciation, and amortization for 2000 ranging from 8.0x to 12.0x. The
cash flow streams and terminal values were then discounted to present values
using a range of discount rates from 30.0% to 40.0%. The terminal multiples and
discount rates were chosen based on several assumptions regarding factors such
as inflation rates, interest rates, the inherent risk in Imagyn's business,
products and technology as well as the medical technology industry as a whole,
and the cost of capital of Imagyn.
The theoretical equity value of Imagyn based on the set of projections
produced a range of value per share of Imagyn Common Stock of $4.77 to $5.95,
with a midpoint value of $5.29. Dillon Read believes that the discounted cash
flow analysis supported Dillon Read's view that the Merger consideration to be
received by Imagyn stockholders is fair, from a financial point of view, to such
stockholders, because the consideration valued at the time of Dillon Read's
opinion was above the range of present values of Imagyn's future cash flows.
UROHEALTH VALUATION REVIEW
Dillon Read noted that there were differences between company financial
forecasts prepared by the management of Urohealth and prevailing publicly
available analyst financial forecasts relating to Urohealth, with management's
forecast for sales, operating income, and net income higher than analyst
forecasts. As a result, Dillon Read performed its analyses using both forecasts.
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Summary of Market Expectations. Dillon Read noted that there had been a
significant change in the prevailing publicly available analyst financial
forecasts for Urohealth from March 18, 1997 to July 3, 1997, as projected sales,
operating income, and net income for the quarter ending June 30, 1997 and for
each of fiscal 1998 and 1999 declined significantly.
Summary of Comparable Companies Analysis. Using publicly available
information, Dillon Read reviewed the stock prices and market multiples of
common stocks of the following companies in the urology and gynecology
businesses: C.R. Bard, Inc., Collagen Corporation, Conceptus, Inc., The Cooper
Companies, Inc., FemRx, Inc., Gynecare, Inc., Mentor Corporation, Rochester
Medical Corporation, UroMed Corporation, UroQuest Medical Corporation, United
States Surgical Corporation, and Vivus, Inc. Dillon Read believes these
companies are engaged in lines of business that are generally comparable to
those of Urohealth.
Dillon Read determined the equity market value and derived an "enterprise
value" (defined as equity market value adjusted by adding total debt and
subtracting cash and cash equivalents) for each of these comparable companies,
and calculated a range of such enterprise values as a multiple of the latest 12
months net sales and as a multiple of calendar year 1997 and 1998 expected net
sales using publicly available analyst financial forecasts. Enterprise value as
a multiple of the latest 12 months net sales at the median was 5.4x and ranged
from 1.6x to 126.9x for these comparable companies. Enterprise value as a
multiple of calendar year 1997 expected net sales at the median was 5.3x and
ranged from 2.0x to 69.9x. Enterprise value as a multiple of calendar year 1998
expected net sales at the median was 2.8x and ranged from 1.1x to 7.3x.
Dillon Read also considered the equity value for each of these comparable
companies, and calculated a range of equity values as a multiple of calendar
year 1997, calendar year 1998, and calendar year 1999 expected earnings per
share estimates based on publicly available analyst financial forecasts. Equity
value to 1997 expected earnings per share estimates for these comparable
companies at the median was 27.3x, and ranged from 19.3x to 51.7x. Equity value
to 1998 expected earnings per share estimates for these comparable companies at
the median was 20.5x, and ranged from 17.5x to 30.0x. Equity value to 1999
expected earnings per share estimates at the median was 17.0x, and ranged from
4.3x to 26.7x.
Dillon Read noted based on management forecasts that the closing price of
Urohealth Common Stock on July 15, 1997 of $5.25 was 3.0x latest 12 months net
sales, 1.9x calendar year 1997 forecasted net sales, and 1.3x calendar year 1998
forecasted net sales. Urohealth's equity value was 6.4x calendar year 1998
forecasted earnings per share, and 3.7x calendar year 1999 forecasted earnings
per share.
Dillon Read noted based on prevailing analyst forecasts that the closing
price of Urohealth Common Stock was 2.0x calendar year 1997 expected net sales
and 1.3x calendar year 1998 expected net sales. Urohealth's equity value was
8.2x calendar year 1998 expected earnings per share, and 5.7x calendar year 1999
expected earnings per share.
Dillon Read believes that the calculated multiples supported Dillon Read's
view that the Merger Consideration to be received by Imagyn stockholders is
fair, from a financial point of view, to such stockholders, because the
Urohealth ratios described above were within or below the range of selected
public comparable multiples, using both the company financial forecasts prepared
by the management of Urohealth and prevailing publicly available analyst
financial forecasts.
Discounted Cash Flow Analysis for Urohealth. Dillon Read performed a
discounted cash flow analysis of Urohealth using both the company financial
forecast provided by Urohealth management as well as prevailing publicly
available analyst financial forecasts. Utilizing each of these forecasts, Dillon
Read calculated the theoretical discounted present value of equity for Urohealth
by adding together the present value of (i) the future stream of unlevered free
cash flow through the fiscal year 2001, and (ii) the future value of Urohealth
at the end of the fiscal year 2001 (the "Terminal Value"), and subtracting the
net debt at June 30, 1997. The Terminal Value was calculated based on multiples
of earnings before interest, taxes, depreciation, and amortization for 2001
ranging from 8.0x to 12.0x. The cash flow streams and terminal values were then
discounted to present values using a range of discount rates from 25.0% to
35.0%. The terminal multiples and discount rates were chosen based on several
assumptions regarding factors such as inflation rates, interest
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rates, the inherent risk in Urohealth's business, products and technology as
well as the medical technology industry as a whole, and the cost of capital of
Urohealth.
The theoretical equity value of Urohealth based on management financial
forecasts produced a range of value per share of Urohealth Common Stock of
$11.12 to $27.14, with a midpoint value of $18.17. Based on prevailing publicly
available analyst financial forecasts, the theoretical equity value of Urohealth
produced a range of value per share of Urohealth Common Stock of $3.49 to
$12.48, with a midpoint value of $7.45. Dillon Read believes that the discounted
cash flow analysis supported Dillon Read's view that the Merger Consideration to
be received by Imagyn stockholders is fair, from a financial point of view, to
such stockholders, because the Urohealth Common Stock value at the time of
Dillon Read's opinion was below the range of present values of Urohealth's
future cash flows based on the company financial forecasts and within the range
of present values of Urohealth's future cash flows based on prevailing publicly
available analyst financial forecasts.
Pro Forma Merger Analysis. Dillon Read considered the pro forma financial
impact of the Merger on Urohealth's fiscal 1998, 1999 and 2000 forecasted
earnings per share estimates utilizing management financial forecast for Imagyn
and both prevailing publicly available analyst forecasts and management
financial forecasts for Urohealth. Dillon Read calculated a range of values,
expressed as the percentage accretion or dilution in Urohealth's earnings per
share, that incorporated Imagyn's management estimates of the potential
synergies in the combination of Urohealth and Imagyn. The calculated range of
values assumed realization of potential synergies from 0.0% to 100.0%. Given
this range of factors and using prevailing publicly available analyst forecasts
for Urohealth, the impact on Urohealth's pro forma earnings per share was
dilutive in 1998, accretive in 1999, and accretive in 2000. Using the management
financial forecast for Urohealth, the impact on Urohealth's pro forma earnings
per share was dilutive in 1998, accretive in 1999 and dilutive in 2000.
Contribution Analysis. Dillon Read considered the relative contribution of
Urohealth and Imagyn to the combined company sales and operating income, in the
context of the Imagyn stockholders' pro forma fully diluted ownership of 29.4%
(after giving effect to the conversion of the Debentures).
Using the financial forecasts prepared by the managements of Urohealth and
Imagyn, Imagyn's contribution to combined company sales was 4%, 6%, 7%, and 8%
in fiscal 1998, 1999, 2000, and 2001, respectively. Imagyn's contribution to
combined company operating income was (44%), (8%), 0%, and 4% in fiscal 1998,
1999, 2000, and 2001, respectively. Using prevailing publicly available analyst
financial forecasts for Urohealth, Imagyn's contribution to combined company
sales was 5%, 5%, 8%, and 9% in fiscal 1998, 1999, 2000, and 2001, respectively.
Imagyn's contribution to combined company operating income was (47%), (9%), 0%,
and 7% in fiscal 1998, 1999, 2000, and 2001, respectively.
Dillon Read believes that the contribution analysis supported Dillon Read's
view that the Merger Consideration to be received by Imagyn stockholders is
fair, from a financial point of view, to such stockholders, because the Imagyn
stockholders' pro forma fully diluted ownership of 29.4% exceeded Imagyn's
relative contribution to the combined company's sales and operating income in
each of fiscal 1998, 1999, 2000, and 2001, using both the company financial
forecasts prepared by the management of Urohealth and prevailing publicly
available analyst financial forecasts.
Dillon Read believes that its analyses must be considered as a whole and
that selecting portions of its analyses and other factors considered by it,
without considering all factors and analyses, could create a misleading view of
the processes underlying its opinion. Dillon Read did not quantify the effect of
each factor upon its opinion. Dillon Read made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond Imagyn's and Dillon Read's control. Any
estimates contained in Dillon Read's analyses are not necessarily indicative of
actual values, which may be significantly more or less favorable than as set
forth therein. Estimates of the financial value of companies do not purport to
be appraisals or necessarily reflect the prices at which companies actually may
be sold. Because such estimates inherently are subject to uncertainty, Dillon
Read assumes no responsibility for their accuracy.
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Dillon Read is an internationally recognized investment banking firm which,
as a part of its investment banking business, regularly is engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Dillon Read was the lead
manager in Imagyn's initial public offering. In the ordinary course of its
business, Dillon Read has traded Imagyn Common Stock for its own account and for
the accounts of customers and has traded Urohealth Common Stock for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
Pursuant to an engagement letter, dated October 4, 1996, as amended,
between Imagyn and Dillon Read, Imagyn agreed to pay Dillon Read a fee of
$50,000 in connection with Dillon Read's retention, a fee of $250,000 for
services rendered in connection with the preparation of its fairness opinion
dated April 18, 1997, and $250,000 for an additional fairness opinion dated July
16, 1997, and 1.25% of the Merger Consideration pursuant to the consummation of
the Merger, net of the retainer fee already received by Dillon Read pursuant to
its engagement. Imagyn has also agreed to reimburse Dillon Read for the expenses
reasonably incurred by it in connection with its engagement (including
reasonable counsel fees) and to indemnify Dillon Read and its officers,
directors, employees, agents and controlling persons against certain expenses,
losses, claims, damages or liabilities in connection with its services,
including those arising under the federal securities laws.
Dillon Read will not be updating its opinion either prior to the mailing of
this Proxy Statement/Prospectus or prior to the Imagyn Special Meeting or the
closing of the Merger.
CONDITIONS AND TERMS OF THE MERGER AGREEMENT
CLOSING AND EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware. Such filing will occur on
or after the date of the "Closing," which will occur on the first business day
after satisfaction or waiver of certain conditions set forth in the Merger
Agreement, unless the parties agree to another date for the Closing (see
"Conditions of the Merger Agreement" below).
EFFECTS OF THE MERGER
As of the Effective Time, the following will occur:
1. The separate existence of Urohealth Sub will cease, and Urohealth
Sub will be merged with and into Imagyn.
2. Each issued and outstanding share of Imagyn Common Stock will be
converted into 1.40 fully paid and nonassessable shares of Urohealth Common
Stock.
3. Each share of common stock, $.01 par value, of Urohealth Sub (all
of which are held by Urohealth) outstanding immediately prior to the
Effective Time will be converted into one share of common stock of Imagyn,
the surviving corporation after Urohealth Sub merges with and into Imagyn.
4. All shares of Imagyn Common Stock owned by Imagyn as treasury
stock, and all shares of Imagyn Common Stock owned by Urohealth or any
wholly-owned subsidiary of Urohealth, will be cancelled and retired and
will cease to exist.
5. All shares of Urohealth Common Stock owned by Imagyn or any
subsidiary will become treasury stock.
6. Each outstanding option to purchase shares of Imagyn Common Stock
("Imagyn Option"), whether vested or unvested, will be assumed by
Urohealth, and deemed to constitute the right to acquire, on the same terms
and conditions as were applicable under the Imagyn Option, shares of
Urohealth Common Stock based on the Exchange Ratio.
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<PAGE> 48
CONDITIONS OF THE MERGER
Conditions to the Closing of the Merger include, but are not limited to,
the following:
1. Stockholder Approval: The Merger Agreement shall have been
approved and adopted by (i) the affirmative vote of the holders of a
majority of the outstanding shares of Imagyn Common Stock and (ii) the
affirmative vote of holders of a majority of the outstanding shares of
Urohealth Common Stock who attend or are represented at the Urohealth
Special Meeting in person or by proxy.
2. Urohealth's Counsel Tax Opinion: Urohealth shall have received the
opinion of its tax counsel addressed to Urohealth to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). See "United States Federal Income Tax
Consequences" below.
3. Imagyn's Counsel Tax Opinion: Imagyn shall have received the
opinion of its tax counsel addressed to Imagyn to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code. See "United States
Federal Income Tax Consequences" below.
4. Limit on Cash Payments: The aggregate amount of cash required to
be paid on account of all cash payments for fractional shares shall not
exceed ten percent (10%) of the value of the Urohealth Common Stock
issuable in exchange for Imagyn Common Stock.
5. Pooling Letters. Each of Urohealth and Imagyn shall have received
from their independent public accountants letters indicating that the
Merger qualifies as a pooling of interests under generally accepted
accounting principles.
Each of the Boards of Directors of Urohealth and Imagyn has the authority
to waive certain conditions to the Closing of the Merger, including the
condition that it receive the opinion of its tax counsel. Certain other
conditions, including the condition that each of the Boards of Directors receive
a pooling letter from its independent auditors and the limit on cash payments,
may be waived only with the consent of the Boards of Directors of Urohealth,
Urohealth Sub and Imagyn. The condition that the Merger be approved by the
stockholders of each of Urohealth, Urohealth Sub and Imagyn may not be waived.
In order for the condition that both parties to the Merger receive letters
relating to pooling of interests accounting treatment from their respective
independent auditors to be waived, both the Boards of Directors of Urohealth and
Imagyn must approve such waiver. If such condition were to be waived, Imagyn and
Urohealth would resolicit stockholder approval of the Merger through a new Joint
Proxy Statement/Prospectus which would contain, among other things, pro forma
financial information prepared with the assumption that the Merger would be
accounted for as a purchase. In addition, as the opinions of the parties'
respective financial advisors assume that the Merger will be accounted for as a
pooling of interests, such opinions would not be applicable to a transaction
that would be accounted for as a purchase.
Currently, neither Urohealth nor Imagyn anticipates that the closing
condition relating to pooling of interests accounting treatment will be waived.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated prior to the Effective Time upon
certain occurrences, including but not limited to the following:
1. By mutual written consent of Urohealth and Imagyn.
2. By either Urohealth or Imagyn if the Merger has not been
consummated on or before September 30, 1997.
3. By written notice from either Urohealth or Imagyn to the other
party indicating that there has been a material breach of a material
obligation of the other party under the Merger Agreement, subject to a cure
period.
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<PAGE> 49
4. By written notice from either Urohealth or Imagyn to the other
party if any court or governmental entity of competent jurisdiction
prohibits the consummation of the transactions contemplated by the Merger
Agreement, and any appeal or reconsideration has been rejected or is
unavailable.
5. By written notice from either Urohealth or Imagyn to the other
party if approval of the stockholders of Urohealth or of Imagyn required
for the consummation of the Merger 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.
6. By Imagyn, if it shall have received an acquisition proposal from
a third party regarding the acquisition of Imagyn and the Board of
Directors of Imagyn shall have determined that in the exercise of its
fiduciary duties to Imagyn stockholders that Imagyn must pursue the
alternative acquisition proposal.
CANCELLATION FEE
In the event that Imagyn enters into an acquisition transaction with a
party other than Urohealth, or the Merger is not approved following an
acquisition proposal from a party other than Urohealth, and under certain other
related circumstances, Imagyn is obligated to pay to Urohealth a cancellation
fee of $5,000,000. In the event that the stockholders of Urohealth or Imagyn
fail to approve the Merger in a circumstance not involving an offer by a third
party with respect to an acquisition proposal, the party electing to terminate
the Merger Agreement is required to pay the non-terminating party an expense
reimbursement fee of $2,000,000.
PAYMENT IN LIEU OF FRACTIONAL SHARES
No fractional shares of Urohealth will be issued as a result of the Merger.
In lieu of the issuance of fractional shares, each Imagyn stockholder who
otherwise would be entitled to a fractional share of Urohealth Common Stock will
receive a cash payment equal to the product obtained by multiplying the
fractional share interest to which such holder would otherwise be entitled by
the average closing price for a share of Urohealth Common Stock on the Nasdaq
for the five trading days immediately following the Effective Time.
INTEREST OF CERTAIN PERSONS IN THE MERGER
At the Effective Time, Franklin D. Brown, President and Chief Executive
Officer of Imagyn will be entitled to receive a severance payment equal to
$240,000, in full satisfaction of Imagyn's obligations to him under his
employment agreement and the termination thereof. In addition, Mr. Brown will
enter into a one-year non-compete agreement, under which he will agree not to
compete with the business of Imagyn as conducted by Urohealth after the Merger,
in consideration of payments of $120,000 on January 2, 1998 and $120,000 on June
30, 1998.
Urohealth will also enter into employment agreements at the Effective Time
with seven officers of Imagyn providing for a one-year terms at their current
salary levels. In the event that any of such Imagyn officers are not offered, or
do not accept employment with Urohealth, such officers will receive at the
closing of the Merger a severance payment equal to one year's salary.
On June 3, and June 5, 1997, Urohealth and Imagyn entered into
Manufacturer's Representative Agreements pursuant to which Imagyn and Urohealth
appointed each other as sales representatives to market and sell certain of each
other's products on a commission basis. Each Manufacturer's Representative
Agreement will terminate by its terms at the Effective Time.
OPERATION AND MANAGEMENT OF IMAGYN AFTER THE MERGER
After the Merger, the business and operations of Imagyn will be managed and
operated as a wholly-owned subsidiary of Urohealth. Certain current Urohealth
officers may become officers of Imagyn shortly following consummation of the
Merger. Urohealth expects that the operations of Urohealth and Imagyn will be
consolidated after the Merger and that decisions as to the continuing employment
of Imagyn officers and employees will be made on a case-by-case basis after the
consummation of the Merger based upon Urohealth's evaluation of the combined
operations of the two companies.
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<PAGE> 50
STOCKHOLDER APPROVALS
Urohealth Stockholder Approval. The rules and regulations of the Nasdaq
require approval of the issuance of the shares of Urohealth Common Stock under
the Merger Agreement by holders of a majority of the outstanding shares of
Urohealth Common Stock voting at the Urohealth Annual Meeting in person or by
proxy.
Urohealth Sub Stockholder Approval. The DGCL requires the affirmative vote
of a majority of the issued and outstanding shares of common stock of Urohealth
Sub for approval of the Merger Agreement. Urohealth owns all the issued and
outstanding shares of common stock of Urohealth Sub and has voted such shares to
approve the Merger Agreement.
Imagyn Stockholder Approval. The DGCL requires the affirmative vote of a
majority of the issued and outstanding shares of Imagyn Common Stock for
approval of the Merger Agreement.
COMPARISON OF RIGHTS OF HOLDERS OF IMAGYN COMMON STOCK AND UROHEALTH COMMON
STOCK
If the Merger is consummated, holders of Imagyn Common Stock will become
holders of Urohealth Common Stock, and the rights of such former Imagyn
stockholders will be governed by the laws of the State of Delaware and by the
Urohealth Certificate of Incorporation and Urohealth Bylaws. Urohealth and
Imagyn are both incorporated under the laws of the State of Delaware.
Consequently, the Merger will affect the rights of Imagyn stockholders only to
the extent that there are differences in the Certificates of Incorporation and
Bylaws of Urohealth and Imagyn. Certain of those differences are summarized
below. This summary is qualified in its entirety by reference to the full text
of such documents.
Special Meeting of Stockholders. The Imagyn Bylaws and the Urohealth Bylaws
have essentially identical provisions regarding special meeting of stockholders.
Number and Election of Directors. The Urohealth Bylaws set the number of
directors at a number established from time to time by Urohealth's Board of
Directors. Urohealth does not currently have a classified or staggered board;
however, a proposal will be voted upon at the Urohealth Annual Meeting to create
a classified board. The Imagyn Bylaws set the number of directors as six, until
amended by the Imagyn Board of Directors. The directors of Imagyn are divided
into three classes, with two directors in each class. Each director, after an
initial term, serves a three-year term with the terms of one class of directors
expiring each year.
Removal of Directors. Neither the Imagyn Certificate of Incorporation and
Bylaws nor the Urohealth Certificate of Incorporation and Bylaws contains
provisions altering the requirements of the DGCL with respect to removal of
directors.
Vacancies. The Imagyn Bylaws and the Urohealth Bylaws each provide that
vacancies on their respective Boards of Directors are to be filled by the vote
of a majority of directors then in office.
Indemnification of Directors. Both the Imagyn Bylaws and the Urohealth
Bylaws provide that the officers and directors of Imagyn and Urohealth will be
indemnified to the fullest extent permitted and in the manner required by the
DGCL. The Urohealth Bylaws provide that a director seeking to enforce his or her
indemnification rights may bring suit to recover a claim for indemnification if
that claim has not been paid by Urohealth within 30 days of its submission.
Limitation of Personal Liability of Directors. The Imagyn Certificate of
Incorporation and the Urohealth Certificate of Incorporation both limit a
director's personal liability to Imagyn or its stockholders, and Urohealth or
its stockholders, respectively, for monetary damages for breach of fiduciary
duty to the fullest extent permitted by the DGCL.
GOVERNMENTAL AND REGULATORY APPROVALS
Urohealth and Imagyn are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than compliance with federal and
applicable state securities laws, compliance with the
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<PAGE> 51
HSR Act and corporate laws and the rules of the Nasdaq, and the required
transfer of or amendment to certain of Imagyn's licenses and permits.
RESALES OF UROHEALTH COMMON STOCK
The shares of Urohealth Common Stock received by Imagyn stockholders in the
Merger will be freely transferable, except that the shares received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of Imagyn prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act (or Rule 144 in the case of such persons who become affiliates of Urohealth
or as otherwise permitted under the Securities Act). Persons who may be deemed
to be affiliates of Imagyn or Urohealth generally include individuals or
entities that control, are controlled by, or are under common control with, such
party and may include certain officers and directors of such party as well as
principal stockholders of such party.
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Time, American Stock Transfer and Trust
Company, or such other bank or trust company designated by Urohealth and
reasonably acceptable to Imagyn (the "Exchange Agent"), will mail written
transmittal materials concerning exchange of stock certificates to each record
holder of shares of Imagyn Common Stock outstanding at the Effective Time. The
transmittal materials will contain instructions with respect to the proper
method of surrender of certificates formerly representing shares of Imagyn
Common Stock in exchange for certificates representing shares of Urohealth
Common Stock.
Upon surrender to the Exchange Agent of certificates formerly representing
shares of Imagyn Common Stock for cancellation, together with properly completed
transmittal materials, each Imagyn stockholder will be entitled to receive a
certificate representing the number of whole shares of Urohealth Common Stock
into which the stockholder's shares of Imagyn Common Stock have been converted
and a check for cash in lieu of the issuance of any fractional share of
Urohealth Common Stock. Imagyn stockholders shall not be entitled to receive
interest on any such cash to be received in the Merger.
Until they have surrendered their Imagyn Common Stock certificates for
exchange, Imagyn stockholders will not be entitled to receive any dividends or
other distributions that may be declared and payable to holders of record of
Urohealth Common Stock. Upon the surrender of Imagyn Common Stock certificates,
Urohealth Common Stock certificates (together with any such withheld dividends
or other distributions without interest) will be delivered. At the same time or
as soon as possible thereafter, any cash payment for a fractional share will be
paid (without interest). See "Conditions and Terms of the Merger -- Payment in
Lieu of Fractional Shares."
After the Effective Time, certificates representing shares of Imagyn Common
Stock converted into Urohealth Common Stock in the Merger will be deemed for all
other corporate purposes to evidence ownership of the shares of Urohealth Common
Stock into which they were converted. Any Imagyn stockholder whose certificate
for Imagyn Common Stock has been lost, destroyed, or stolen will be entitled to
issuance of a certificate representing the shares of Urohealth Common Stock into
which such Imagyn Common Stock will have been converted upon compliance with
such requirements as Urohealth and the Exchange Agent customarily apply in
connection with lost, stolen, or destroyed certificates representing shares of
Urohealth Common Stock.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of the material United States
federal income tax consequences of the Merger. This summary is based upon the
United States Internal Revenue Code of 1986, as amended (the "Code"),
regulations and rulings now in effect or proposed thereunder, current
administrative rulings and practice and judicial authority, all of which are
subject to change which change may be retroactive. Any such change could alter
the tax consequences to Urohealth or Imagyn stockholders set forth herein. This
summary does not discuss all aspects of United States federal income taxation
that may be relevant to a particular investor in light of personal circumstances
or to certain types of investors subject to
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<PAGE> 52
special treatment under the United States federal income tax laws (for example,
life insurance companies, tax-exempt organizations, foreign investors, dealers
in securities and taxpayers subject to the alternative minimum tax) and does not
discuss any aspect of state, local or foreign tax laws.
Consummation of the Merger is subject to the receipt by Imagyn of an
opinion, dated the Effective Time, of counsel to Imagyn, to the effect that the
Merger will be treated for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, and that
Urohealth and Imagyn will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. Such opinion of counsel may be subject to
conditions stated therein and will also rely upon the facts set forth or
referred to therein, including facts stated by a responsible officer or officers
of either or both of Urohealth and Imagyn. Further, such an opinion is not
binding upon the United States Internal Revenue Service ("IRS") or the courts.
Imagyn does not intend to apply for a ruling from the IRS with respect to the
United States federal income tax consequences of the Merger.
In addition to the foregoing, consummation of the Merger is subject to the
receipt by Urohealth of an opinion, dated as of the Effective Time, of counsel
to Urohealth, to the effect that, for United States federal income tax purposes,
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code, and that Urohealth and Imagyn will each be a party to that
reorganization within the meaning of Section 368(b) of the Code. Such opinion of
counsel may be subject to conditions stated therein and will also rely upon the
facts set forth or referred to therein, including facts stated by a responsible
officer or officers of either or both of Urohealth and Imagyn. Such opinion is
not binding upon the IRS or the courts. Urohealth does not intend to apply for a
ruling from the IRS with respect to the United States federal income tax
consequences of the Merger.
If the Merger constitutes such a reorganization, the following would be the
material United States federal income tax consequences of the Merger to the
stockholders of Imagyn: (i) no gain or loss will be recognized by stockholders
of Imagyn upon their receipt of Urohealth Common Stock in exchange for their
Imagyn Common Stock, except stockholders who receive cash proceeds for
fractional share interests in Urohealth Common Stock will recognize gain or loss
equal to the difference between such proceeds and the tax basis allocated to
their fractional share interests, and such gain or loss will constitute capital
gain or loss if their Imagyn Common Stock is held as a capital asset at the
Effective Time; (ii) the tax basis of the shares of Urohealth Common Stock
received by the stockholders of Imagyn will be the same as the tax basis of
their Imagyn Common Stock, less the tax basis attributable to fractional share
interest in Urohealth Common Stock for which cash is received in lieu thereof;
and (iii) the holding period of the Urohealth Common Stock in the hands of the
Imagyn stockholders will include the holding period of their Imagyn Common
Stock, provided such Imagyn stock is held as a capital asset at the Effective
Time.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY. SUCH DISCUSSION MAY NOT BE APPLICABLE TO A
STOCKHOLDER WHO ACQUIRED SHARES OF IMAGYN STOCK PURSUANT TO THE EXERCISE OF AN
EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION. IMAGYN STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS FOR MORE SPECIFIC AND DEFINITE ADVICE AS
TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM ON THE EXCHANGE OF
THEIR IMAGYN STOCK PURSUANT TO THE MERGER, AS WELL AS ADVICE TO THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
The foregoing discussion of the expected tax consequences of the Merger was
based on opinions of Urohealth's tax counsel, Morrison & Foerster LLP, and
Imagyn's tax counsel, Wilson Sonsini Goodrich & Rosati.
ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a pooling-of-interests.
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<PAGE> 53
STOCKHOLDERS' RIGHT TO DISSENT
Under the General Corporation Law of the State of Delaware, neither holders
of Imagyn Common Stock nor Urohealth Common Stock will not be entitled to rights
of appraisal in connection with the Merger.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Urohealth
Urohealth'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. For current price information, stockholders are
encouraged to consult publicly available sources.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996:
First quarter.............................................. $13-7/8 $ 9
Second quarter............................................. $ 9-3/8 $ 6-3/16
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
Second quarter (through September 4, 1997)................. $ 6 $ 4
</TABLE>
Urohealth 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
Urohealth 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 and preferred stock of a
subsidiary.
Imagyn
Imagyn Common Stock is traded on the Nasdaq National Market under the
symbol "IGYN." Prior to May 30, 1996, Imagyn's Common Stock was not publicly
traded.
The following table sets forth the high and low sales prices per share for
the periods indicated.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
Second Quarter (from May 30, 1996)........................... $17 $10-3/4
Third Quarter................................................ $11-1/8 $ 7
Fourth Quarter............................................... $10-7/8 $ 6-7/8
1997
----
First Quarter................................................ $10-1/8 $ 6-1/8
Second Quarter............................................... $ 9-7/8 $ 6-7/8
Third quarter (through September 4, 1997).................... $ 6-7/8 $ 5-3/8
</TABLE>
Imagyn has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future.
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<PAGE> 54
UROHEALTH SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Urohealth have been
derived from the consolidated financial statements of Urohealth which have been
prepared in accordance with United States generally accepted accounting
principles and include the statements of operations and balance sheet data for
Osbon Medical Systems, Ltd. ("Osbon"), Advanced Surgical, Inc. ("Advanced"),
Dacomed Corporation ("Dacomed"), Allstate Medical Products, Inc. ("Allstate")
and Microsurge, Inc. ("Microsurge") which acquisitions were accounted for as
pooling-of-interests transactions. The selected consolidated financial data
presented below have also been derived from statement of operations and balance
sheet data for Richard-Allan, which has been accounted for as a purchase, from
August 14, 1996, and X-Cardia, which has been accounted for as a purchase, from
February 28, 1997. For further information on these and other business
combinations, see "Urohealth Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1 of Notes to Consolidated
Financial Statements of Urohealth contained elsewhere herein. Financial data as
of March 31, 1996 and 1997 and for the year ended June 30, 1995, the nine months
ended March 31, 1996 and the year ended March 31, 1997 are derived from the
consolidated financial statements of Urohealth included elsewhere herein that
have been audited by Ernst & Young LLP, independent auditors, except for the
financial statements of Microsurge for all periods presented and the financial
statements of Dacomed for the fiscal year ended June 24, 1995, consolidated
subsidiaries which were audited by other independent auditors. The data should
be read in conjunction with the consolidated financial statements, related
notes, and other financial information included or referred to herein. The
selected consolidated financial data set forth below for the years ended June
30, 1993 and 1994 and as of June 30, 1993, 1994 and 1995 are derived from
financial statements not included herein. The financial data for the nine months
ended March 31, 1995, for the 12-months ended March 31, 1996 and for the three
months ended June 30, 1996 and 1997 are derived from the unaudited financial
statements of Urohealth, which contain all adjustments, consisting of normal
recurring accruals (except for the restructuring, direct acquisition and other
costs and extraordinary items identified in the statement of operations data
below) which Urohealth considers necessary for a fair presentation of the
financial position and results of operations for those periods. The results of
operations for the three months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the entire year. The following data
should be read in conjunction with "Urohealth Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Urohealth
Consolidated Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED 12-MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,(1) ENDED YEAR ENDED JUNE 30,
------------------------------ ------------------- MARCH 31, MARCH 31, -------------------
1993 1994 1995 1995 1996 1996 1997 1996 1997
-------- -------- -------- -------- -------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................... $ 32,666 $ 39,376 $ 49,250 $ 34,467 $ 42,953 $ 56,630 $ 90,695 $ 17,318 $ 25,237
Gross profit................. 20,008 24,341 30,721 22,026 27,989 36,793 49,612 11,198 13,535
Selling, general and
administrative............. 26,298 36,114 41,057 28,839 37,056 47,977 57,691 10,685 16,863
Research and development..... 6,332 11,480 5,406 4,752 2,777 3,881 4,997 800 1,665
Restructuring, direct
acquisition and other
costs(2)................... 563 1,000 7,663 6,812 9,688 10,539 62,832 -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loss from operations......... (13,185) (24,253) (23,405) (18,377) (21,532) (25,604) (75,908) (287) (4,993)
Interest expense............. 325 406 367 254 1,059 1,165 8,143 1,044 5,433
Loss before extraordinary
item....................... (13,441) (24,804) (24,837) (19,299) (23,024) (27,527) (83,510) (1,290) (9,591)
Extraordinary item........... -- -- -- -- -- -- (2,973) (2,973) (1,823)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net loss..................... $(13,441) $(24,804) $(24,837) $ 19,299 $(23,024) $(27,527) $(86,483) $ (4,263) $(11,414)
Loss per share before
extraordinary item......... $ (1.04) $ (1.90) $ (1.70) $ (1.39) $ (1.58) $ (1.85) $ (4.31) $ (0.10) $ (0.40)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------------------- ----------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents............................. $10,161 $ 7,065 $ 2,857 $ 3,345 $ 2,591 $ 5,750
Working capital (deficit)........................ 17,307 12,784 5,909 (3,330) 1,714 30,508
Total assets..................................... 32,954 31,473 31,082 33,355 137,159 179,689
Short-term debt.................................. -- -- 1,689 9,549 14,518 5,268
Current portion of long-term debt................ 1,568 2,025 822 546 3,328 3,216
Long-term debt................................... 1,475 1,529 2,674 8,272 98,292 53,269
Senior subordinated notes, net of discount....... -- -- -- -- -- 108,340
Redeemable convertible preferred stock........... -- -- 1,143 3,554 -- --
Common stockholders' equity (deficiency)......... 23,825 19,537 12,941 (4,575) (14,511) (23,976)
</TABLE>
- ---------------
(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.
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<PAGE> 55
UROHEALTH 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. Urohealth has recorded
significant direct acquisition costs, write-off of purchased research and
development and other charges related primarily to 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. Urohealth 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 in-house molding
capabilities for recently acquired products.
As a result of the foregoing, Urohealth's fiscal 1997 results are not
necessarily comparable to prior periods. The fiscal 1997 results also may not be
comparable due to, among other reasons, the pooling of results of operations of
merged entities for periods during which such entities were operated under a
different management team and the acquisitions completed in fiscal 1997 and
accounted for as purchase transactions. In addition, historical results are not
necessarily indicative of, nor will they be comparable to, the financial results
Urohealth will realize in future periods.
Restatement of Fiscal 1997 Quarters. Urohealth restated the results of
operations for the first three fiscal quarters of 1997 to reflect the delayed
recognition of revenue from distributor initial stocking orders ($2,465,000 in
Q3), the delayed recognition of revenue relating to the shipment of introductory
products ($661,000 in Q1, $855,000 in Q2 and $55,000 in Q3), reductions of
overhead capitalized in inventory ($143,000 in Q1, $349,000 in Q2 and $978,000
in Q3) and increased sales return allowances ($53,000 in Q1, $53,000 in Q2 and
$115,000 in Q3). Those adjustments have been reflected in the discussion set
forth below. For a more complete description of the effect of this restatement
see Note 14 of Notes to Consolidated Financial Statements of Urohealth.
Change in Fiscal Year End. In 1996, Urohealth changed its fiscal year end
from June 30 to March 31, therefore, the following discussion for fiscal 1997
compares the year ended March 31, 1997 with the 12-months ended March 31, 1996
and fiscal 1996 compares the nine month transition period ending March 31, 1996
to the corresponding period of the prior year.
50
<PAGE> 56
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996.
Net sales. For the three months ended June 30, 1997, net sales of $25.2
million were $7.9 million or 46% higher than sales of $17.3 million for the
corresponding period in 1996. This increase was largely due to the acquisition
of Richard Allan, recorded as a purchase, on August 19, 1996 which increased
revenues by approximately $9.6 million for the three months ended June 30, 1997
compared to the corresponding period in 1996. Sales for the three months ended
June 30, 1997 include approximately $7.6 million of reorders received from
Urohealth's new surgical products distributors. The increase in surgical
products sales was offset by a decrease of $3.7 million in sales of urology
products for the three months ended June 30, 1997 compared to the corresponding
period of the prior year. Urohealth believes that the introduction of a new
drug-based treatment for impotence adversely affected the sale of vacuum
erection devices during the quarter as patients opted to try the new treatment
modality. While it is impracticable for Urohealth to predict the long-term
effect of the new treatment modality, Urohealth had an increase in vacuum
erection device sales after quarter end. Urohealth's shipments of approximately
$15.1 million of surgical products to certain new surgical product distributors
during fiscal 1997 as part of initial stocking orders are expected to be
recognized as revenue later this fiscal year.
Gross profit. For the three months ended June 30, 1997, gross profit
increased $2.3 million or 21% over the corresponding period in 1996. The gross
profit percentage decreased from 65% for the three months ended June 30, 1996 to
54% for the three months ended June 30, 1997. The decrease in gross profit
percentage was primarily due to the large increase in lower margin surgical
product sales. For the three months ended June 30, 1996, higher margin urology
products accounted for 78% of sales, decreasing to approximately 39% of sales
during the three months ended June 30, 1997.
Selling, general and administrative. Selling, general and administrative
expenses of $16.9 million for the three months ended June 30, 1997 were $6.2
million or 58% higher than selling, general and administrative expenses of $10.7
million for the corresponding period in 1996. The increase was due to the
increased sales levels and selling, general and administrative expenses included
in the quarter ended June 30, 1997 relating to Richard-Allan operations
(approximately $4.7 million) and the infrastructure for Urohealth's
visualization and gynecology divisions (approximately $900,000) which were not
included in the corresponding quarter of the prior year.
Research and development. Research and development costs for the three
months ended June 30, 1997 increased $865,000 over the corresponding period in
1996. During fiscal 1997, Urohealth made significant investments in, and
acquisitions of, technology. The increase in research and development
expenditures is related to the development of new products using the acquired
technologies.
Interest expense. Interest expense for the three months ended June 30, 1997
increased $4.4 million over the corresponding period in 1996. The increase was
primarily due to interest expense associated with Urohealth's sale of $110
million of 12.5% Senior Subordinated Notes in April 1997 as well as a full three
months of interest on the convertible subordinated debentures issued in May
1996.
Extraordinary item. Urohealth used approximately $54 million of the net
proceeds from the offering of the Notes to repay amounts outstanding under its
term and revolving credit facility and recorded an extraordinary loss of $1.8
million, consisting of the write-off of deferred financing costs, related to the
early retirement of this credit facility.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Net Sales. Net sales during the 12-months ended March 31, 1997 ("fiscal
1997" or "1997") increased $34 million, or 60%, over the twelve months ended
March 31, 1996. This increase was primarily due to higher sales of Urohealth's
urology products which increased $11.8 million, or 28%, to $53.7 million, the
purchase of Richard-Allan on August 14, 1996 which increased revenues by
approximately $16.3 million and the acquisition of Microsurge in March 1997
which increased revenues by $3.1 million. In addition, Urohealth 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 Urohealth's
urology products, minimally invasive and general surgery products, and
medical/surgical products represented 59.3%, 30.3% and 10.4%, respectively, of
net sales for the year ended March 31, 1997.
51
<PAGE> 57
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, Urohealth'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. Urohealth 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 Urohealth 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 Urohealth made acquisitions of technologies under
development that were also accounted for as purchased research and development
and written-off. Accordingly, $25.5 million, $11.5 million and $10.2 million
have been expensed in connection with the acquisitions of Richard-Allan,
X-Cardia and other technology purchases, respectively. The acquired in-process
research and development projects to which the write-offs relate include: the
articulating endoscopic cutter and stapler (Richard-Allan) (the "AEC Project"),
the cardiac output endotracheal tube (X-Cardia) (the "ECOM Project"), the
reflexive oximetry sensor (X-Cardia) (the "ROS Project"), the percutaneous
excisional breast biopsy system (PEBB) (the "PEBB Project"), the pivotal
endoscopic technology (Pivotal) (the "Pivotal Project"), the optical aspirating
currette (the "OAC Project") and pHEM alert (the "pHEM Project"). Urohealth
determined on a project by project basis the uncertainties associated with
successfully completing each project, and estimated the amount necessary to
complete each project, which at the time of valuations were as follows: the AEC
Project: $200,000; the ECOM Project: $2.1 million; the ROS Project: $2.7
million; the PEBB Project: $2.8 million; the Pivotal Project: $1.6 million; the
OAC Project: $1.4 million; and the pHEM Project: $700,000. Urohealth then valued
the purchased research and development primarily using the income approach,
which included an analysis of markets, cash flows, and risks associated with
achieving such cash flows for each project. Based on the foregoing analysis a
portion of the purchase price was allocated to each project based on the
appraised fair market value of the project. Due to uncertainties that are an
inherent part of the research and development process, there can be no assurance
that such acquired research and development projects will be successfully
completed, or if successfully completed, the products will find market
acceptance or generate sufficient net cash flows to recover invested funds.
Restructuring Charges. In September 1996, Urohealth 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 Urohealth'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. Urohealth 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
52
<PAGE> 58
administrative costs. Although subject to future adjustment, management of
Urohealth 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, Urohealth implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from the mergers with Osbon
and Microsurge. The plan provides for the elimination of approximately 90
personnel and the closure of all significant operations at Osbon (except for
customer service, sales and a limited accounting support staff) and the closure
of all Microsurge facilities. The estimated cost associated with each component
of this restructuring plan and the cash and non-cash charges incurred during
fiscal 1997 are summarized in the table below. Non-cash charges consist of the
write-down of existing assets to their estimated net realizable value. Although
subject to future adjustment, management of Urohealth 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 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 Urohealth 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.
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<PAGE> 59
Research and Development. Research and development expenses during 1996
decreased $2.0 million or 42% in 1996 over the same period in 1995. Overall, the
decline in research and development costs was a result of Urohealth's decision
to narrow the focus of such efforts, and to adopt a program of actively
acquiring or licensing developed technology. In connection with the acquisition
of Laparomed Corporation on July 27, 1994, Urohealth expensed $5.3 million of
purchased research and development. The Laparomed Corporation acquisition has
been accounted for as purchase with a purchase price of approximately $7
million.
Restructuring Charges. In December 1995, Urohealth implemented a
restructuring plan to consolidate redundant facilities and reduce personnel
resulting from the mergers with Dacomed, Osbon and Advanced. Under the plan,
Urohealth eliminated approximately 70 manufacturing, engineering and
administrative personnel and closed all operations at two acquired facilities.
The estimated cost associated with each component of this restructuring plan and
the cash and non-cash charges incurred during fiscal 1996 are summarized in the
table below. Non-cash charges consist of the write-down of existing assets to
their estimated net realizable value. Reclassifications during the period relate
to decreases in severance amounts payable to officers of acquired companies,
offset by increases in estimates for facility closure costs including loss on
sale of discontinued product lines and closure costs related to international
operations of acquired companies. The remaining restructuring accrual at March
31, 1996 relates primarily to terminated employee severance and facility lease
obligations, which are expected to be paid in cash. Although subject to future
adjustment, management of Urohealth believes that restructuring reserves as of
March 31, 1996 are adequate to complete the restructuring.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH RECLASSI- MARCH 31,
ACCRUAL CHARGES CHARGES FICATIONS 1996
-------------- -------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs........ $2,620 $ -- $1,171 $(730) $ 719
Facility reduction costs......... 2,836 1,187 1,258 730 1,121
------ ------ ------ ----- ------
$5,456 $1,187 $2,429 $ -- $ 1,840
====== ====== ====== ===== ======
</TABLE>
Direct Acquisition Costs. Merger and acquisition costs during 1996
increased $3.4 million over the same period in 1995. The results of operations
in 1996 reflect additional transaction costs of $4.2 million related to
Urohealth's mergers with Osbon, Advanced and Dacomed. These transaction costs
include expenses related to broker and other professional fees.
Interest Expense. Interest expense during 1996 increased by approximately
$805,000 or 317% over the same period in 1995, primarily due to the issuance of
the Debentures as well as increased borrowings under term loans and lines of
credit.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Expenses related to minority interest were $78,000, $55,000 and $25,000
during fiscal 1995, 1996 and 1997, respectively. Such expenses consist of 7%
dividends payable to stockholders of preferred stock of a Urohealth subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
In April 1997, Urohealth completed the sale of $110 million of its 12 1/2%
Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. Urohealth used approximately $54 million of the net
proceeds from the offering to repay amount outstanding under Urohealth's term
and revolving credit facility. Concurrently with the consummation of the sale of
the Notes, Urohealth entered into a new $50 million revolving credit facility
with Urohealth's senior lender (the "Credit Facility"). The Credit Facility is
secured by substantially all of Urohealth's assets and matures in March 2002.
Urohealth is required to meet certain financial covenants under the 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 Credit Facility. Urohealth was not in
compliance with certain financial covenants under its Credit Facility for the
quarter ended June 30, 1997, and has been granted a waiver through September 15,
1997 by its senior lender that permits borrowings equal to the lesser of $15
million and 80% of eligible accounts receivable under the facility. As of June
30, 1997, after giving effect to the waiver, Urohealth's borrowing eligibility
under the Credit Facility was approximately $13.4 million. Subsequent to
54
<PAGE> 60
June 30, 1997, Urohealth drew down $13.3 million under the Credit Facility. As
of June 30, 1997, Urohealth had working capital of approximately $30.5 million.
Urohealth 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, Urohealth is obligated to repay at maturity approximately
$5.8 million of notes and accrued interest assumed in the acquisition of
Microsurge. In addition, Urohealth is obligated to pay $16.5 million to the
former X-Cardia shareholders on or prior to October 3, 1997 relating to the
achievement of the patent approval milestone.
Approximately $5.5 million of Urohealth's restructuring charges are
projected to be paid over the next 12 months. The long-term portion consists of
redundant facility lease costs to be paid out through 2003 and severance costs
to be paid out over the next two years. Urohealth currently expects to pay these
restructuring charges from cash flow from operations or from financing
activities.
Urohealth had capital expenditures for the nine months ended March 31,
1996, the year ended March 31, 1997 and the three months ended June 30, 1997 of
$3.0 million, $12.3 million and $3.1 million, respectively, primarily due to the
consolidation and expansion of manufacturing and upgrade of management
information systems. Urohealth currently has a $2.7 million commitment for a
corporate aircraft and anticipates capital expenditures, primarily for increased
manufacturing capacity and information systems, for the next 12 months will
exceed $10.0 million.
Urohealth is a holding company whose material assets consist primarily of
the capital stock of its subsidiaries. Consequently, Urohealth is dependent upon
dividends paid by its subsidiaries to pay Urohealth's operating expenses and to
service Urohealth's debt obligations, including its obligations under the Notes
and the 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 Urohealth.
Through June 30, 1997 Urohealth has continued to have negative cash flow
from operations, primarily due to increases in operating losses, accounts
receivable and inventories. Operating losses increased for the reasons discussed
previously in this Management's Discussion and Analysis of Financial Condition
and Results of Operations. Urohealth's accounts receivable balances were
approximately $4.8 million higher at June 30, 1997 than at March 31, 1997
primarily due to increased sales during the quarter ended June 30, 1997.
Management anticipates further increases in accounts receivable in 1997,
possibly also on extended payment terms, as sales volume under a number of
distribution agreements increases. Urohealth's inventory balances were
approximately $8.8 million higher at June 30, 1997 than at March 31, 1997 due to
an increase in inventories to support increased sales volume. Urohealth expects
further increases in inventories to support anticipated sales under group
purchasing organization and distribution agreements. Cash used in operations
totaled approximately $55 million for the year ended March 31, 1997 and
approximately $22.9 million for the three months ended June 30, 1997.
Urohealth's operations have been funded primarily from the proceeds of debt and
equity offerings.
Urohealth believes currently available cash balances, amounts available
under the 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.
55
<PAGE> 61
IMAGYN SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below of Imagyn for the
years ended December 31, 1994, 1995 and 1996 and as of December 31, 1995 and
1996 are derived from the consolidated financial statements of Imagyn which have
been audited by Coopers & Lybrand L.L.P., independent accountants. The selected
consolidated financial data of Imagyn set forth below for the years ended
December 31, 1992 and 1993 and as of December 31, 1992, 1993 and 1994 are also
derived from the consolidated financial statements audited by Coopers & Lybrand
L.L.P. which are not included herein. The selected consolidated financial data
at June 30, 1997 and for the six month periods ended June 30, 1996 and 1997 are
derived from unaudited consolidated financial statements included elsewhere
herein and include in the opinion of Imagyn, all adjustments consisting of only
normal recurring adjustments necessary for a fair presentation of Imagyn's
results of operations for those periods and financial position at that date.
Operating results for the six month period ended June 30, 1997 are not
necessarily indicative of operating results for any subsequent period. The
following data should be read in conjunction with "Imagyn Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of Imagyn included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales........................... $ 1,238 $ 1,047 $ 1,005 $ 2,243 $ 9,371 $ 3,972 $ 1,925
Cost of sales....................... 702 1,006 1,268 1,811 6,579 2,811 1,443
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)................. 536 41 (263) 432 2,792 1,161 482
Cost and expenses:
Sales and marketing............... 1,665 2,397 2,317 3,296 4,039 1,375 3,004
Research and development.......... 1,917 1,917 1,797 1,811 2,708 1,421 2,119
General and administrative........ 1,360 904 1,108 1,253 2,277 880 1,737
------- ------- ------- ------- ------- ------- -------
Total costs and expenses........ 4,942 5,218 5,222 6,360 9,024 3,676 6,860
------- ------- ------- ------- ------- ------- -------
Other operating income.............. 1,000 -- -- 3,500 -- -- --
------- ------- ------- ------- ------- ------- -------
Loss from operations............ (3,406) (5,177) (5,485) (2,428) (6,232) (2,515) (6,377)
------- ------- ------- ------- ------- ------- -------
Interest income (expense), net...... 178 337 175 (217) 1,826 340 1,225
------- ------- ------- ------- ------- ------- -------
Net loss............................ $(3,228) $(4,840) $(5,311) $(2,645) $(4,408) $(2,179) $(5,155)
======= ======= ======= ======= ======= ======= =======
Net loss per share(l)............... $ (0.76) $ (1.16) $ (1.26) $ (0.59) $ (0.61) $ (0.38) $ (0.59)
======= ======= ======= ======= ======= ======= =======
Shares used in computing net loss
per share(1)...................... 4,233 4,240 4,263 4,573 7,196 5,804 8,782
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996 JUNE 30, 1997
------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and cash
investments............................. $12,859 $ 7,269 $ 2,021 $ 9,340 $ 41,353 $ 33,647
Working capital........................... 12,897 7,763 2,672 10,431 44,010 37,836
Total assets.............................. 14,287 9,388 4,174 12,024 51,956 47,145
Convertible redeemable preferred stock.... 19,950 20,030 20,122 9,936 -- --
Accumulated deficit....................... (7,527) (12,447) (17,838) (20,543) (24,951) (30,106)
Stockholders' equity (deficit)............ (7,524) (12,525) (17,912) (97) 48,889 43,954
</TABLE>
- ---------------
(1) See Note 17 of Notes to Consolidated Financial Statements of Imagyn for
information concerning the computation of net loss per share and pro forma
net loss per share.
56
<PAGE> 62
IMAGYN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
Imagyn was formed in 1989 to advance the development of gynecological
applications of novel catheter technology licensed by Imagyn Baxter Healthcare
Corporation ("Baxter") and Thomas J. Fogarty, M.D. ("Fogarty"). In 1992, Imagyn
commenced commercial shipments of its Ovation systems, based on this technology,
to international distributors for resale to physicians and hospitals.
In November 1992, Imagyn entered into an agreement with Terumo Corporation
("Terumo") for the sale and licensed manufacture of the Ovation systems in
Japan. In connection with the granting of the distribution and license rights
under this agreement, Terumo paid Imagyn distribution and license fees
aggregating $2.1 million. Based on Imagyn's continuing obligations under the
agreement to transfer manufacturing know-how for the Ovation systems to Terumo,
the license fees of $1.0 million have been treated as deferred income until such
time as Imagyn completes the transfer of the manufacturing know-how pursuant to
the agreement. Upon completion of such transfer, Imagyn will receive royalties
on product sales by Terumo. During 1993 and 1994, Terumo conducted clinical
trials in Japan for the purpose of supporting regulatory and reimbursement
approvals for the Ovation system. In August 1996, Imagyn's agreement with Terumo
was amended to grant Terumo additional distribution rights for the Ovation
system in certain Asian markets.
In January 1994, Imagyn was notified by the FDA that its PMA application
for the Ovation falloposcopy system submitted to the FDA in May 1992 was
deficient in certain respects, particularly with respect to the design of the
clinical study. Imagyn attempted to address the FDA's concerns by providing a
reevaluation of its clinical data; however, the FDA did not find this analysis
acceptable and, in September 1995, Imagyn withdrew this PMA application. In
September 1996, the FDA advised Imagyn that its Ovation falloposcopy system
could be eligible for 510(k) clearance review. In September 1996, Imagyn
submitted a 510(k) clearance application to the FDA for its Ovation falloposcopy
system. On January 31, 1997, Imagyn received 510(k) marketing clearance for its
Ovation falloposcopy system.
In August 1994, Imagyn commenced international commercial shipments of its
MicroLap microlaparoscopy system. By February 1995, Imagyn had received three
FDA 510(k) clearances for the MicroLap system, after which Imagyn commenced
marketing the system in the United States. Imagyn engaged the services of
non-stocking sales representative organizations to promote sales of the MicroLap
system.
In August 1995, Terumo received Japanese regulatory approval for marketing
of the Ovation tubal recanalization system. Following this approval, Terumo
commenced planning for the 1996 commercial introduction of the Ovation tubal
recanalization system in Japan. Terumo has applied for, but has not yet
obtained, full Japanese reimbursement approval.
In September 1995, Imagyn completed an equity recapitalization which
included a reverse 1-for-5 stock split of all outstanding stock, the conversion
of all Preferred Stock into Common Stock, and the sale of $9.9 million of new
Preferred Stock.
In October 1995, Imagyn entered into a distribution agreement with United
States Surgical Corporation ("USSC") pursuant to which USSC was granted
exclusive international marketing rights for the MicroLap system in all
international markets (excluding China and India). USSC was also granted, on a
co-exclusive basis with Imagyn, marketing rights to the MicroLap system in the
United States. As a result of the agreement with USSC, Imagyn terminated all of
its domestic sales representative organizations and international distributors
for the MicroLap system and, in connection with these terminations, Imagyn made
certain payments to these distributors. Following execution of the agreement
with USSC, Imagyn increased its manufacturing capacity to support USSC's
introduction of the MicroLap system and, in January 1996, Imagyn completed
training of certain USSC sales personnel and commenced commercial shipments of
the MicroLap system to USSC.
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In September 1996, Imagyn received 510(k) clearance from the FDA to market
its single use MicroSpan hysteroscope sheath in the United States. Following
receipt of the 510(k) clearance, Imagyn commenced the recruitment of direct
sales representatives and launched the MicroSpan microhysteroscopy system in the
United States on a limited basis in the fourth quarter of 1996.
Imagyn manufactures the Ovation systems and certain of its MicroLap and
MicroSpan system products, including its proprietary microlaparoscope,
microhysteroscope and micro-access devices, at its manufacturing facilities.
Imagyn has limited manufacturing capacity and may be required to increase both
its in-house manufacturing capability and the size of its manufacturing
facilities. Although Imagyn expanded its manufacturing facilities in 1996, there
can be no assurance that such facilities will be adequate or that Imagyn will be
able to attract, train and retain the required personnel, including personnel
skilled in micro-optics assembly processes. Imagyn may need to obtain
alternative manufacturing facilities or to establish contract manufacturing for
its products. Delays associated with, or inability to establish, such capacity
could have a material adverse affect on Imagyn's business, financial condition
and results of operations. Imagyn currently obtains certain components of its
product systems from single source suppliers. These components include the optic
image fiber used in the MicroLap, a similar version of which is also being used
in the MicroSpan, and the medical video camera and light source used in
connection with the Ovation tubal recanalization system. There can be no
assurance that Imagyn will not encounter future component shortages or other
disruptions in supply of materials. Delays associated with any future raw
materials or component shortages could have a material adverse effect on
Imagyn's business, financial condition and results of operations, particularly
as Imagyn scales up its manufacturing activities.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, the extent to
which Imagyn's products gain market acceptance, the timing and volume of orders
from USSC, Terumo, other international distributors and Imagyn's other
customers, actions relating to regulatory and reimbursement matters, progress of
clinical trials, introduction of alternative means for microlaparoscopy,
microhysteroscopy and fallopian tube visualization by competitors of Imagyn,
pricing of competitive products, the cost and effect of promotional discounts
and marketing programs in which Imagyn may be required to engage and the absence
of a backlog of orders. In addition, sales to USSC for the first six months
were, and for the remainder of 1997, are expected to be below those for
comparable periods of 1996 due primarily to Imagyn's introduction of its new
model microlaparoscope in the second quarter of 1997 and USSC's decision not to
purchase non-proprietary MicroLap instrumentation and disposable products from
Imagyn in 1997. Imagyn's future revenues and results of operations may also be
adversely affected by a longer sales cycle and slower customer recruitment rate
in the non-hospital physician market, as compared to the hospital market, and
limitations on Imagyn's ability to contract with group purchasing organizations
due to the limited breadth of Imagyn's current product offerings. Results of
operations will also depend upon the amount of royalties payable under the
license from Baxter and Fogarty relating to the linear everting catheter
technology used in the Ovation systems. Imagyn has a limited history of
operations and has experienced significant operating losses since inception.
Operating losses are expected to continue for at least the next twelve months as
Imagyn continues to expend substantial resources to expand its marketing and
sales activities in the United States and fund research and development and the
introduction of new products.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net sales. Net sales for the year ended December 31, 1996 increased to $9.4
million from $2.2 million for the year ended December 31, 1995. The increase was
primarily the result of the first full year of sales to USSC of Imagyn's
MicroLap system, which resulted in a substantial increase in the volume of
MicroLap sales. In 1996, sales to USSC were approximately 90% of Imagyn's total
sales. In 1996, 6% of Imagyn's sales were to international customers; in 1995,
72% of Imagyn's sales were to international customers. The decrease in the
percentage of Imagyn's sales to international customers is primarily the result
of the increase in United States sales and the termination of Imagyn's
international distributors for the MicroLap system. Imagyn records all sales to
USSC as domestic sales; however, sales of Imagyn's products by USSC are expected
to include sales to international customers made through Autosuture, Inc., a
subsidiary of USSC. Net sales for the year ended December 31, 1995, increased to
$2.2 million from $1.0 million for the year ended
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December 31, 1994. The increase was primarily the result of the commencement of
sales in the United States in 1995 of the MicroLap system. Also contributing to
the increase, but to a lesser extent, were an increase in sales of the MicroLap
system in international markets and initial sales of Imagyn's Ovation system to
Terumo.
Cost of sales. Cost of sales increased to $6.6 million for the year ended
December 31, 1996 from $1.8 million for the year ended December 31, 1995. The
increase was attributable to the increase in the volume of sales of Imagyn's
products. Also contributing to the increase in cost of sales in 1996 were non-
recurring production costs and inefficiencies associated with the rapid increase
and expansion of production operations at Imagyn's current manufacturing
facilities. Cost of sales for the year ended December 31, 1995 increased to $1.8
million from $1.3 million for the year ended December 31, 1994, primarily due to
the increase in the volume of sales of Imagyn's products.
Sales and marketing. Sales and marketing expenses increased to $4.0 million
for the year ended December 31, 1996 from $3.3 million for the year ended
December 31, 1995. The increase was primarily due to sales and marketing
expenses associated with the introduction of Imagyn's MicroSpan products in the
United States, including expenses in connection with the recruitment of direct
sales personnel. Sales and marketing expenses increased to $3.3 million for the
year ended December 31, 1995 from $2.3 million for the year ended December 31,
1994. The increase was primarily due to sales and marketing expenses associated
with the introduction of Imagyn's MicroLap products in the United States,
including expenses of $400,000 associated with the termination of international
distributors and United States sales representatives for the MicroLap system in
connection with the USSC agreement.
Research and development. Research and development ("R & D") expenses,
which include clinical and regulatory expenses, increased to $2.7 million for
the year ended December 31, 1996 from $1.8 million for the year ended December
31, 1995. This increase was attributable to increased expenditures for product
development and enhancements and costs associated with clinical trials of the
Ovation falloposcopy system in the United States. R & D expenses of $1.8 million
for the year ended December 31, 1995 were approximately equal to the $1.8
million for the year ended December 31, 1994.
General and administrative. General and administrative expenses increased
to $2.3 million for the year ended December 31, 1996 from $1.3 million for the
year ended December 31, 1995. The increase was primarily the result of the
amortization of non-cash deferred compensation charges associated with grants of
stock options to employees. Also contributing to the increase, but to a lesser
extent, were the hiring of additional personnel and other ongoing expenses
associated with Imagyn's public reporting requirements. General and
administrative expenses increased to $1.3 million for the year ended December
31, 1995 from $1.1 million for the year ended December 31, 1994. This increase
primarily resulted from expenses associated with an increase in the level of
Imagyn's operations.
Other operating income. Other operating income of $3.5 million for the year
ended December 31, 1995 resulted from nonrecurring payments in connection with
various marketing rights for certain products. There was no such income for the
years ended December 31, 1996 and 1994.
Interest income (expense), net. Net interest income for the year ended
December 31, 1996 was $1.8 million, as compared to interest expense of $217,000
for the year ended December 31, 1995. This increase was attributable primarily
to interest earned on higher cash balances held by Imagyn during the year ended
December 31, 1996 and to a lesser extent to the retirement of bridge financing
notes in September 1995. Interest income was $175,000 for the year ended
December 31, 1994. There were no short term notes outstanding during the year
ended December 31, 1994.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net Sales. Net sales for the six months ended June 30, 1997 decreased to
$1.9 million from $4.0 million for the six months ended June 30, 1996. The
decrease was primarily attributable to USSC's decision not to purchase
non-proprietary MicroLap instrumentation and disposable products from Imagyn in
1997 and to a lesser extent to Imagyn's introduction and commencement of
shipments of its new model microlaparoscope during the second quarter of 1997.
As a result, sales of MicroLap products to USSC during the six months
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ended June 30, 1997 were $3.0 million less than sales of these products to USSC
during the six months ended June 30, 1996. For the six months ended June 30,
1997, 45% of Imagyn's sales were to international customers; for the six months
ended June 30, 1996, 8% of Imagyn's sales were to international customers. The
increase in the percentage of Imagyn's sales to international customers was
primarily due to the decrease in sales to USSC and to a lesser extent due to an
increase in sales to Terumo and the introduction of Imagyn's MicroSpan products
in Europe. Imagyn records all sales to USSC as domestic sales; however, sales of
Imagyn's products by USSC are expected to include sales to international
customers made through Autosuture, Inc., a subsidiary of USSC.
Cost of sales. Cost of sales for the six months ended June 30, 1997
decreased to $1.4 million from $2.8 million for the six months ended June 30,
1996. The decrease in cost of sales was attributable to the decrease in the
level of sales for the period. Cost of sales for the six months ended June 30,
1997 also included non-recurring production costs associated with Imagyn's
start-up manufacture of its new model microlaparoscope.
Sales and marketing. Sales and marketing expenses for the six months ended
June 30, 1997 increased to $3.0 million from $1.4 million for the six months
ended June 30, 1996. The increase was primarily associated with a increase in
promotional expenditures and the expenses associated with direct sales
personnel.
Research and development. Research and development expenses for the six
months ended June 30, 1997 increased to $2.1 million from $1.4 million for the
six months ended June 30, 1996. This increase was attributable to increased
expenditures for product development and enhancements, including costs and
expenses associated with initial production of Imagyn's new model
microlaparoscope.
General and administrative. General and administrative expenses for the six
months ended June 30, 1997 increased to $1.7 million from $880,000 for the six
months ended June 30, 1996. The increase was primarily the result of
non-recurring expenses associated with the pending merger with Urohealth and to
a lesser extent the amortization of non-cash deferred compensation charges
associated with grants of stock options to employees, the hiring of additional
personnel and other ongoing expenses associated with Imagyn's public reporting
requirements.
Other income (expense), net. Net other income for the six months ended June
30, 1997 increased to $1.2 million from $340,000 for the six months ended June
30, 1996. This increase was attributable to interest income earned on higher
cash balances held by Imagyn during the six months ended June 30, 1997.
INCOME TAXES
Imagyn has not generated any taxable income to date and therefore has not
paid any federal income taxes since its inception. Imagyn accounts for income
taxes under Statement of Financial Accounting Standards No. 109 ("FAS 109").
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances, in
amounts equal to the net deferred tax assets as of December 31, 1996 and 1995,
have been established in each period to reflect these uncertainties.
At December 31, 1996, Imagyn had federal and state net operating loss
carryforwards of $16.5 million and $8.0 million, respectively, and federal and
state research and experimentation credit carryforwards of $387,000 and
$276,000, respectively, that will expire at various dates beginning in 1997
through 2010, if not utilized. Utilization of net operating loss and tax credit
carryforwards will be subject to a substantial annual limitation due to the
ownership change limitations of the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation is likely to result in the
expiration of most of Imagyn's net operating loss and tax credit carryforwards
before full utilization as a result of the September 1995 recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Imagyn's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $30.1 million as of June 30, 1997.
Imagyn has funded its operations since inception primarily through
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the private placement of equity securities, the net proceeds of the June 1996
initial public offering and other operating income. Through June 30, 1997,
Imagyn had raised $30.3 million from the private placement of equity securities.
Through June 30, 1997, Imagyn had received $5.6 million in fees relating to two
distribution agreements. In June 1996, Imagyn completed an initial public
offering of 3,162,500 shares of Common Stock raising net proceeds of
approximately $43 million.
Imagyn received a total of $5.6 million in distribution fees from two
transactions; $2.1 million from Terumo in fiscal 1992 pursuant to the granting
of distribution and license rights to Terumo and $3.5 million in fiscal 1995
from USSC pursuant to the granting of certain marketing rights to USSC. A total
of $4.6 million in distribution fees ($1.1 million in 1992 and $3.5 million in
1995) have been recognized as operating income and included in Imagyn's
statement of operations for such period. $1.0 million of the aggregate $2.1
million of distribution and license fees paid to Imagyn by Terumo in 1992 have
been treated as a deferred income until such time as Imagyn completes the
transfer of manufacturing know-how pursuant to the agreement with Terumo.
At June 30, 1997, Imagyn's principal source of liquidity consisted of cash,
cash equivalents and short-term investments of $33.6 million. Cash used in
Imagyn's operations was $5.6 million for the year ended December 31, 1996 and
$3.2 million and $6.2 million for the six month periods ended June 30, 1996 and
1997, respectively. Imagyn's capital expenditures during the year ended December
31, 1996 were $1.3 million and $330,000 and $256,000 for the six month periods
ended June 30, 1996 and 1997, respectively. Imagyn anticipates that capital
expenditures will increase in future periods due to expansion of manufacturing
operations and facilities. Imagyn intends to finance its capital needs
principally its existing capital resources. Imagyn has not sought to obtain any
credit facilities to provide additional working capital.
Imagyn believes that existing capital resources will be sufficient to fund
its operations through 1998. However, Imagyn's future liquidity and capital
requirements will depend on numerous factors, including the extent to which
Imagyn's products gain market acceptance, actions relating to regulatory and
reimbursement matters, progress of clinical trials, introduction of alternative
means for microlaparoscopy, microhysteroscopy and fallopian tube visualization
by competitors of Imagyn, pricing of competitive products, the cost and effect
of promotional discounts and marketing programs in which Imagyn may be required
to engage and the resources that Imagyn devotes to marketing, manufacturing and
developing its products. Imagyn's capital requirements will also depend on,
among other things, the resources required to hire and develop a direct sales
force in the United States and the resources required to expand manufacturing
capacity and facilities requirements. Accordingly, there can be no assurance
that Imagyn will not require additional financing within this time frame. There
can be no assurance that additional funding, if needed, will be available on
terms satisfactory to Imagyn, or at all. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Failure to raise capital when needed could have a
material adverse effect on the business, financial condition and results of
operations of Imagyn.
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BUSINESS OF UROHEALTH
OVERVIEW
Urohealth is a developer, manufacturer and distributor of products for the
urology, minimally invasive and general surgery, and gynecology markets (the
"Target Markets"). Urohealth has a broad offering of products used by health
care professionals for their patients suffering from impotence, incontinence and
other gynecological and urological disorders, and other conditions requiring
minimally invasive and general surgery. Urohealth was incorporated in August
1985. In October 1994, under the leadership of new management, Urohealth 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 Urohealth 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.
Urohealth 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. Urohealth has increased sales from $4.3 million for the year ended June
30, 1994 (prior to giving effect to its acquisitions) to $90.7 million for the
year ended March 31, 1997.
GROWTH STRATEGY
Urohealth'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 Urohealth'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.
Urohealth believes that its acquisition and product development strategy
has been successful in building a broad selection of medical products and
combining companies and product lines that can capitalize on the manufacturing
and distribution capabilities of Urohealth. In the urology market, Urohealth
acquired Dacomed which offered a line of high-quality products designed to
diagnose and treat male impotence, but which lacked manufacturing and marketing
expertise and an effective distribution channel. Urohealth then acquired Osbon
which was the market leader in vacuum erection devices for the treatment of male
impotence primarily on the strength of Osbon's sales force. Urohealth relocated
Dacomed manufacturing operations to its Costa Mesa, California manufacturing
facility and began to market and sell the Dacomed products through the Osbon
distribution channel. As a result of the combination, the Dacomed products were
marketed through an established distribution channel and the Osbon sales force
had a broader product line to offer their customers.
To expand its presence in the market for minimally invasive and general
surgery products, Urohealth acquired Advanced which had a pipeline of potential
products but had limited manufacturing and distribution capabilities and was
experiencing significant liquidity and capital constraints as the result of its
substantial research and development program. Advanced's commercially viable
products were integrated into Urohealth's manufacturing and distribution
infrastructure. In June 1996, Urohealth acquired product lines of O.R. Concepts.
In August 1996, Urohealth acquired Richard-Allan, an established company with a
broad array of minimally invasive products including the recently introduced
Reflex(R) AEC35(TM) articulating cutter and stapler. In August 1996, Urohealth
also acquired a line of minimally invasive surgery products from X-Med.
Management believes that operating efficiencies and synergies similar to those
created by combining the acquired urology products and companies will result
from the combination of Advanced, Richard-Allan and the product lines acquired
from O.R. Concepts and X-Med.
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In June 1996, Urohealth introduced its EndoView(TM) video endoscopy system.
The EndoView(TM) system is designed for use in the hospital and physician's
office setting and is priced to make it affordable for widespread use in the
offices of physician's performing endoscopic procedures. Urohealth recently
released its new Reflex(R) AEC35(TM) articulating cutter and stapler, which
greatly increases the types and number of procedures that can be performed using
minimally invasive surgical techniques. The AEC35's articulating head gives the
surgeon greater range and flexibility in performing minimally invasive surgical
procedures. Products such as the EndoView(TM) and the Reflex(R)AEC35(TM) provide
Urohealth's sales force with increased access to physicians and surgeons, and,
therefore, increased selling opportunities as physicians and surgeons are
anxious to learn about innovations which could have a material effect on their
practices.
Urohealth now has in place a sales force of approximately 160 persons.
Urohealth plans to expand further its product offerings for its Target Markets
with products currently under development and through the acquisition of
complementary products and product lines. Urohealth targets urologists,
gynecologists and general surgeons using its sales force, of which 70 sales
representatives call primarily on urologists and 90 sales representatives focus
their selling efforts on gynecologists and general surgeons.
Urohealth believes that the medical products industry is highly fragmented
and that there are a significant number of opportunities to acquire additional
product lines or companies in complementary lines of business. Urohealth is
continuously exploring these opportunities and management believes that future
growth, will, in significant part, be through acquisitions.
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. Urohealth also
offers a comprehensive line of products designed to serve the minimally invasive
and general surgery market and has recently introduced visualization products
which can be used in a number of medical applications.
Erectile Dysfunction
Erectile dysfunction is estimated to affect between 10 and 20 million men
in the United States, with the vast majority of cases remaining untreated. Only
recently have physicians become more knowledgeable regarding treatment
alternatives and most patients suffering from erectile dysfunction fail to seek
medical treatment for their problem. Erectile dysfunction can have either a
psychological or physiological cause. Approximately 85% of erectile dysfunction
cases are attributable to physiological causes, the most common of which are
related to vascular disease.
There are three basic treatments for physiological erectile dysfunction:
(i) drug therapy; (ii) mechanical therapy, involving the use of vacuum erection
devices; and (iii) surgery, involving the implantation of a penile prothesis.
Currently available drug therapies include oral drugs, which have limited
effectiveness, an injectable, prostaglandin and urethral suppositories.
Mechanical therapy involves the use of non-invasive vacuum erection devices
which create a vacuum in a plastic cylinder that increases blood flow to the
penis 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 protheses can be either manually or
hydraulically operated to achieve an erection.
Urohealth 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
market for erectile dysfunction products could grow as the average age of men in
the United States continues to increase.
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Incontinence
Urinary incontinence is estimated to affect between 15 and 25 million
adults in the United States of which approximately 85% are female. A recent
survey revealed that one out of every six adult women in the United States
suffers from some form of urinary incontinence. Women typically experience a
higher incidence of incontinence than men primarily as a result of childbearing
and its impact on the urinary system. There are three basic types of urinary
incontinence: (i) stress incontinence, which involves leakage related to rapid
movement, a sneeze or exercise; (ii) urge incontinence, which involves a sudden
need to empty the bladder; and (iii) overflow incontinence, which results from
an overly distended bladder, typically caused by an obstruction or a weakened
bladder.
The vast majority of patients who suffer from some form of incontinence do
not seek treatment for their problem, with most of the patients utilizing some
form of home treatment to deal with their medical problem. There are a number of
treatments for incontinence, including adult diapers and pads, catheterization
and clamping of the urethra, pelvic muscle repositioning and training,
electrical stimulation therapy, surgery, collagen injections and drug therapy.
Urohealth believes that the market for incontinence products could also
increase as patients become more knowledgeable about treatment options. In
addition, the number of patients suffering from incontinence problems could
increase as the average age in the United States continues to increase. With
new, less invasive technologies in development, such as urethral inserts for
women, the general interest of both physicians and consumers in treatments for
incontinence should increase.
Minimally Invasive and General Surgery
Minimally invasive surgery, or endoscopy, relies on viewing tubes
(endoscopes) that allow surgeons to look into the body. Such surgeries are
carried out using special instruments that are inserted into one to six small
"keyhole" incision sites. Laparoscopy is the term for minimally invasive surgery
within the abdominal cavity. Laparoscopy was primarily developed by
gynecologists who use minimally invasive surgical techniques to perform
hysterectomies, tubal ligations, infertility procedures and to remove fibroid
tumors and ovarian cysts, as well as for other exploratory and diagnostic
procedures. General surgeons use laparoscopy for such common procedures as gall
bladder removal, hernia repair and appendectomies. Gastroenterologists remove
intestinal tissue laparoscopically, including operations for Crohn's disease,
diverticulitis, non-cancerous polyps and colon tumors. Urologists can perform
nephrectomies (removal of a kidney) and bladder neck suspensions
laparoscopically, as well as remove kidney stones and treat bladder cancer.
Because minimally invasive surgery is far less traumatic than conventional
open surgery techniques, patient recovery time is much faster and the period of
hospitalization is greatly reduced. Typically, patients are back to normal
activity levels within one week of surgery performed using minimally invasive
surgery techniques. While minimally invasive surgery requires surgeons to learn
a new set of skills, it is estimated that 80% of all general surgery will be
done endoscopically by the year 2000. The transition from open surgery to
minimally invasive surgery has gained significant momentum in the past few years
as studies have shown minimally invasive surgery to be more economical and
beneficial to the patient, including shortening the hospital stay and reducing
post-operative complications, resulting in faster recovery.
Urohealth believes that successful companies in this marketplace will
develop and market products that make these procedures more cost and time
effective.
Visualization
Endoscopy, meaning "to look within the body," is enabled through the use of
telescopes, light sources, cameras and video viewing, recording and printing
systems. Telescopes (referred to as "endoscopes") differ in size and
functionality relative to specific anatomies, including those to look within the
abdomen (laparoscopes), the uterus (hysteroscopes), the bladder (cystoscopes),
the joints (arthroscopes), the colon (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
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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.
Urohealth 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
Urohealth offers a broad range of products to urologists, general surgeons
and gynecologists. Historically, Urohealth has been highly dependent on the sale
of vacuum erection devices for the treatment of male impotence. However,
Urohealth believes that with the acquisition of Richard-Allan and other
businesses and the introduction of its EndoView(TM) product, Urohealth's
reliance on vacuum erection devices has and should continue to decrease.
Urohealth offers a broad line of minimally invasive and general surgery
instruments, which are sold primarily to general surgeons, gynecologists and
urologists. Urohealth's comprehensive product line includes an antifogger,
pneumo needles, trocars, graspers, scissors, retractors, a kittner, specimen
retrieval bags, wound access and closure devices and electrosurgical and suction
and irrigation probes. The recent acquisition of Richard-Allan expanded
Urohealth's product offerings of access products, wound closure products and
hand held instruments for both open and minimally invasive surgeries. Urohealth
recently introduced its Reflex(R) AEC35(TM) articulating cutter and stapler,
which is the only endoscopic surgical product on the market to have articulation
capabilities. Urohealth also recently introduced its EndoView(TM) product, which
is an inexpensive, portable video viewing system that urologists, general
surgeons, and gynecologists can attach to an endoscope. Urohealth believes that
there are additional product opportunities in the "visualization" area and is
exploring those opportunities.
Urohealth offers a number of products designed for the treatment of
urological disorders, including the leading vacuum erection system, a penile
prosthesis and diagnostic equipment. Urohealth's vacuum erection systems, which
are available by prescription, include Esteem(TM), ErecAid(R), Catalyst(TM) and
Impower(TM). Urohealth's vacuum erection devices are not subject to patent
protection that would prohibit others from offering competing products.
Urohealth 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. Urohealth 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 Urohealth are
used in the treatment of urological disorders.
Urohealth offers a number of products designed for the treatment of
incontinence, including a line of catheters and urinary drainage systems, and
other products such as washable pads, briefs and diapers. Urohealth is actively
seeking additional products to serve this market. These products are marketed to
both gynecologists and urologists, as are Urohealth's AccuBar(TM) and
AccuLoop(TM) vaporizing electrodes. Urologists use vaporizing electrodes to
ablate prostate tissue, and gynecologists use them to ablate endometrial tissue.
Urohealth is developing a number of additional products for its Target
Markets including additional articulating minimally invasive surgical
instruments and a breast biopsy system. Urohealth's future success will depend
in part on its ability to commercialize products under development and to
develop new medical products both for its existing markets and for new markets.
The extent and pace at which market acceptance of such products is achieved is a
function of many variables, including price, product performance and attributes,
product reliability, the effectiveness of marketing and sales efforts, the
ability to meet delivery schedules, as well as general economic conditions
affecting customers' purchasing patterns. New product development and
introduction in the medical product market requires considerable time and
capital and is
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subject to the risks of market acceptance. There can be no assurance as to the
continued market acceptance of Urohealth's existing products or Urohealth's
ability to develop or acquire additional products in the future.
On February 28, 1997, Urohealth acquired X-Cardia and its cardiac output
monitoring technology. Urohealth has prototype products developed and
anticipates beginning clinical trials on a product using the technology during
1997.
Reposable Products
On March 31, 1997, Urohealth acquired Microsurge. Microsurge designs,
develops, manufactures and markets surgical instrumentation for use in minimally
invasive surgery. Microsurge is currently developing families of surgical
instrumentation for use in minimally invasive abdominal procedures, referred to
as laparoscopy, and minimally invasive thoracic procedures, referred to as
thoracoscopy. Microsurge's laparoscopic instrumentation is based on a
"multi-use" design concept which seeks to address the shortcomings of, and
provide an alternative to, currently available single-use disposable and
traditional reusable laparoscopic instrumentation. Microsurge is also exploring
the applicability of its product designs and technologies to other areas of
minimally invasive surgery, such as cardiac and colorectal surgery.
Laparoscopy was initially performed using traditional stainless steel
instrumentation designed to be sterilized and reused many times. The principal
benefit of traditional reusable instrumentation is that its reusable nature
reduces the instrumentation cost per procedure. However, this instrumentation is
often difficult to clean and needs to be repaired periodically in order to
continue to be used effectively. In addition, after a number of repairs, the
precision of traditional reusable instrumentation permanently degrades. In
response to these shortcomings, surgical instrumentation manufacturers
introduced single-use disposable laparoscopic instrumentation in 1989. These
manufacturers facilitated the market acceptance of single-use disposable
products by offering surgeons training programs focusing on the use of this new
instrumentation. Although disposable laparoscopic instrumentation has less
precision than traditional reusable instrumentation it was widely accepted
because it did not need to be cleaned or repaired. However the managed care cost
containment pressures of the 1990s have caused healthcare providers to
reevaluate the use of single-use disposable laparoscopic instrumentation because
of its high cost per surgical procedure.
To address the shortcomings of single-use disposable and traditional
reusable laparoscopic instrumentation, Microsurge is developing a family of
"multi-use" laparoscopic surgical instrumentation. Multi-use laparoscopic
instrumentation is designed to provide a lower instrumentation cost per
procedure than single-use disposable instrumentation and greater convenience and
more consistent performance than traditional reusable instrumentation.
Microsurge's multi-use laparoscopic instrumentation is designed to be easily
cleaned and used multiple times. Most of this instrumentation is comprised of
two components. One component, generally a handle, is designed to be used many,
often hundreds of, times. The other component, generally a tip configuration, is
designed to be used one or more times. When the performance of any component
deteriorates, it is discarded and replaced by a new component, eliminating the
need for repairs.
Microsurge's principal laparoscopic products include its line of DetachaTip
multi-use hand-held scissors, graspers and dissectors and DetachaPort multi-use
trocars. Microsurge is also developing a DetachaClip multi-use laparoscopic clip
applier for use in ligating vessels and ducts. Microsurge began marketing its
laparoscopic products in July 1993 and has since introduced over 52 products to
the laparoscopic instrumentation market.
The manufacturing, product development, and sales and marketing for the
Microsurge reposable product line has been integrated with the Company's
existing operations.
SALES AND MARKETING
Urohealth 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
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accounts department and a network of international distributors gives Urohealth
widespread access to the markets it serves.
Approximately 90 domestic sales representatives call on general surgeons
and gynecologists, primarily in the operating room setting in hospitals and
surgery centers. This sales force offers a full line of minimally invasive and
general surgical instruments, including pneumo needles, trocars, retractors,
scissors, staplers and access and wound closure devices for a wide range of
diagnostic and operative procedures. With proprietary technology, such as that
demonstrated by the new Reflex(R) AEC35(TM) articulating cutter and stapler, an
endoscopic surgical device that simultaneously cuts and staples tissues in
difficult to reach anatomy, this sales force has been welcome in the operating
room. In addition, these sales representatives work with distributor sales
representatives providing training and technical support for the sales efforts
of Urohealth distributors for these products.
Another 70 domestic sales representatives call on urologists with
Urohealth'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 Urohealth's products. As a value added service to patients
and physicians, Urohealth staffs a 24 hour, 365 days per year urology "hot line"
to answer questions about erectile dysfunction and product use. Urohealth
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 successfully launched in June, 1996.
Urohealth expects to protect its market position with this new product and to
develop follow-on products for distribution through its 160 sales
representatives. Urohealth believes that the availability of innovative
products, such as EndoView(TM) and the Reflex(R) AEC35(TM) articulating cutter
and stapler, provides Urohealth'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 Urohealth'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 Urohealth's products, prepares competitive proposals, makes
presentations and enters into long term sales relationships with hospital
chains, managed care organizations and medical/surgical distributors. Urohealth
has recently focused its sales and marketing efforts on establishing
relationships with large healthcare group purchasing organizations, and recently
entered into an agreement with one of the largest group purchasing organizations
in the United States to supply designated products to the organization's
outpatient, physician group and other alternate site members.
While Urohealth is not required to maintain significant amounts of
inventory to address customer's demands or to maintain favorable supply
arrangements for raw materials, particularly since implementation of Urohealth's
decision to sell its surgical products through distributors, Urohealth's current
inventory levels are significant. Those inventory levels reflect inventory held
by distributors for which revenue has not been recognized and inventory built in
anticipation of a significant group purchasing organization order. See
"Urohealth Management's Discussion and Analysis of Financial Condition and
Results of Operations." Urohealth generally permits distributors to balance
inventory periodically by returning inventory purchased by the distributor for
other medical products of Urohealth. In addition, the ultimate customers for
Urohealth's products generally have a right to return products that they find
unsatisfactory within 30 days after the date of purchase. Urohealth sells
several product lines that are considered "capital equipment" by hospitals and
other purchasers. From time to time, Urohealth offers certain customers extended
payment terms to facilitate sales of these products. See "Risk
Factors -- Concentration of Credit Risk; Extended Payment Terms."
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INTERNATIONAL SALES
International sales (sales outside of North America) were $3.3 million,
$1.7 million, $11.8 million and $3.6 million for the year ended June 30, 1995,
for the nine months ended March 31, 1996, for the year ended March 31, 1997 and
for the three months ended June 30, 1997, respectively. Urohealth distributes
its products through a network of distributors covering a number of countries
outside of North America.
MANUFACTURING
Urohealth's manufacturing operations are conducted primarily at its
facilities in Costa Mesa, California and Richland, Michigan. At its Costa Mesa
facility, Urohealth conducts injection molding operations, assembles products
and conducts quality assurance procedures. Urohealth has a Class 100 clean room
at its Costa Mesa facility. Because of Urohealth's injection molding
capabilities, Urohealth has been able to manufacture a number of its acquired
products in-house, thereby realizing significant cost savings. Urohealth 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. Urohealth's manufacturing
facility in Richland, Michigan is a sophisticated manufacturing facility that
employs many manufacturing techniques designed to lower costs and insure
quality.
Urohealth 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. Urohealth's
manufacturing operations consist of the fabrication of certain specialized
components and assembly, inspection, testing and packaging of these components
into a final product. Final assembly and packaging operations for some of the
products are conducted in environmentally controlled rooms. Various components,
subassemblies and certain finished products are manufactured by suppliers to
Urohealth's specifications. In addition, Urohealth manufactures its line of
reusable underpads and briefs at its manufacturing facility in Watertown, South
Dakota, and conducts certain assembly operations at its facilities in Augusta,
Georgia.
Urohealth 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 Urohealth presently believes that there are
a number of possible vendors for most of the raw materials, components and
subassemblies required for Urohealth'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 Urohealth.
The disruption or termination of any single source vendor could have a material
adverse effect on Urohealth's operations. Urohealth'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 Urohealth competes with a number of multi-product companies, there
are a number of "single product" companies serving, or developing products for,
some of Urohealth's Target Markets. Urohealth 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 Urohealth expects that
competitive pressures will intensify. Urohealth 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 Urohealth, and many of them have substantially greater
financial and other resources with which to pursue development, manufacturing,
marketing and distribution of their products. Urohealth 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 Urohealth's competitors could cause a decline in sales
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or loss of market acceptance of Urohealth's existing or future products.
Increased competitive pressure also could lead to intensified price-based
competition that could materially adversely affect Urohealth's business, results
of operations and financial condition. There can be no assurance that Urohealth
will be able to compete successfully in the future.
Urohealth 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 Urohealth's potential products, an
important factor in competition may be the timing of market introduction of its
or its competitors' products. Accordingly, Urohealth 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 Urohealth's products becoming
obsolete before Urohealth recovers a significant portion of the research,
development and commercialization expenses incurred with respect to those
products. Some of Urohealth's competitors have long-term or preferential supply
arrangements with hospitals. Such arrangements may act as a barrier to market
entry by Urohealth. There can be no assurance that Urohealth will be able to
compete successfully with existing or future competitors.
In the minimally invasive surgery market, Urohealth competes with medical
products companies, including United States Surgical Corporation and Ethicon,
Inc., a division of Johnson & Johnson. In the erectile dysfunction market,
Urohealth competes with companies such as Mission Pharmacal and Mentor, which
together with Urohealth control a significant portion of the market for vacuum
erection devices. Urohealth's products also compete with those of others
designed for alternative methods of treatment, such as drugs sold by
pharmaceutical companies as a treatment for erectile dysfunction. Because many
of the competing drug-based treatments for impotence have only recently been
introduced, or are still being developed, it is impracticable for Urohealth to
assess the competitive impact of those treatments on Urohealth's vacuum erection
business. In the incontinence market, Urohealth competes with disposable paper
adult diapers and briefs manufactured by large paper companies, such as Kimberly
Clark, and with competing products similar to those offered by Urohealth.
RESEARCH AND DEVELOPMENT; PRODUCT DEVELOPMENT
Urohealth recognizes that the sale of medical products requires continuous
development of new products and refinements of established products. A major
component of Urohealth's research and development strategy, involves identifying
products and companies that have developed products that may be potential
acquisition candidates. Urohealth believes that there are a number of
opportunities to acquire products and technologies that have already been
developed or partially developed.
Urohealth 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 Urohealth as a percentage of sales have
decreased significantly as Urohealth 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 Urohealth's research and
development expenditures have decreased as Urohealth 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.
Urohealth'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, Urohealth has several product development
projects underway which involve enhancements of, or improvements to, existing
products. As Urohealth has acquired businesses and technologies, it has acquired
a number of products under development which will require additional research
and development efforts by Urohealth in an attempt to
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bring products to market. As a result, Urohealth anticipates that research and
development expenditures will increase in the future over historical levels.
Urohealth 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
Urohealth believes that patents and other proprietary rights are important
to its business. Urohealth'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 Urohealth's products. Urohealth 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 Urohealth 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 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 Urohealth.
Urohealth recently acquired X-Cardia which has filed patent applications with
respect to its cardiac output monitoring technology, although no assurance can
be given that patent approval will be received. There can be no assurance as to
the breadth or degree of the protection that may be afforded by such patent, or
whether such applications ultimately may be approved. 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 the 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
Urohealth 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 assurance as to the
breadth and degree of protection of these rights or that other companies will
not independently develop products similar to Urohealth's products that will not
infringe on Urohealth's rights but will compete directly with Urohealth's
products. In addition, the laws of some foreign countries may not protect
Urohealth'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 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 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 Urohealth.
Furthermore there can be no assurance that competitors or potential competitors
will not independently develop similar or alternative technologies 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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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.
GOVERNMENT REGULATION
Most of Urohealth'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 Urohealth sells its products.
The process of receiving governmental approval may take a number of years and
the expenditure of substantial resources. There can be no assurance that even
after such time and expenditures, regulatory approval will be obtained for any
of the products developed by 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 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 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 new information reflecting on the
safety or effectiveness of an approved product, can lead the FDA to withdraw its
approval to market the product. Urohealth incurs substantial costs in complying
with regulatory requirements.
With the enactment of the Medical Device Amendments in May 1976 to the FDC
Act, the FDA classified medical devices in commercial distribution into three
classes, Class I, II or III. This classification is based on the controls
necessary 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. Urohealth 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 Urohealth's products
pending receipt of a newly required 510(k) Notification or if the FDA were to
refuse to grant 510(k) Notification, Urohealth's revenues and operating income
could be materially and adversely
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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 Urohealth'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
Urohealth, 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 Urohealth cannot obtain 510(k) Notification for a product
subject to FDA marketing approval, Urohealth will be required to seek approval
to market the device through the PMA process. The preparation and processing of
a PMA is significantly more complex and time consuming than the 510(k)
Notification process. The PMA process may take several years or longer and
requires the submission of extensive supporting data and clinical information.
An approved PMA application for a new instrument indicates that the FDA has
determined that a device has been proven, through the submission of preclinical
and clinical data and manufacturing information, to be safe and effective for
its intended uses. Upon receipt, the FDA will conduct a preliminary review of
the PMA to determine whether the submission is sufficiently complete to permit a
substantive review. If sufficiently complete, the submission is declared
fileable by the FDA. By regulation, the FDA has 180 days to review a PMA once it
is determined to be fileable. While the FDA generally has responded to PMAs
within the allotted time period, complete PMA reviews more often occur over a
significantly protracted time period, and generally take approximately two years
or more from the date of filing to approval.
Substantially all of Urohealth's FDA marketing clearances have been
obtained through the 510(k) process. Certain future applications, however, may
require PMA clearance. 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 be required to
take the products in question off the market. Also, the FDA could bring
regulatory or enforcement actions against Urohealth. Urohealth has met and
continues to meet the requirements for FDA compliance through their good
manufacturing practice guidelines and semi-annual FDA inspections. In addition,
changes in regulations could have a material adverse effect on Urohealth.
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
Urohealth 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 Urohealth 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 Urohealth'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 Urohealth's business, financial condition and results of
operations.
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FDA and state regulations also govern the manufacturing of Urohealth's
medical products. Urohealth is registered as a medical device manufacturer with
the FDA and state health service agencies. The FDA and state health service
agencies inspect Urohealth from time to time to determine whether it is in
compliance with various regulations relating to medical device manufacturing,
including the Good Manufacturing Practice ("GMP") regulations governing
manufacturing, testing and quality control, and product liability of medical
devices. Although Urohealth believes that it currently is in material compliance
with these regulations, a determination that Urohealth 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 Urohealth'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 Urohealth's business, results of
operations and financial condition.
There have been a number of proposals over the last several years that, if
implemented, could have the effect of eliminating or reducing, or curtailing
increases in, Medicare and Medicaid reimbursement for certain medical products,
and there has been increasing pressure from private payors to limit increases in
healthcare costs. Any of these proposals (including without limitation any such
proposal relating to Urohealth's Rigiscan product), if adopted could have a
material adverse effect on Urohealth'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 Urohealth'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 Urohealth's activities which
could have a material adverse effect on Urohealth's business, results of
operations and financial condition. Moreover, there can be no assurance that the
required regulatory clearances will be obtained, or that those obtained may not
include significant limitations on the uses of the product in question. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by Urohealth more difficult in the future.
Urohealth 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 Urohealth'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 Urohealth.
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<PAGE> 79
ENVIRONMENTAL MATTERS
Urohealth 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 Urohealth's operations routinely involve the
handling of chemicals and wastes, some of which are or may become regulated as
hazardous substances. Urohealth has not incurred any significant expenditures or
liabilities for environmental matters to date. However, no assurance can be
given that Urohealth will not incur significant expenditures in future periods
with respect to complying with environmental laws.
LITIGATION
In July 1997, several complaints were filed against the Company, certain of
its officers and directors and, in certain complaints, the lead underwriters of
the Company's November 1996 public offering requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages. The suits were filed in the United States
District Court for the Central District of California. All of the suits are
based on substantially the same facts and have been brought on behalf of
purchasers of Common Stock of the Company during various periods between July
18, 1996 and July 1, 1997. No proceedings have taken place in any of the suits.
In addition, Urohealth is involved in litigation in the normal course of
business. Urohealth does not anticipate that the outcome of such proceedings
would likely have a material adverse effect on its business, results of
operations or financial condition.
PRODUCT LIABILITY AND INSURANCE
The nature of Urohealth's present and planned medical products,
particularly surgically implanted products, exposes Urohealth to product
liability risks. Urohealth 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 Urohealth in the
future or that Urohealth will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims or product
recalls could have a material adverse effect on the business, results of
operations and financial condition of Urohealth. In addition, Urohealth is
required under certain of its licensing agreements to indemnify its licensors
against certain product liability claims by third parties.
EMPLOYEES
As of July 31, 1997, Urohealth employed approximately 973 persons.
Urohealth has experienced no work stoppages and is not a party to any collective
bargaining agreement. Urohealth believes that its relations with employees are
good.
FACILITIES
The following table summarizes the leased and owned facilities of
Urohealth:
<TABLE>
<CAPTION>
FACILITY LOCATION PRIMARY USES SQUARE FEET LEASED/OWNED
- --------------------------- ------------------------------ ---------------- ----------------
<S> <C> <C> <C>
Newport Beach, CA Corporate Offices 16,500 leased
Costa Mesa, CA Manufacturing; R&D 52,600 leased
Irvine, CA Warehouse 42,000 leased
Richland, MI Manufacturing; Sales; 43,500 owned
Administration
Augusta, GA Sale Offices; Administration 31,656 leased
Augusta, GA Warehouse and assembly 57,500 owned
Watertown, SD Manufacturing 15,700 leased
Sparta, NJ Office and warehouse 7,000 leased
</TABLE>
74
<PAGE> 80
Urohealth 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
Urohealth's corporate executive offices. The lease provides for monthly rental
payments of approximately $24,000 per month.
Urohealth 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. Urohealth leased an additional 10,200 square feet at the
same location on August 1, 1996. The lease expires on July 31, 1997 and provides
for monthly payments of $4,080. The Company leased an additional 10,212 square
feet of space at another location in Costa Mesa on June 1, 1996. The lease
expired May 31, 1997, and is continuing on a month to month basis thereafter at
a monthly rate of $4,800.
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.
Urohealth 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.
Urohealth 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 Urohealth to pay insurance, utility, maintenance and other costs.
Urohealth owns 57,500 square feet of office, warehouse and assembly space in
three other buildings in Augusta, Georgia. These facilities relate to urology
operations.
Urohealth 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
Urohealth to pay for utilities and other costs not specifically borne by the
landlord. Urohealth also leases 1,115 square feet of office space in Minnetonka,
Minnesota. The lease runs from April 1, 1993 through March 31, 1998 and provides
for rental payments of $1,218 per month. These leases relate to Allstate
operations.
Urohealth leases approximately 7,000 square feet of office and warehouse
space in Sparta, New Jersey. The lease runs from August 1996 through March 2000,
and provides for rental payments of $8,500 per month.
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<PAGE> 81
MANAGEMENT OF UROHEALTH
The following table sets forth the names and ages of all executive
officers, certain key employees and directors of Urohealth as of July 31, 1997.
A summary of the background and experience of each of these individuals is set
forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ------------------------------------ --- -----------------------------------------------------
<S> <C> <C>
Charles A. Laverty(1)............... 51 Chairman of the Board and Chief Executive Officer
Bruce A. Hazuka..................... 50 Chief Operating Officer
Kevin M. Higgins.................... 55 Senior Vice President and General Counsel
Joseph T. Artino.................... 47 Vice President -- Finance
Paul Petersen....................... 38 President -- Urology Products
Richard Kindberg.................... 40 President -- Surgical Products
M. Cassandra Hoag................... 42 President -- Gynecology Products
Randall L. Condie................... 42 President -- Medical/Surgical Products
Michael Schuler..................... 47 President -- Visualization Products
Abbey J. Butler(2).................. 57 Director
John S. Chamberlin.................. 68 Director
Robert N. Elkins, M.D.(3)........... 51 Director
Melvyn J. Estrin(3)................. 52 Director
C. Sage Givens...................... 40 Director
Lawrence Goelman(1)(2)(3)........... 56 Director
Michael S. Gross.................... 35 Director
Richard Newhauser................... 50 Director
Francis J. Tedesco, M.D.(2)......... 52 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Directors of Urohealth are elected at annual meetings of stockholders to
serve one-year terms or until their successors are elected and officers of
Urohealth serve at the discretion of the Board of Directors. See "Proposal No.
1 -- Classification of the Board of Directors."
CHARLES A. LAVERTY became Chief Executive Officer in September 1994, and
Chairman of the Board of Directors in December 1994. Mr. Laverty has spent the
last 15 years of his 20 years of management and marketing experience in the
healthcare field and currently serves as a director of Integrated Living
Communities, an operator of retirement communities. Prior to joining Urohealth,
Mr. Laverty was employed as Senior Executive Vice President and was a director
of Coram Healthcare Corporation, the second largest home infusion therapy
company in the U.S., which was formed by the merger of Curaflex Health Services,
Inc., HealthInfusion, Inc., Medisys, Inc., and T2 Medical, Inc. Mr. Laverty
served as the Chairman of the Board, President and Chief Executive Officer of
Curaflex Health Services from February 1989 to July 1994. Prior to his
association with Curaflex, Mr. Laverty served as President and Chief Executive
Officer of InfusionCare, Inc., a home infusion services company, from October
1988 to February 1989. In addition, he has held several positions, including
Chief Operating Officer, with Foster Medical Corporation, a durable medical
equipment supply company, and worked in both sales and management for C.R. Bard,
a medical device company.
BRUCE A. HAZUKA served as Executive Vice President -- Operations from
September 1995 until March 1997 when he became Chief Operating Officer. Mr.
Hazuka has spent his entire 27 years of general management, marketing and
operations experience in the healthcare field, and was founder, President and
Chief Executive Officer of Healthcare Associates, Inc. which was founded in
January 1990. Prior to joining Urohealth, Mr. Hazuka served as Chairman of the
Board, President and Chief Executive Officer of Allscrips Pharmaceuticals, Inc.,
a pharmaceutical benefits management company, from September 1990 to June 1994.
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<PAGE> 82
Mr. Hazuka is a director of Integrated Medical Resources, Inc., a provider of
disease management services for men suffering from erectile dysfunction.
KEVIN M. HIGGINS became Senior Vice President and General Counsel of
Urohealth in November 1995. From 1989 to 1995 Mr. Higgins was Vice President and
General Counsel of Curaflex Health Services, Inc. From 1987 to 1989 he was Vice
President and General Counsel of Foster Medical Corporation. Prior to that, Mr.
Higgins was with Avon Products, Inc.
JOSEPH T. ARTINO became Vice President -- Finance of Urohealth in September
1996. From July 1995 to September 1996, Mr. Artino was Chief Financial Officer
of Children's Homecare, Inc. From April 1992 to July 1995, Mr. Artino was
Corporate Controller of Curaflex Health Services, Inc. Mr. Artino was appointed
Assistant Treasurer and Acting Chief Financial Officer of Urohealth in July
1997.
PAUL PETERSEN became President -- Urology Products in January 1997. From
December 1995 until January 1997, Mr. Petersen served as Senior Vice
President -- Sales and Marketing. Mr. Petersen served in various management
positions at Osbon Medical Systems from October 1988 until December 1995 when
Osbon Medical Systems became a subsidiary of Urohealth.
RICHARD KINDBERG has served as President -- Surgical Products since August
1996. He joined Richard-Allan as Director of Marketing, Sales Development and
International Sales in January 1995 and served in these capacities until August
1996 when Urohealth acquired Richard-Allan. He was Director of New Product
Development at Focal Interventional during 1994. Prior to that time, he served
as Director of Professional Marketing & Education at the Ethicon Endosurgery
Division of Johnson & Johnson.
M. CASSANDRA HOAG served as Senior Vice President -- Sales and Marketing
from October 1994 through August 1996 at which time she became
President -- Gynecological Products. Prior to joining Urohealth, Ms. Hoag served
as a Division Vice President of Curaflex Health Services, Inc. From April 1989
to December 1992, Ms. Hoag served as Curaflex's Vice President, Central
Operations. Prior to joining Curaflex, Ms. Hoag held several positions,
including Vice President of Central Operations, with Foster Medical Corporation
and Abbey Healthcare Group from February 1985 to April 1989.
RANDALL CONDIE has served as President -- Medical Surgical Products since
February 1997. Prior to that Mr. Condie was Vice President, National Accounts
for Urohealth, serving in that capacity since August 1995. Prior to that he held
several executive sales management positions with Urohealth since October 1994.
MICHAEL SCHULER joined Urohealth in January 1996 as Senior Vice President,
New Business Development. He became President -- Visualization Products in
August 1996. Prior to joining Urohealth, Mr. Schuler was with Advanced Surgical,
Inc. from 1992 until 1995. He was appointed Chief Executive Officer in 1994.
Prior to Advanced, Mr. Schuler was with Johnson and Johnson Interventional
Systems as Vice President of Product Management.
ABBEY J. BUTLER has served as a director of Urohealth since March 1995. He
is Co-Chairman and Co-Chief Executive Officer of Avatex Corporation, formerly
FoxMeyer Health Corporation, a holding company that is primarily engaged in
owning and operating a medical claims processing company, owning and operating
hotels and office buildings, and investing in other corporations and businesses.
Avatex Corporation was formerly the owner of one of the largest distributors of
pharmaceuticals and health care products in the United States. Mr. Butler became
a director of Avatex in 1990. Mr. Butler also serves as managing partner of
Centaur Partners, L.P., an investment partnership with ownership interests in
Avatex, as well as the President and a director of C.B. Equities Corp., a
private investment company. Mr. Butler presently serves as a director and a
member of the Executive Committee of FWB Bancorporation, the holding company of
Grand Bank, Phar-Mor, Inc., a discount drug store chain, Carson, Inc., a health
and beauty products manufacturer, and Cyclone, Incorporated, a distributor and
installer of chain link fence systems, highway guard rails and industrial gates
and posts. Certain affiliates and subsidiaries of Avatex Corporation of which
Mr. Butler was Co-Chairman, including FoxMeyer Drug Company, are currently
involved in proceedings under the Bankruptcy Code.
JOHN S. CHAMBERLIN has served as a director of Urohealth since June 1996.
Mr. Chamberlin worked for 22 years in various assignments for General Electric
Company, including sales, product planning, marketing, General Manager of Radio
Receiver Department and Vice President and General Manager of the Housewares
77
<PAGE> 83
and Audio Business Division. From 1976 to 1985 he was the President and Chief
Executive Officer of Lenox, Inc. and in 1985 joined Avon Products, Inc. as
President and Chief Operating Officer, leaving Avon in 1988. Mr. Chamberlin is
presently Chairman of the Board of Life Fitness Company and WNS, Inc., and he
serves on the Boards of Directors of The Scotts Co., Seasons, Inc., the Robbins
Company, Healthsouth Corporation and the Sports Holding Company. Mr. Chamberlin
is a Trustee of the Medical Center of Princeton and the Woodrow Wilson National
Fellowship Foundation.
ROBERT N. ELKINS, M.D. has served as a director of Urohealth since March
1995. Dr. Elkins is the founder of Integrated Health Services, Inc., a provider
of post acute and subacute care through more than 25,000 beds in 192 facilities
located in 30 states. Dr. Elkins has served as the Chairman and Chief Executive
Officer of Integrated Health Services since 1986. Dr. Elkins, a graduate of the
University of Pennsylvania, received his M.D. degree from the Upstate Medical
Center at the State University of New York and completed his residency at
Harvard University.
MELVYN J. ESTRIN has served as a director of Urohealth since March 1995. He
is Co-Chairman and Co-Chief Executive Officer of Avatex Corporation, formerly
FoxMeyer Health Corporation, a holding company that is primarily engaged in
owning and operating a medical claims processing company, owning and operating
hotels and office buildings, and investing in other corporations and businesses.
Avatex Corporation was formerly the owner of one of the largest distributors of
pharmaceuticals and health care products in the United States. Mr. Estrin became
a director of Avatex in 1990. Mr. Estrin also serves as managing partner of
Centaur Partners, L.P., an investment partnership with ownership interests in
Avatex, as well as Chairman of Human Service Group, Inc., a privately held
company that provides training, development and technical assistance to
governmental and educational institutions. Mr. Estrin presently serves as a
member of the board of directors of Grand Bank, Phar-Mor, Inc., a discount drug
store chain, Carson, Inc., a health and beauty products manufacturer, and
Washington Gas Light Company. Certain affiliates and subsidiaries of Avatex
Corporation of which Mr. Estrin was Co-Chairman, including FoxMeyer Drug
Company, are currently involved in proceedings under the Bankruptcy Code.
C. SAGE GIVENS has served as a director of Urohealth since June 1996. Ms.
Givens is the founding Managing Partner of Acacia Venture Partners, located in
San Francisco. Acacia Venture Partners was formed to invest exclusively in all
stages of healthcare service companies. Prior to forming Acacia Venture
Partners, Ms. Givens was a General Partner of First Century Partners, a private,
diversified venture capital and buyout fund, where she launched and managed the
partnership's diversification into healthcare. Ms. Givens was also formerly a
Managing Director at Smith Barney and presently serves as a director of
Healthsouth Corporation and Phycor, and serves on the Boards of Directors of
several other private portfolio companies.
LAWRENCE GOELMAN has served as a director of Urohealth since March 1995.
From 1981 until 1995, Mr. Goelman served as the Chairman and Chief Executive
Officer of CostCare, a national healthcare cost management firm. Since 1995, Mr.
Goelman has acted as a consultant, and is currently the Chairman and Acting
Chief Executive Officer of Diedrich's Coffee, Inc. and is Managing Director of
Archway Capital L.L.P.
MICHAEL S. GROSS has served as a director of Urohealth since June 1996. Mr.
Gross is one of the founding principals of Apollo Advisors, L.P. which, together
with an affiliate, acts as managing general partner of Apollo Investment Fund,
L.P., AIF II, L.P. and Apollo Investment Fund III, L.P., private securities
investment funds, and of Lion Advisors, L.P., which acts as financial advisor to
and representative for certain institutional investors with respect to
securities investments. Mr. Gross is a director of Allied Waste Industries,
Inc., Converse, Inc., The Florsheim Group, Inc., Furniture Brands International,
Inc. and Proffitts, Inc.
RICHARD NEWHAUSER became a director of Urohealth in August 1996. Prior to
that he served as Chairman and Chief Executive Officer of Richard-Allan from
1974 until the acquisition of Richard-Allan by the Company in August 1996.
FRANCIS J. TEDESCO, M.D. has served as a director of Urohealth since
December 1995. Dr. Tedesco has served as President of the Medical College of
Georgia since 1988, and prior to that time he held several different positions
at the college, including Professor of Medicine and Chief, Section of
Gastroenterology and Vice President for Clinical Affairs.
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<PAGE> 84
PRINCIPAL UROHEALTH STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Urohealth Common Stock as of July 31, 1997 of (i) each person known
by Urohealth to own beneficially 5% or more of the Common Stock, (ii) each
current director of Urohealth and each person nominated to be a director of
Urohealth, (iii) each named executive officer, and (iv) all current directors
and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
------------------------
NAME AND ADDRESS(1) NUMBER PERCENT
- -------------------------------------------------------------------------- --------- -------
<S> <C> <C>
Appaloosa Management L.P.(2).............................................. 2,836,500 10.0%
Avatex Corporation(3)..................................................... 2,464,827 8.4
Apollo Investors Fund III, L.P.
Apollo Overseas Partners III, L.P.
Apollo (U/K) Partners, L.P. (4)........................................... 2,200,906 7.7
Chase Venture Capital Associates, L.P.(5)................................. 2,196,069 7.7
Charles A. Laverty(6)..................................................... 1,322,816 4.5
Robert N. Elkins, M.D.(7)................................................. 153,889 *
Lawrence Goelman(8)....................................................... 128,295 *
Melvyn J. Estrin(9)....................................................... 2,479,827 8.4
Abbey J. Butler(9)........................................................ 2,479,827 8.4
Francis J. Tedesco(10).................................................... 15,000 *
Michael S. Gross(11)...................................................... 2,208,406 7.7
John Chamberlin(12)....................................................... 28,333 *
C. Sage Givens(13)........................................................ 28,333 *
Richard Newhauser......................................................... 2,040,281 7.2
Bruce A. Hazuka(14)....................................................... 138,889 *
Paul Petersen(15)......................................................... 122,809 *
Michael Schuler(16)....................................................... 77,890 *
All current directors and executive officers as a group (16
persons)(17)............................................................ 9,167,890 28.8
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated in the following footnotes, each person named in
the table has sole voting and investment power with respect to all shares
shown as beneficially owned, subject to applicable community property law.
Unless otherwise noted in the following notes the address of each person
listed is c/o Urohealth Systems, Inc., 5 Civic Plaza, Suite 100, Newport
Beach, California 92660. The foregoing table presents voting securities
which include Common Stock and the Debentures which vote with the Common
Stock on an "as converted" basis.
(2) Information obtained from filings made with the Securities and Exchange
Commission. The address for Appaloosa Management L.P. is 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078. David A. Tepper is deemed to
beneficially own the shares beneficially owned by Appaloosa Management L.P.
Mr. Tepper is the President and sole stockholder of Appaloosa Partners,
Inc., the general partner of Appaloosa Management L.P.
(3) Includes 1,414,827 shares of Common Stock and warrants to purchase
1,050,000 shares of Common Stock which are currently exercisable. The
address of Avatex Corporation is 5910 North Central Expressway, Dallas,
Texas 75206.
(4) Represents Debentures which vote on an "as converted" basis representing
2,087,156 shares of Voting Stock and warrants to purchase 113,750 shares of
Common Stock which are currently exercisable. The general partner of each
of the Apollo entities listed is Apollo Advisors II, L.P. ("Advisors")
whose general partner is Apollo Capital Management II, Inc. ("ACMI").
Messrs. Leon Black and John Hannan, directors of ACMI and founding
principals of Advisors, disclaim beneficial ownership of the shares shown
above. The address for Apollo Advisors II, L.P. is 1301 Sixth Avenue, New
York, New York 10019.
(5) Represents Debentures which vote on an "as converted" basis representing
2,082,569 shares of Voting Stock and warrants to purchase 113,500 shares of
Common Stock which are currently exercisable. The address for Chase Venture
Capital Associates, L.P. is 380 Madison Avenue, New York, New York 10017.
Chase Venture Capital Associates is an affiliate of Chase Manhattan
Corporation.
(6) Includes 1,322,816 shares subject to options exercisable on or before
September 30, 1997.
(7) Includes 153,889 shares subject to options exercisable on or before
September 30, 1997.
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<PAGE> 85
(8) Includes 128,295 shares subject to options exercisable on or before
September 30, 1997.
(9) Includes the 2,464,827 shares of Common Stock and Warrants beneficially
owned by Avatex Corporation as shown above and 15,000 shares subject to
options exercisable on or before September 30, 1997. Messrs. Estrin and
Butler are Co-Chairmen of the Board of Directors of Avatex Corporation.
(10) Includes 15,000 shares subject to options exercisable on or before
September 30, 1997.
(11) Includes securities held by Apollo Advisors II, L.P., of which Mr. Gross is
a principal. Mr. Gross disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein. Includes 7,500 shares
subject to options exercisable on or before September 30, 1997.
(12) Includes 28,333 shares subject to options exercisable on or before
September 30, 1997.
(13) Includes 28,333 shares subject to options exercisable on or before
September 30, 1997.
(14) Includes 138,889 shares subject to options exercisable on or before
September 30, 1997.
(15) Includes 55,556 shares subject to options exercisable on or before
September 30, 1997.
(16) Includes 63,784 shares subject to options exercisable on or before
September 30, 1997.
(17) Includes 2,236,794 shares subject to options exercisable on or before
September 30, 1997, warrants to purchase 1,163,750 shares of Common Stock
and Debentures which vote on an "as converted" basis with respect to
2,087,156 Common Stock equivalents.
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<PAGE> 86
COMPENSATION OF UROHEALTH DIRECTORS AND EXECUTIVE OFFICERS
AND OTHER INFORMATION
Summary of Executive Compensation
The following table sets forth for each of Urohealth's last three completed
fiscal years the compensation of the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION OTHER ANNUAL UNDERLYING
----------------------- COMPENSATION OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) ($) (#)
- ---------------------------------- ------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles A. Laverty................ 1997 $ 450,000 $ -- * --(2)
President and 1996 $ 250,100 $375,900 1,138,833
Chief Executive Officer 1995 $ 159,400 $ 50,000 500,000
Julian W. Osbon................... 1997 $ 327,799(3) $ -- * --
(former executive officer) 1996 $ 101,900 $ 40,000 --
1995 $ -- $ -- --
James L. Johnson.................. 1997 $ 294,733 $ -- *
Executive Vice President 1996 $ 152,000 $ 51,100 336,517
and Chief Financial Officer(4) 1995 $ -- $ -- --
Bruce A. Hazuka................... 1997 $ 220,833 $ -- * --(2)
Executive Vice President 1996 $ 104,700 $ 52,000 200,000
and Chief Operating Officer 1995 $ -- $ -- --
Paul Petersen..................... 1997 $ 259,000(5) $ -- *
President -- Urology Products 1996 $ 191,222(5) $
1995 $ -- $
Michael Schuler................... 1997 $ 225,000 $ *
President -- Visualization 1996 $ 142,879 $
Products
1995 $ -- $ --
</TABLE>
- ---------------
* Other Annual Compensation did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus.
(1) The information for fiscal 1996 covers a nine month transition period ending
March 31, 1996.
(2) In May 1997, Mr. Laverty was granted an option to purchase 1,500,000 shares
and Mr. Hazuka was granted an option to purchase 50,000 shares.
(3) Excludes severance payment of $800,000 made during fiscal 1997.
(4) Mr. Johnson resigned in July 1997.
(5) Includes commissions provided for in Mr. Petersen's employment agreement.
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<PAGE> 87
Summary of Option Grants
The following table sets forth the individual grants of stock options made
by Urohealth during the year ended March 31, 1997 to each of the named executive
officers of Urohealth.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------- ASSUMED RATE
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------- ------------ ------------ ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Charles A. Laverty.......... -- -- -- -- -- --
Julian W. Osbon............. -- -- -- -- -- --
James L. Johnson............ -- -- -- -- -- --
Bruce A. Hazuka............. -- -- -- -- -- --
Paul Petersen............... -- -- -- -- -- --
Michael Schuler............. -- -- -- -- -- --
</TABLE>
Summary of Options Exercised
The following table sets forth information concerning exercise of stock
options during the year ended March 31, 1997 by each of the named executive
officers of Urohealth and the value of unexercised options at March 31, 1997.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FY-END (#) FY-END ($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Charles A. Laverty........... -- -- 1,110,100/528,728 $1,241,607/$350,061
Julian Osbon................. -- -- 0/0 0/0
James L. Johnson............. -- -- 217,073/119,444 $125,348/$112,152
Bruce A. Hazuka.............. -- -- 127,778/72,222 $55,903/$31,597
Paul Petersen................ -- -- 52,778/47,222 $125,348/$112,152
Michael Schuler.............. 3,104 $20,739 61,006/47,222 $142,482/$112,152
</TABLE>
1996 Directors' Stock Incentive Plan
In July 1996, Urohealth approved the 1996 Directors' Stock Incentive Plan
(the "Directors' Plan") which authorizes the issuance of up to 300,000 shares of
Common Stock in the form of stock options to non-employee directors of
Urohealth. The Directors' Plan was approved by Urohealth stockholders in August
1996. Under the Directors' Plan, each non-employee director of Urohealth
automatically receives an option to purchase 7,500 shares of Urohealth Common
Stock upon joining the Urohealth Board of Directors and an additional 7,500
share option immediately following each annual meeting of stockholders. Options
are granted at fair market value on the date of grant and have a ten-year term.
Options vest on the first anniversary of the date of grant; provided, that the
options become immediately exercisable upon a "change of control."
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Retirement Savings Plan
In January 1995, Urohealth adopted the Urohealth Retirement Savings Plan
(the "401(k) Plan") under Section 401(k) of the Internal Revenue Code. The
401(k) Plan generally covers all full-time employees of Urohealth who are over
age 21 and have completed one year of service with at least 1,000 hours of
service. Employees may elect to defer, in the form of contributions to the
401(k) Plan, from 1% up to 12% of their annual compensation, subject to the
federal maximum limit. No matching contributions are expected to be made by
Urohealth relating to fiscal 1997. Employees are fully vested in contributions
made by them to the 401(k) Plan. Employees become vested in contributions made
by Urohealth after completion of two years of service.
Certain Relationships and Related Transactions
In May 1996, Urohealth sold $50 million of its 8.75% Convertible
Subordinated Debentures due May 30, 2006 (the "Convertible Debentures") to a
group of investors in a private placement transaction. The Convertible
Debentures are convertible into Urohealth Common Stock at a conversion price,
subject to adjustment, of $10.90 per share, and the holders of the Convertible
Debentures vote with the holders of the Urohealth Common Stock on an "as
converted" basis. In connection with the placement of the Convertible
Debentures, Urohealth also issued warrants to purchase a total of 250,000 shares
of Urohealth Common Stock at an exercise price, subject to adjustment, of
$10.90. An entity affiliated with Dr. Blutt, a director of the Urohealth,
purchased $22.7 million of the Convertible Debentures and the warrants, and
entities affiliated with Mr. Gross, a director of Urohealth, purchased $22.7
million of Convertible Debentures and warrants.
In connection with the acquisition of Richard-Allan by Urohealth, Urohealth
entered into a three-year employment agreement with Richard R. Newhauser for an
annual salary of $350,000, and into a consulting agreement pursuant to which Mr.
Newhauser will provide consulting services to Urohealth for a five-year period
after expiration of the employment agreement for $200,000 per year. In addition,
Urohealth has agreed to provide Mr. Newhauser health insurance benefits during
the terms of the employment and consulting agreements and during his retirement
thereafter.
In connection with the acquisition of Richard-Allan, Urohealth purchased
from a partnership of which Mr. Newhauser was a general partner, the real
property on which the Richard-Allan operations were conducted for a purchase
price of $4.5 million, of which $1.5 million was paid in cash at the closing and
the balance of which is represented by a $3.0 million promissory note which
bears interest at 8 1/4% per annum. The interest on the note paid periodically
throughout the term of the note and the principal is due and payable on the
tenth anniversary of the closing.
During fiscal 1997, Urohealth loaned $550,000 on an unsecured basis to
Charles A. Laverty, Urohealth's Chairman and Chief Executive Officer. The loan
bears interest at a rate of 6.02% per annum and all principal and interest under
the note is due and payable on the earlier of (a) November 25, 1999 and (b) 30
days after termination of Mr. Laverty's employment agreement. Subsequent to
March 31, 1997, Urohealth loaned $1,500,000 to Mr. Laverty on the same terms and
conditions as the earlier loan.
During fiscal 1997, Urohealth made payments of $81,667 to HCA, Inc. in
payment for consulting services provided to Urohealth in prior fiscal years.
Bruce A. Hazuka, Executive Vice President and Chief Operating Officer of
Urohealth, is an executive officer and controlling stockholder of HCA, Inc..
Employment Agreements
CHARLES A. LAVERTY. Urohealth and Mr. Laverty are parties to an Amended and
Restated Employment Agreement, dated April 1, 1996, pursuant to which Mr.
Laverty serves as Urohealth's Chief Executive Officer. The initial term of the
agreement is through April 1, 1999, after which date the agreement automatically
renews for successive three-year terms unless either party exercises their
option to terminate the agreement. Mr. Laverty's salary under the agreement was
$450,000 for fiscal 1997, adjusted annually, plus bonuses. Mr. Laverty's base
salary under the agreement was increased to $500,000 beginning in fiscal 1998.
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<PAGE> 89
Urohealth may terminate the agreement for "cause" which is defined as (a)
Mr. Laverty's final conviction of a felony related to his duties under the
agreement or (b) Mr. Laverty's willful failure to perform his reasonable
responsibilities and duties under the agreement after 30 days notice from the
Board. In the event that Mr. Laverty terminates the agreement without cause at
any time during the last two quarters of any fiscal year any options scheduled
to vest during such fiscal year shall automatically vest as of the date of
termination. If Urohealth terminates the agreement for any reason other than for
cause, or if Mr. Laverty terminates the agreement due a material breach by
Urohealth of its obligations under the agreement, then Urohealth will be
obligated to (A) pay to Mr. Laverty severance pay equal to three years of his
salary and earned bonus as of the date of such termination and (B) provide and
pay for all benefits to which Mr. Laverty is entitled under the agreement for a
period of three years after termination. In addition, if Urohealth terminates
the agreement for any reason other than for cause, or if Mr. Laverty terminates
the agreement due to a material breach by Urohealth, all options then granted to
Mr. Laverty will become immediately vested and exercisable.
Mr. Laverty may terminate the agreement upon 30 days notice upon or within
one year after a "Change of Control" as such term is defined in the agreement.
If Mr. Laverty terminates the agreement for any reason (including with or
without cause) upon or within one year after a Change of Control, Urohealth is
obligated to (A) pay to Mr. Laverty severance equal to $2,500,000 and (B)
provide and pay for all benefits to which he is entitled under the agreement for
a period of three years after termination. In addition, all options then held by
Mr. Laverty will become immediately vested and exercisable. If, however, an
event giving rise to a Change of Control is initiated by Urohealth, then prior
to the Urohealth Board approving the Change of Control, Mr. Laverty must inform
the Board whether he intends to terminate the agreement. If Mr. Laverty informs
the Board that he does not intend to terminate the agreement as a result of the
Change of Control, he will forfeit all termination and payment rights in the
agreement based on that particular Change of Control.
Mr. Laverty agreed that during his employment and for a period of 18 months
after he ceases to be employed by Urohealth, regardless of the manner of
termination and except as limited by the agreement, he will not compete with
Urohealth.
BRUCE A. HAZUKA. Urohealth and Mr. Hazuka are parties to an employment
agreement dated November 30, 1995 pursuant to which Mr. Hazuka serves as a
member of senior management of Urohealth. The agreement provides for an initial
one-year term with two automatic one-year renewals thereafter. Mr. Hazuka's
annual salary under the agreement is $200,000, adjusted annually (currently at
$300,000), plus bonuses. Urohealth can terminate Mr. Hazuka's employment for
cause (as defined in the agreement). Urohealth can terminate Mr. Hazuka's
employment without cause upon at least 90 days' prior notice, in which case all
of the options then held by Mr. Hazuka shall become immediately vested and
exercisable, and Mr. Hazuka shall be entitled to severance equal to the amount
of his salary for the remaining term of the agreement (including extensions
thereof).
Following a "change of control" (as defined in the agreement), Mr. Hazuka
may terminate the agreement with or without "good reason" (as defined in the
agreement), upon 30 days' notice given at any time during the one-year period
after the change of control. If Mr. Hazuka terminates his employment during the
one-year period after the change of control for good reason, or if his
employment is terminated without cause during such period, then he shall be
entitled to receive a lump sum severance payment equal to the greater of (i) one
times his salary and bonus for the 12 months preceding the change of control and
(ii) the remaining amount of salary payable for the term of the agreement.
PAUL PETERSEN. Urohealth and Mr. Petersen are parties to an employment
agreement dated December 29, 1995 pursuant to which Mr. Petersen serves as a
member of senior management of Urohealth. The agreement provides for an initial
one-year term, with two automatic one-year renewals thereafter. Mr. Petersen's
annual salary under the agreement is $125,000, adjusted annually (currently
$214,000, with minimum guaranteed bonuses), plus bonuses. Urohealth can
terminate Mr. Petersen's employment for cause (as defined in the agreement).
Urohealth can terminate Mr. Petersen's employment without cause upon at least 90
days' prior notice, in which case Mr. Petersen shall be entitled to severance
equal to the amount of his salary and bonus for the remaining term of the
agreement (including extensions thereof).
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<PAGE> 90
Following a "change of control" (as defined in the agreement), Mr. Petersen
may terminate the agreement with or without "good reason" (as defined in the
agreement), upon 30 days' notice given at any time during the one-year period
after the change of control. If Mr. Petersen terminates his employment during
the one-year period after the change of control for good reason then he shall be
entitled to receive a lump sum severance payment equal to one times his salary
and bonus for the 12 months preceding the change of control.
MICHAEL SCHULER. Urohealth and Mr. Schuler are parties to an employment
agreement dated January 2, 1996 pursuant to which Mr. Schuler serves as a member
of senior management of Urohealth. The agreement provides for an initial
one-year term, with two automatic one-year renewals thereafter. Mr. Schuler's
annual salary under the agreement is $225,000 plus bonuses. Urohealth can
terminate Mr. Schuler's employment for cause (as defined in the agreement).
Urohealth can terminate Mr. Schuler's employment without cause upon at least 90
days' prior notice, in which case Mr. Schuler is entitled to severance equal to
the amount of his salary for the remaining term of the agreement (including
extensions thereof).
Following a "change of control" (as defined in the agreement), Mr. Schuler
may terminate the agreement with or without "good reason" (as defined in the
agreement), upon 30 days' notice given at any time during the one-year period
after the change of control. If Mr. Schuler terminates his employment during the
one-year period after the change of control for good reason, or if his
employment is terminated by Urohealth without cause, then he shall be entitled
to receive a severance payment equal to the greater of (i) one times his salary
and bonus for the 12 months preceding the change of control and (ii) the
remaining amount of salary payable for the term of the agreement.
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<PAGE> 91
Notwithstanding anything to the contrary set forth in Urohealth's previous
public filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including this proxy
statement/prospectus, in whole or in part, the following report and Stock
Performance Graph which follows shall not be deemed to be incorporated in any
such filings.
Report of the Compensation Committee on Executive Compensation
GENERAL
The Urohealth Board of Directors has a Compensation Committee (the
"Committee"), consisting of Dr. Elkins, Mr. Estrin, and Mr. Goelman. The
Committee is charged by the Board of Directors with establishing a compensation
plan which will enable Urohealth to compete effectively for the services of
qualified officers and key employees, to give such employees appropriate
incentive to pursue the maximization of long-term stockholder value and to
recognize such employees' success in achieving both qualitative and quantitative
goals for the benefit of Urohealth. The Committee establishes appropriate levels
of compensation for specific individuals, as well as compensation and benefit
programs for Urohealth as a whole. See "Proposal No. 2 Election of
Directors -- Compensation Committee Interlocks and Insider Participation."
COMPENSATION PHILOSOPHY AND POLICIES FOR EXECUTIVE OFFICERS
As its first principle, the Committee believes that executives of Urohealth
should be rewarded based upon their success in meeting Urohealth's operational
goals, improving its earnings, maintaining its leadership role in the
urological, gynecological and minimally invasive surgical instrument business,
and generating consistent and superior returns for its stockholders. The
Committee strives to establish levels of compensation that take such factors
into account and provide appropriate recognition for past achievement and
incentives for future success. The Committee recognizes that the demand for
executives with expertise and experience in the areas of medical devices and
services within the healthcare services fields is intense. In order to attract
and retain qualified persons, the Committee believes that Urohealth must offer
current compensation at levels consistent with those of other publicly-traded
healthcare companies. In addition, the Committee believes that it is in the best
interests of Urohealth's stockholders to offer its executives meaningful equity
participation in Urohealth, in order that those executives' interests will be
aligned with those of Urohealth's stockholders. The Committee feels that the
historic mix of cash compensation and equity participation has proven to be
effective in stimulating Urohealth's executives to meet both long-term and
short-term goals and has been a major factor in limiting turnover among senior
executives.
Urohealth's compensation program has three distinct elements: base salary;
incentive compensation, including both cash incentive compensation and
equity-based compensation; and retirement compensation. These elements are
discussed below:
Base Salary: While the demand for experienced managers in the healthcare
industry continues to grow, Urohealth has been very successful in attracting and
retaining key executives. Urohealth believes that its compensation package is
instrumental in such success. The Committee endeavors to establish base salary
levels for those key executives which are consistent with those provided for
similarly situated executives of other publicly-traded healthcare companies,
taking into account each executive's areas and level of responsibility,
historical performance and tenure with Urohealth. In establishing such levels,
Urohealth considers compensation for executives of other publicly-traded
providers of healthcare services, as well as other publicly-traded companies of
similar size and with a similar growth rate. Compensation decisions are not
targeted to specific levels in the range of compensation paid by such companies,
nor does Urohealth maintain a record of where its compensation stands with
respect to such other companies. However, the Committee takes such levels of
compensation into account in determining appropriate levels of compensation for
Urohealth's executives.
Incentive Compensation: In addition to base salary, the Committee
establishes cash incentive compensation for executives of Urohealth, based upon
each such executive's success in meeting qualitative and quantitative
performance goals on an annual basis. Individual incentive bonuses are
determined on a basis that takes into account each executive's success in
achieving standards of performance, which may or may not be
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quantitative, established by the Committee and such executive's superiors. Bonus
determinations are made on a case-by-case basis, taking into account appropriate
quantitative and qualitative factors, and there is no fixed relationship between
any particular performance factor and the amount of a given executive's bonus.
Incentive compensation can be a major component of Urohealth's executive
compensation, and the Committee believes that placing executives at risk for
such a component is effective in motivating such executives to achieve such
goals.
In addition to cash incentive compensation, as a growth company, Urohealth
utilizes equity-based compensation, in the form of stock options, as a tool to
encourage its executives to work to meet its operational goals and maximize
long-term stockholder value. Because the value of stock options granted to an
executive is directly related to Urohealth's success in enhancing its market
value over time, the Committee feels that its stock option program is a very
effective tool in aligning the interests of management and stockholders.
The Committee determines stock option grants under Urohealth's stock option
plans. Specific grants are determined taking into account an executive's current
responsibilities and historical performance, as well as the executive's
perceived contribution to Urohealth's results of operations. Options are also
used to give incentive to newly-promoted officers at the time that they are
asked to assume greater responsibilities, and, in some cases, to executives who
have joined Urohealth through acquisitions and have assumed significant
leadership roles within Urohealth. In evaluating option grants, the Committee
considers prior grants and shares currently held, as well as the recipient's
success in meeting operational goals and the recipient's level of
responsibility. However, no fixed formula is utilized to determine particular
grants. The Committee believes that the opportunity to acquire a significant
equity interest in Urohealth has been a strong motivation for Urohealth's
executives to pursue the long-term interests of Urohealth and its stockholders,
and has promoted longevity and retention of key executives. Information relating
to stock options granted to the five most highly-compensated executive officers
of Urohealth is set forth elsewhere in this Proxy Statement/Prospectus.
Retirement Compensation: As described elsewhere herein, in 1991 the Company
adopted a 401(k) retirement plan in order to give all full-time employees an
opportunity to provide for their retirement on a tax-advantaged basis.
CHIEF EXECUTIVE OFFICER COMPENSATION
Urohealth is a party to an Employment Agreement with Charles Laverty,
pursuant to which Mr. Laverty is employed as Chairman of the Board, Chief
Executive Officer and President of Urohealth for a three-year term which ends
March 31, 1999. In addition, the Company has agreed to use its best efforts to
cause Mr. Laverty to be elected as a Director of Urohealth during the term of
the Agreement. Under the Agreement, Mr. Laverty received a base salary of
$450,000 in fiscal 1997 (increased to $500,000 for fiscal 1998 and each year
thereafter), with incentive compensation of up to $2,000,000, subject to annual
review by the Board of Directors, and is entitled to participate in any bonus
plan approved by the Board of Directors for Urohealth's management. Mr. Laverty
was granted an additional 1,500,000 stock options vesting over 36 months at the
closing price of a share of Urohealth Common Stock on May 21, 1997. Such
additional option grant was based on the Committee's assessment of Mr. Laverty's
contribution to Urohealth as the builder of the urological, gynecological and
minimally invasive surgical platforms for Urohealth, including his role in the
consummation of eight acquisitions during 1996 and 1997, as well as Urohealth's
success in achieving annual budgeted net income targets and other factors
described below. Mr. Laverty is also provided with a car allowance and with life
and disability insurance. Under the Agreement, Mr. Laverty's employment may be
terminated for cause or if he should become disabled. Termination of Mr.
Laverty's employment under the Agreement will result in certain severance pay
arrangements. In the event that Urohealth were to be acquired, merged or
reorganized in such a manner as to result in a change of control of the Company,
Mr. Laverty has the right to terminate his employment under the Agreement, in
which case he will receive a lump sum payment equal to five years' annual base
salary (including the gross incentive portion thereof) under the Agreement. Mr.
Laverty has agreed not to compete with Urohealth for an eighteen month period
after any such termination. The Committee approved an amendment to the Agreement
that provides for Mr. Laverty to receive certain payments in the event that
Urohealth is merged or combined with another corporation in a transaction in
which Urohealth is not the surviving or continuing entity. The amount of the fee
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<PAGE> 93
would be equal to the greater of: (i) 1% of value of such transaction in excess
of $20 per share; and (ii) 1% of the capitalization of Urohealth in excess of
$640 million.
The Committee reports to the Board of Directors on compensation
arrangements with Mr. Laverty and recommends to the Board of Directors the level
of incentive compensation, both cash and equity-based, which is appropriate for
Mr. Laverty with respect to each fiscal year of Urohealth. In making such
recommendation, the Committee takes into account Urohealth's performance in the
marketplace, its success in meeting strategic goals and its success in meeting
budgets. Again, ultimate compensation decisions are not made in a formulary
manner, but in a manner which takes into account Urohealth's competitive
position, its position in the financial markets, and the significant
contributions made by Mr. Laverty to the success of Urohealth. In making its
decisions with respect to Mr. Laverty's compensation, the Committee believes
that it is appropriate to recognize the significant role Mr. Laverty has played
in building Urohealth to its current position and that under his leadership
Urohealth has significantly enhanced stockholder value over a period of years
and continues to grow in assets, net revenues, net income and market value.
SECTION 162(M) OF THE INTERNAL REVENUE CODE
The Omnibus Budget Reconciliation Act of 1993 contained a provision under
which a publicly-traded corporation is sometimes precluded from taking a federal
income tax deduction for compensation in excess of $1,000,000 that is paid to
the chief executive officer and the four other most highly-compensated
executives of the corporation during a corporation's tax year. Compensation in
excess of $1,000,000 continues to be deductible if that compensation is
"performance based" within the meaning of that term under Section 162(m) of the
Internal Revenue Code. Certain transition rules apply with respect to stock
option plans which were approved prior to December 20, 1993, pursuant to Rule
16b-3(b) under the Exchange Act.
Urohealth believes that its employee stock option plans meet the
requirements of Section 162(m) as performance-based plans; however, the
Committee does from time to time grant options outside the employee stock option
plans. The Committee and the Board of Directors have currently made a decision
not to amend Urohealth's cash compensation programs to meet all requirements of
Section 162(m) because such a decision would not be in the best interests of
Urohealth's stockholders. The Committee believes that, in establishing bonus and
incentive awards, certain subjective factors must be taken into account in
particular cases, based upon the experienced judgment of the Committee members
as well as on factors which may be objectively quantified. The preservation of
tax deductibility of all compensation is an important consideration. However,
the Committee believes that it is important that Urohealth retain the
flexibility to reward superior effort and accomplishment even where all cash
compensation may not be fully deductible. The Committee will continue to review
the requirements for deductibility under Section 162(m) and will take such
requirements into account in the future as it deems appropriate and in the best
interests of Urohealth's stockholders.
CONCLUSIONS
The Committee believes that the levels and mix of compensation provided to
Urohealth's executives during fiscal 1997 were appropriate and were instrumental
in the achievement of Urohealth's goals for fiscal 1997. It is the intent of the
Committee to ensure that Urohealth's compensation programs continue to motivate
its executives and reward them for being responsive to the long-term interests
of Urohealth and its stockholders.
The foregoing report is submitted by the following Directors of Urohealth,
constituting all of the members of the Compensation Committee of the Board of
Directors:
Robert Elkins, M.D.
Melvyn Estrin
Lawrence Goelman, Chairman
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Urohealth Stock Price Performance
The following performance graph assumes an investment of $100 on August 30,
1991 (the date that Urohealth became subject to Section 12 of the Exchange Act)
and compares the change to March 31, 1997 in the market price of the Urohealth
Common Stock with a broad market index (Dow Jones Equity Market Index) and
industry index (S&P Healthcare (Medical Products and Supplies)). Urohealth paid
no dividends during the periods shown; the performance of the indices is shown
on a total return (dividend reinvestment) basis. The graph lines merely connect
the prices on the dates indicated and do not reflect fluctuations between those
dates.
<TABLE>
<CAPTION>
Cumulative Total Return
-------------------------------------------------------------------
8/30/91 6/30/92 6/30/93 6/30/94 6/30/95 3/31/96 3/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Urohealth Systems, Inc. UROH 100 243 222 109 113 152 112
DOW JONES EQUITY MARKET IDOW 100 106 122 123 155 188 225
S&P HEALTHCARE* IMDP 100 103 84 81 125 166 182
(Medical Products and Supplies)
</TABLE>
- ---------------
* During 1997, Urohealth changed the industry index used in the above
comparison from the Dow Jones Medical Supplies Index to the S&P Healthcare
(Medical Products and Supplies) Index because Urohealth believes that the S&P
Healthcare (Medical Products and Supplies) Index contains companies whose
operations more closely parallel the operations of Urohealth. The Dow Jones
Medical Supplies Index would have had a cumulative total return of 222 for
the period ended March 31, 1997.
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PROPOSAL NO. 1
CLASSIFICATION OF THE BOARD OF DIRECTORS
Classification Proposal
The Urohealth stockholders are being asked to approve at the Urohealth
Annual Meeting an amendment to Urohealth's Bylaws providing for the
classification of the Board of Directors into three classes, each consisting of
a number of directors equal as nearly as practicable to one-third of the total
number of directors. After initial implementation, each class of directors would
be subject to election every third year and would serve for a three-year term.
Currently, all of Urohealth's directors are elected each year for a one-year
term.
The Urohealth Board of Directors believes that this amendment to the Bylaws
is in the best interests of Urohealth and its stockholders. Board classification
will help lend continuity and stability to the management of Urohealth.
Following adoption of the classified board structure, at any given time at least
one-third of the members of the Board of Directors will generally have had prior
experience as Urohealth directors. The Board believes that this will facilitate
long-range planning, strategy and policy and will have a positive impact on
customer and employee loyalty.
If the proposal is approved by stockholders, the Board of Directors will,
for purposes of initial implementation, designate three classes of directors.
Class I, consisting of Melvyn J. Estrin, Richard Newhauser and Francis J.
Tedesco, will be elected initially for a one-year term expiring at the next
annual meeting of stockholders; Class II, consisting of Abbey J. Butler, Robert
N. Elkins and Michael Gross, will be elected initially for a two-year term
expiring at the 1999 Annual Meeting of Stockholders; and Class III, consisting
of John Chamberlin, Lawrence Goelman and Charles A. Laverty, will be elected for
a three-year term expiring at the 2000 Annual Meeting of Stockholders; and, in
each case, until their respective successors are duly elected and qualified.
Information concerning the current nominees for election as directors at the
Urohealth Annual Meeting is set forth herein under "Election of Urohealth
Directors."
If the proposal to adopt a classified board is not approved and
implemented, all of the directors elected at the Urohealth Annual Meeting will
serve a one-year term.
The text of the proposed amendment to the Bylaws is set forth as Annex D to
this Proxy Statement/Prospectus.
Effect of Classification of Board
If adopted, the classification of the Board will apply to every future
election of directors, until the Bylaws are amended eliminating classification
of the Board. Upon adoption of the classified board amendment, the Urohealth
Bylaws will provide that the Board of Directors shall consist of not less than
three and not more than 15 directors, with the exact number of directors
initially set at 9. After implementation of the classified Board, directors will
serve for a term of three years rather than one year, and one-third (or as near
to one-third as practicable) shall be elected each year.
In the event that the current number of directors increases, the increase
will be apportioned by the Board between classes of directors to make each class
as nearly equal as possible. In the event that the number of directors is
decreased, no such decrease shall shorten the term of any incumbent director.
Vacancies in the Board created by any resignation, removal or other reason, or
by an increase in the size of the Board, may be filled for the remainder of the
term by the vote of a majority of the directors remaining in office.
Pursuant to the Delaware General Corporation Law, unless a company's
certificate of incorporation provides otherwise, members of a classified board
of directors may only be removed for cause. Urohealth's Bylaws currently provide
that directors may be removed with or without cause. If the Classified Board
Amendment is approved members of the Urohealth Board of Directors may only be
removed for cause.
The classification of the Urohealth Board of Directors will have the effect
of making more difficult to replace incumbent directors and management, even if
the reason for the desired change is inadequate performance. If the Classified
Board Amendment is approved and implemented, a minimum of three annual
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meetings of stockholders would generally be required to replace the entire
Board, absent intervening vacancies. While the proposal is not intended as a
takeover-resistive measure in response to a specific threat, it may discourage
the acquisition of large blocks of Urohealth's shares by causing it to take
longer for a person or group of persons who acquire such block of shares to
effect a change in management.
The proposal to adopt the Classified Board Amendment is not in response to
any effort by a minority stockholder or group of stockholders to attain
representation on the Board of Directors or acquire greater influence in the
management of Urohealth's business, nor is Urohealth aware of any such effort.
Further, it is not in response to any attempt to acquire control of Urohealth,
nor is Urohealth aware of any such attempt.
Approval of the Classified Board Amendment requires the affirmative vote of
the holders of a majority of the voting power of Urohealth entitled to vote at
the Urohealth Annual Meeting.
THE UROHEALTH BOARD OF DIRECTORS BELIEVES THAT THE ADVANTAGES OF THE
CLASSIFIED BOARD AMENDMENT GREATLY OUTWEIGH THE POSSIBLE DISADVANTAGES.
ACCORDINGLY, THE UROHEALTH BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
CLASSIFIED BOARD AMENDMENT AND UNANIMOUSLY RECOMMENDS THAT UROHEALTH
STOCKHOLDERS APPROVE THE CLASSIFIED BOARD PROPOSAL.
PROPOSAL NO. 2
ELECTION OF UROHEALTH DIRECTORS
At the Urohealth Annual Meeting, Urohealth's stockholders will be asked to
elect eight directors, and the holders of Urohealth's 8.75% Convertible
Subordinated Debentures due 2006 (the "Convertible Debentures") will be asked to
elect one director. Vacancies on the Urohealth Board of Directors and newly
created directorships will generally be filled by vote of a majority of the
directors then in office, except for vacancies relating to directors elected by
the holders of the Convertible Debentures, which are filled by a vote of the
remaining director elected by such holders. The Board of Directors has no reason
to believe that any of its nominees will be unable or unwilling to serve if
elected to office and to the knowledge of the Urohealth Board of Directors, each
of its nominees intends to serve the entire term for which election is sought.
However, should any of the nominees of the Urohealth Board of Directors become
unable or unwilling to accept nomination or election as a director, the proxies
solicited by the Urohealth Board of Directors will be voted for such other
person as the Board may determine.
Contingent upon approval of the Classified Board Amendment (see above
"Classification of the Board of Directors") by Urohealth stockholders, three
directors will be elected for a one-year term expiring at the 1998 annual
meeting of stockholders (Class I), three directors will be elected for a
two-year term expiring at the 1999 annual meeting of stockholders (Class II),
and four directors will be elected for a three-year term expiring at the 2000
annual meeting of stockholders (Class III), in each case until his or her
respective successor is duly elected and qualified. Thereafter, each class of
directors would be subject to election every third year and would serve for a
three-year term. If however, the Classified Board Proposal is not approved, all
directors will be elected to serve until the next annual meeting of stockholders
and until their successors are duly elected and qualified.
Pursuant to the Employment Agreement between Charles A. Laverty and
Urohealth, Urohealth is obligated to use its best efforts to cause Mr. Laverty
to be elected as a voting member of the Urohealth Board of Directors during the
term of his employment. Pursuant to an agreement between Urohealth and Avatax
Corporation (formerly, FoxMeyer Corporation), Urohealth has agreed to use
reasonable efforts to maintain the two Board seats currently held by Avatex
nominees for the next year. Messrs. Butler and Estrin are the Avatex nominees
currently serving on the Urohealth Board of Directors. In connection with the
acquisition of Richard-Allan Medical, Urohealth agreed to use its best efforts
to cause Richard Newhauser to elected to the Urohealth Board of Director until
August 1999. Mr. Gross is one of the two nominees of the holders of the
Convertible Debentures, and the holders of the Convertible Debentures have
elected not to name a second nominee at this time. There are no other
arrangements or understandings between any director or executive officer and any
other person pursuant to which such director or executive officer was or is to
be elected as a director or executive officer, as applicable.
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In voting for directors, each stockholder is entitled to cast one vote for
each candidate for each share of Common Stock. The holders of the Convertible
Debentures are entitled to vote the Convertible Debentures on an "as converted"
basis, and together with the Urohealth Common Stock is referred to herein as
"Voting Stock." Urohealth stockholders are not entitled to cumulate their votes
for members of the Urohealth Board of Directors. The nominees for election to
the Urohealth Board of Directors who receive the greatest number of affirmative
votes (or in the case of the Convertible Debentures, the greatest number of
affirmative votes related to the Convertible Debentures) will be elected to the
Urohealth Board of Directors. The Urohealth Board of Directors has nominated the
individuals listed below for election at the Urohealth Annual Meeting.
THE UROHEALTH BOARD OF DIRECTORS RECOMMENDS A VOTE TO APPROVE EACH NOMINEE
FOR ELECTION AS A MEMBER OF THE UROHEALTH BOARD OF DIRECTORS.
The nominees for election, and their respective classes if the Classified
Board Proposal is approved, are:
<TABLE>
<S> <C> <C>
CLASS I CLASS II CLASS III
------------------------------------------------------------------------------
Michael Gross Abbey J. Butler John Chamberlin
Richard Newhauser Robert N. Elkins Lawrence Goelman
Francis J. Tedesco Melvyn J. Estrin Charles A. Laverty
</TABLE>
Nominees for Director
Information regarding the business experience for the last five years of
each nominee for election to the Urohealth Board of Directors is set forth above
under "Management of Urohealth" and information regarding the ownership by each
nominee of Urohealth Voting Stock is set forth above under "Principal Urohealth
Stockholders."
Directors' Fees
Each Urohealth director who is not a salaried officer is entitled to
receive $10,000 per year and $1,000 for each directors' and committee meeting
attended. Directors are also entitled to reimbursement of expenses incurred in
connection with business of Urohealth. Directors also receive annual grants of
options to purchase 7,500 shares of Urohealth Common Stock after each annual
stockholders meeting pursuant to the Urohealth 1996 Directors' Stock Incentive
Plan.
Committees of the Board
Urohealth currently has three committees of the Board of Directors, the
Executive Committee, the Audit Committee and the Compensation Committee.
The Executive Committee, currently consists of Messrs. Laverty and Goelman,
exercises the power of the Board of Directors (except for certain powers that
may only be exercised by the full Board) in monitoring the management of the
business of Urohealth between meetings of the Urohealth Board of Directors.
The Audit Committee, currently consists of Messrs. Goelman, Butler and
Tedesco, recommends the appointment of Urohealth's independent public
accountants, reviews and approves the scope of the annual audit and reviews the
results thereof with Urohealth's independent accountants. The Audit Committee
also assists the Urohealth Board of Directors in reviewing Urohealth's business
ethics and conflict of interests policies.
The Compensation Committee, consisting of Messrs. Goelman, Elkins and
Estrin, reviews and establishes the salary, bonus and stock awards received by
Urohealth's Chief Executive Officer, and, in consultation with the Chief
Executive Officer, reviews the compensation of the other executive officers of
Urohealth. The Compensation Committee is also responsible for administering
Urohealth's 1994 Stock Incentive Plan and other stock-based incentive plans. The
Compensation Committee determines the recipients of awards, sets the exercise
price of shares granted and determines the terms, provisions and conditions of
all rights granted.
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Compensation Committee Interlocks and Insider Participation
During fiscal 1997, the Compensation Committee consisted of Messrs.
Goelman, Elkins and Estrin. None of these person is or has been as officer or
employee of Urohealth or any of its subsidiaries. In addition, except as
described below, there are no Board of Directors or Compensation Committee
interlocks between Urohealth and other entities involving Urohealth's executive
officers and Board members who serve as executive officers of such entities.
During fiscal 1997, Charles A. Laverty and Lawrence Goelman (a member of
Urohealth's compensation committee) served on the Board of Directors of Pinnacle
Micro, Inc. During a portion of the year Mr. Goelman served as acting Chief
Executive Officer of Pinnacle Micro, Inc. Neither Mr. Goelman nor Mr. Laverty
has any current relationship with Pinnacle Micro, Inc. During fiscal 1997,
Charles A. Laverty served on the Board of Directors (and compensation committee)
and Robert N. Elkins (a member of Urohealth's compensation committee) served as
Chairman of the Board of Integrated Living Communities, Inc.
Attendance at Board and Committee Meetings
During the fiscal year ended March 31, 1997, the Board of Directors met 16
times. In addition, the Audit Committee met one time and the Compensation
Committee met four times. The Executive Committee did not meet on a formal basis
during the year. Each director, except for Mr. Elkins and Ms. Givens, attended
75% or more of the aggregate number of meetings held by the Board of Directors
and all committees of the Board of Directors on which such directors served.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Urohealth's executive officers and directors file reports of beneficial
ownership on Form 3 and changes in beneficial ownership on Forms 4 and 5 with
the SEC. Executive officers and directors are also required by the SEC rules to
furnish Urohealth with copies of all Section 16(a) reports which they file.
Based solely on its review of the Forms 3, 4 and 5 provided to or filed on
behalf of its executive officers and directors, as well as written
representations from these individuals regarding Forms 5, Urohealth believes
that, during the fiscal year ended March 31, 1997, all Section 16(a) filing
requirements applicable to its executive officers and directors were complied
with pursuant to the SEC rules, except for Form 5s relating to shares purchased
under Urohealth's Employee Stock Purchase Plan by Messrs. Johnson, Higgins and
Condie which were filed late.
PROPOSAL NO. 3
APPROVAL OF THE IMAGYN MERGER
At the Urohealth Annual Meeting, the holders of Urohealth Voting Stock will
vote upon a proposal to approve the Merger Agreement and the issuance of
additional shares of Urohealth Common Stock in the Merger with Imagyn. Approval
of the Merger will also constitute approval of the assumption by Urohealth of
the various stock option plans under which options to acquire Imagyn Common
Stock are currently outstanding and approval of those option plans for purposes
of Section 16 of the Exchange Act. See "Urohealth Annual Meeting" and "The
Merger." At the Imagyn Special Meeting, the Imagyn stockholders will vote upon a
proposal to approve the Merger Agreement. See "The Imagyn Special Meeting" and
"The Merger."
THE BOARDS OF DIRECTORS OF UROHEALTH AND IMAGYN UNANIMOUSLY RECOMMEND THAT
THEIR RESPECTIVE STOCKHOLDERS APPROVE THE MERGER PROPOSAL.
PROPOSAL NO. 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Urohealth Board of Directors has recommended that the stockholders
ratify the appointment of Ernst & Young LLP to serve as independent auditors for
Urohealth for the fiscal year ending March 31, 1998. Ernst & Young LLP has been
the principal independent certified public accounting firm utilized by Urohealth
for its fiscal year ended March 31, 1997.
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In the event that ratification of this appointment is not approved by a
majority of the shares of Urohealth Voting Stock voting at the Urohealth Annual
Meeting in person or by proxy, the Urohealth Board of Directors will review its
future selection of auditors. A representative of Ernst & Young LLP is expected
to be present at the Urohealth Annual Meeting, will have an opportunity to make
a statement and will be available to respond to appropriate questions.
THE UROHEALTH BOARD OF DIRECTORS RECOMMENDS THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS UROHEALTH'S INDEPENDENT AUDITORS FOR THE
NEXT FISCAL YEAR
PROPOSAL NO. 5
APPROVAL OF AN INCREASE IN THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
Urohealth's Certificate of Incorporation presently authorizes the issuance
of a total of 50,000,000 shares of Common Stock, $.001 par value per share, and
5,000,000 shares of Preferred Stock, $.001 par value per share. Of such
50,000,000 presently authorized shares of Common Stock, 23,866,210 shares are
presently issued. In addition, Urohealth has reserved as of July 31, 1997
approximately: (i) 6,394,192 shares for issuance upon exercise of outstanding
options; (ii) 2,635,837 shares for issuance upon exercise of outstanding
warrants; (iii) 4,587,156 shares for issuance upon conversion of the Convertible
Debentures; (iv) 1,200,000 shares that may be issued to the former shareholders
of X-Cardia Corporation in the future upon achievement of certain milestones and
in partial satisfaction of future royalty obligations; (v) 1,000,000 shares for
a warrant to be issued to issued to a group purchasing organization; and (vi)
996,600 shares that may be issuable in connection with the placement by
Urohealth of its 12 1/2% Senior Subordinated Notes due 2004. In addition, if the
Merger is approved and consummated Urohealth will issue approximately 11,400,000
additional shares of Common Stock which will further reduce the current number
of authorized but unissued shares of Urohealth Common Stock.
Due to the limited number of authorized shares of Common Stock currently
available for future issuance, an increase in the authorized number of shares of
Common Stock is essential to enable Urohealth to continue its business
activities, including any required capital activities. Accordingly, the
Urohealth Board of Directors has adopted a proposed amendment to Urohealth's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000. The number of authorized shares of
Preferred Stock will remain at 5,000,000 shares.
The additional shares of Common Stock, if so authorized, could be issued at
the discretion of the Board of Directors without any further action by the
stockholders, except as required by applicable law or regulation, in connection
with acquisitions, efforts to raise additional capital for Urohealth, and other
corporate purposes. Shares of Urohealth Common Stock will be issued only upon a
determination by the Board of Directors that a proposed issuance is in the best
interests of Urohealth.
Urohealth management believes that the proposed amendment to the
Certificate of Incorporation will provide several long-term advantages to
Urohealth and its stockholders. The passage of the Authorized Stock Proposal
will enable Urohealth to pursue acquisitions or enter into transactions which
management believes provide the potential for growth and profit. In addition,
the additional shares of Common Stock could be utilized to refinance outstanding
indebtedness if management deemed it desirable to do so. With the extremely
limited number of shares currently available for such uses, it is impractical
for Urohealth to evaluate or seek to consummate business combinations or other
transactions which, if they could be accomplished, might enhance stockholder
value. Additional authorized shares could be used to raise cash assets through
sales of stock to public and private investors. If additional shares are
available, transactions dependent upon the issuance of additional shares would
be less likely to be undermined by delays and uncertainties occasioned by the
need to obtain stockholder authorization prior to the consummation of such
transactions. The ability to issue shares, as deemed in Urohealth's best
interests by the Urohealth Board, will also permit Urohealth to avoid the
expenses which would be incurred in holding certain stockholders' meetings.
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The Urohealth Board has proposed a substantial increase in the authorized
Common Stock of Urohealth. Such an increase is designed to provide flexibility
to Urohealth's management. However, these additional shares, if issued, will
have a substantial dilutive effect on the present Urohealth stockholders.
The affirmative vote of the holders of record of a majority of the
outstanding shares of Voting Stock entitled to vote thereon is necessary to
adopt the Authorized Stock Proposal.
The affirmative vote of the holder of record of a majority of the
outstanding shares of Voting Stock entitled to vote thereon is necessary to
adopt the Name Change Proposal.
THE UROHEALTH BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AUTHORIZED STOCK PROPOSAL.
If the Authorized Stock Proposal is adopted, the first paragraph of Article
4 of Urohealth's Certificate of Incorporation will read as follows:
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Hundred Five Million
(105,000,000), consisting of One Hundred Million (100,000,000) shares of
Common Stock with a par value of one-tenth of one cent ($.001) per share
and Five Million (5,000,000) shares of Preferred Stock with a par value of
one-tenth of one cent ($.001) per share. The Preferred Stock may be issued
in one or more series, and the Board of Directors is expressly authorized
(i) to fix the designations, powers, preferences, rights, including voting
rights, qualifications, limitations and restrictions with respect to any
series of Preferred Stock and (ii) to specify the number of shares of any
series of Preferred Stock.
PROPOSAL NO. 6
NAME CHANGE PROPOSAL
Urohealth stockholders will be asked to vote upon a proposal authorizing
the amendment of Urohealth's Certificate of Incorporation to change the name of
Urohealth to "Imagyn Medical Technologies, Inc." The adoption of the new name is
subject to approval of, and consummation of, the Merger. The Board of Directors
believe that the new name will better describe the business of Urohealth.
Urohealth anticipates incurring expenses in connection with changing its name,
however, such expenses are not expected to be material.
THE UROHEALTH BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
APPROVAL OF THE NAME CHANGE PROPOSAL.
In the event that the Name Change Proposal is adopted and approved by
stockholders, Urohealth management will have the authority to change the name of
Urohealth as described above at such time, if at all, as management deems it
appropriate to make such change, subject to approval and consummation of the
Merger. In the event the Name Change Proposal is implemented Article 1 of the
Urohealth Certificate of Incorporation will be amended and restated in its
entirety to read as follows:
"1. The name of the Corporation is Imagyn Medical Technologies, Inc."
PROPOSAL NO. 7
WRITTEN CONSENT PROPOSAL
Urohealth stockholders will be asked to vote upon a proposal authorizing
the amendment of Urohealth's Certificate of Incorporation to require that any
action by stockholders of Urohealth be taken at a special or annual meeting of
stockholders and not by written consent. The Urohealth Board of Directors
believes that this amendment to the Certificate of Incorporation is in the best
interests of Urohealth and its stockholders.
Urohealth's Certificate of Incorporation currently provides that action to
be taken or which may be taken at an annual or special meeting of stockholders
may be taken without prior notice and without a vote if a consent in writing
setting forth the action so taken is signed by the holders of a majority of the
Voting Stock of
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Urohealth which would have been entitled to vote on such action. The Written
Consent Proposal would eliminate the ability of stockholders to take action
without a meeting of stockholders. Under Delaware law, when stockholders are to
take action at a meeting a corporation must give written notice of the meeting
to all stockholders entitled to vote, even when one stockholder or a group of
stockholders will have a majority of the votes to be cast. This prior notice
allows minority stockholders to take whatever action they deem appropriate to
protect their interests, including seeking to persuade majority stockholders to
follow a different course, selling their shares or litigation. If action is
taken by majority holders by written consent, no prior notice is necessary and
minority holders may not have an opportunity to protect their interests. The
primary purpose of the amendment is to prevent stockholder action without prior
notice to all stockholders. Because the Bylaws of Urohealth do not permit
stockholders to call a special meeting, the proposed amendment will have the
effect of preventing the Urohealth stockholders from taking action at any time
other than an annual meeting (or a special meeting authorized by the Board of
Directors or other authorized persons) to replace directors, amend the
Certificate of Incorporation or to take any other action authorized to be taken
by stockholders under Delaware law. Such a provision may have the effect of
discouraging potential purchasers from attempting to acquire control of
Urohealth or, in some cases, may discourage the accumulation of large blocks of
Urohealth Common Stock.
The proposal to adopt the Written Consent Proposal is not in response to
any effort by a minority stockholder or group of stockholders to attain
representation on the Urohealth Board of Directors, otherwise act by written
consent or any attempt to influence the management of Urohealth's business, nor
is Urohealth aware of any such effort. Further, it is not in response to any
attempt to acquire control of Urohealth, nor is Urohealth aware of any such
attempt. The Urohealth Board of Directors believes that it is important that
stockholders be able to discuss matters which may affect their rights, that the
Board and the stockholders are able to give advance consideration to any such
action, and that it is therefore appropriate for stockholders of a publicly-held
corporation to take such action affecting the corporation and its stockholders
only at a meeting.
The affirmative vote of the holders of record of a majority of the
outstanding shares of Voting Stock entitled to vote thereon is necessary to
adopt the Written Consent Proposal.
THE UROHEALTH BOARDS OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
APPROVAL OF THE WRITTEN CONSENT PROPOSAL.
In the event that the Written Consent Proposal is adopted and approved by
stockholders, Urohealth management will file appropriate documentation with the
Delaware Secretary of State to amend the Certificate of Incorporation of
Urohealth so that a new ARTICLE 11 will be added, which shall read as follows:
"11. Whenever, and so long as, the Corporation is subject to the
reporting requirements of Section 12 or 15(d) of the Securities Exchange
Act of 1934 (or any successor law), any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken only
upon the vote of stockholders at an annual or special meeting duly noticed
and called in accordance with the Delaware General Corporation Law, and may
not be taken by written consent of stockholders without a meeting."
DESCRIPTION OF UROHEALTH CAPITAL STOCK
GENERAL
Urohealth is authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value, and 5,000,000 shares of Preferred Stock, $.001 par value of
which 250,000 shares have been designated as Series A Junior Participating
Preferred Stock (the "Series A Preferred Shares").
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
of Common Stock (and the Debentures described below) entitled to vote in any
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election of directors may elect all of the directors standing for election.
Subject to any preferences which may be granted to the holders of Preferred
Stock, each holder of Common Stock is entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, as well as any distributions to the stockholders
upon liquidation, dissolution or winding up of Urohealth. Each holder of Common
Stock is entitled to share ratably in all assets of Urohealth remaining after
payment of all debts and other liabilities and subject to the prior rights of
any outstanding Preferred Stock. Holders of Common Stock have no conversion,
redemption, subscription or preemptive rights or other rights to subscribe for
additional shares. The outstanding shares of Common Stock are validly issued,
fully paid and nonassessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which Urohealth may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to issue the Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series,
without any further vote or action by the stockholders of Urohealth. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of Urohealth without further action of the
stockholders of Urohealth. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of Common
Stock of Urohealth, including the loss of voting control to others.
Urohealth has adopted a Preferred Share Purchase Rights Plan (the "Rights
Plan") which is designed to deter coercive or certain takeover tactics, to
prevent a person or group from gaining control of Urohealth without offering
fair value to all stockholders and to deter other abusive takeover tactics which
are not in the best interest of stockholders. In May 1993, Urohealth executed
the Rights Plan with its transfer agent and 250,000 Series A Preferred Shares
were designated for potential issuance under the Rights Plan. Under the terms of
the Rights Plan each share of Common Stock is accompanied by one right; each
right entitles the registered stockholder to purchase from Urohealth
one-hundredth of a share of Series A Junior Participating Preferred Stock, $.001
par value, at an exercise price of $200. The rights only become exercisable ten
days after a public announcement that an acquiring person (as defined in the
Rights Plan) has acquired 20% or more of the outstanding shares of Common Stock
of Urohealth or a person or group offers to acquire 35% or more of the
outstanding Common Stock or ten days after Urohealth determines that a person is
an Adverse Person (as defined in the Rights Plan). Urohealth can redeem the
Rights for $.01 per Right at any time until ten days after the rights become
exercisable (the 10-day period can be extended by Urohealth). The Rights Plan
will expire on June 30, 2003 unless earlier redeemed by Urohealth. If,
subsequent to the rights becoming exercisable, Urohealth is acquired in a merger
or other business combination at any time when there is a 20% or more holder,
the rights will then entitle a holder to buy shares of common stock of the
acquiring company with a market value equal to twice the exercise price of each
right. Alternatively, if the 20% holder acquires Urohealth by means of a merger
in which Urohealth and its stock survive, or if any person acquires 35% or more
of Urohealth's Common Stock, each right now owned by a 20% or more stockholder,
will become exercisable for Common Stock of Urohealth having a market value
equal to twice the exercise price of the right.
VOTING DEBENTURES
The holders of the Debentures are entitled to vote on all matters submitted
to a vote of the stockholders of Urohealth, voting together with the holders of
the Common Stock (and any other shares of capital stock of Urohealth entitled to
vote at a meeting of stockholders) as one class. Each Debenture is entitled to a
number of votes equal to the number of shares of Common Stock into which the
Debenture could then be converted. As of August 31, 1997, there was $50.0
million aggregate principal amount of Debentures outstanding which would convert
into 4,587,156 shares of Common Stock.
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DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law ("Section 203")
provides, in general, that a stockholder acquiring more than 15% of the
outstanding voting shares of a corporation subject to the statute (an
"Interested Stockholder") but less than 85% of such shares may not engage in
certain "Business Combinations" with the corporation for a period of three years
subsequent to the date on which the stockholder became an Interested Stockholder
unless (i) prior to such date the corporation's Board of Directors approved
either the Business Combination or the transaction in which the stockholder
became an Interested Stockholder or (ii) the Business Combination is approved by
the corporation's board of directors and authorized by a vote of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder, or transactions in which the Interested Stockholder
receives certain other benefits.
REGISTRATION RIGHTS
Urohealth has agreed with the holders of the warrants (the "Warrants")
issued in connection with the sale of Urohealth's 12 1/2% Senior Subordinated
Notes due 2004 (the "Notes") to register for resale the Warrants and the shares
of Urohealth Common Stock issuable upon exercise of the Warrants. Urohealth is
obligated to file such registration relating to the Warrants on or before June
10, 1997.
Urohealth has granted registration rights to the holders of the Debentures
with respect to both the Debentures and the shares of Common Stock into which
the Debentures may be converted. Pursuant to such rights, the Company may, on no
more than one occasion and when requested by the holders of not less than 51% of
the aggregate principal amount of the Debentures outstanding at such time the
request is made, be required to register the Debentures for resale under the
Securities Act. In addition, Urohealth may, on no more than three occasions, be
required to register the shares of Common Stock into which the Debentures may be
converted. Such registration may only be required of Urohealth if the
registration is requested with respect to not less than 20% of the shares of
Common Stock underlying the Debentures. Finally, shares of Common Stock into
which the Debentures may be converted may also participate in any other
registered offering initiated by Urohealth for its own account or for shares of
Common Stock owned by other stockholders of Urohealth.
Urohealth has granted registration rights to Avatex Corporation ("Avatex")
in connection with financing transactions. At any time, the holders of not less
than 20% of the shares of Common Stock received or to be received in connection
with these transactions may, on two occasions, require Urohealth to register
such shares of Common Stock for resale under the Securities Act. In addition,
shares of Common Stock issued or to be issued in connection with these
transactions may also participate in any other registered offering initiated by
Urohealth for its own account or for shares of Common Stock owned by other
stockholders of Urohealth.
Urohealth has granted registration rights to certain "affiliates" of Osbon
with respect to shares of Common Stock received by them in the acquisition of
Osbon by Urohealth. The holders of not less than 20% of the shares of Common
Stock received in the acquisition of Osbon by holders of registration rights
may, on one occasion, require Urohealth to register such shares of Common Stock
for resale under the Securities Act. In addition, shares of Common Stock
received by "affiliates" of Osbon in Urohealth's acquisition of Osbon may also
participate in any other registered offering initiated by Urohealth for its own
account or for shares of Common Stock owned by other stockholders of Urohealth.
Urohealth has granted registration rights to certain "affiliates" of
Dacomed with respect to shares of Common Stock received by them in the
acquisition of Dacomed by Urohealth. The holders of not less than 20% of the
shares of Common Stock received in the acquisition of Dacomed by Urohealth by
the holders of
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registration rights may, on one occasion, require Urohealth to register such
shares of Common Stock for resale under the Securities Act. In addition, shares
of Common Stock received by "affiliates" of Dacomed in Urohealth's acquisition
of Dacomed may also participate in any other registered offering initiated by
Urohealth for its own account or for shares of Common Stock owned by other
stockholders of Urohealth.
Urohealth has granted certain piggyback registration rights with respect to
shares of Common Stock to be received upon exercise of warrants issued to a
lender in connection with loans to the Company and granted piggyback and demand
registration rights to another lender with respect to shares issuable upon
exercise of a warrant issued in connection with Urohealth's former credit
facilities.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company is the transfer agent and
registrar for the Urohealth Common Stock.
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BUSINESS OF IMAGYN
Imagyn designs, develops and markets micro-invasive, cost-effective devices
for diagnosis and treatment of gynecological and reproductive disorders.
Imagyn's proprietary technology platform based on micro-optics and micro-access
devices provides physicians with the ability to atraumatically access and
visualize the abdominal cavity, the uterus and the fallopian tubes. Imagyn's
proprietary micro-optics enable physicians to visualize a patient's internal
anatomy with the resolution and light efficiency of larger, more invasive
devices commonly used today. Imagyn's proprietary, disposable micro-access
devices enable physicians to perform certain procedures outside the hospital
without the need for general anesthesia. Imagyn's principal product systems
based on these core technologies are the MicroLap microlaparoscopy system, the
MicroSpan microhysteroscopy system and the Ovation systems for infertility
indications. Compared to traditional procedures, Imagyn's product systems
facilitate earlier definitive diagnosis and treatment, significantly lower the
procedure cost associated with more invasive surgery and reduce patient
discomfort, recovery time and morbidity.
Imagyn's diagnostic and operative micro-invasive product systems address a
broad continuum of gynecological and reproductive disorders affecting a large
number of women, including pelvic pain, uterine disorders and infertility, and
provide a less invasive procedure for tubal sterilization. Because of the high
incidence of these disorders and the popularity of tubal sterilization as a
contraceptive method, large markets exist for devices that treat such disorders
and that facilitate tubal sterilization. First, pelvic pain affects
approximately 6 million women in the United States and can be caused by a number
of serious conditions, including endometriosis, adhesions and pelvic
inflammatory disease. Second, uterine disorders affect approximately 25 million
women in the United States and may lead to significant complications including
uterine bleeding, acute pain and infertility. Third, infertility is an
increasingly common and often emotionally traumatic condition which affects
approximately 5 million women in the United States. Finally, tubal sterilization
is chosen as a permanent contraceptive method by approximately 800,000 women
annually in the United States. Despite the large size of these markets, there
can be no assurance that Imagyn's product systems will be accepted and will
compete effectively in any of these markets. Market acceptance of Imagyn's
product systems will be dependent upon, among other things, physicians'
determinations that Imagyn's product systems and the procedures in which they
are intended to be used are safe and effective alternatives to current
hospital-based procedures and demonstrate clinical utility, and can be used in a
cost-effective manner.
Imagyn's product systems enable physicians to access and visualize all of
the organs of a woman's reproductive system outside the hospital without the
need for general anesthesia. The MicroLap system, which enables the physician to
access the abdominal cavity without the need for post-operative sutures,
includes a 2 millimeter-diameter microlaparoscope with resolution and light
efficiency characteristics which Imagyn believes are comparable to those of
standard 10 millimeter-diameter laparoscopes. The MicroSpan system incorporates
a new, high resolution microhysteroscope and a new uterine access device to
enable the physician to atraumatically access and visualize the interior of the
uterus. Atraumatic access involves gaining access to the patient's abdominal
area for performing laparoscopy without creating serious injury or trauma to the
patient and is achieved by virtue of the small diameter of Imagyn's MicroLap
microlaparoscope. Due to the small diameter of the MicroLap, general anesthesia
and post-operative suturing of the access site are typically not required. The
MicroLap and MicroSpan systems enable physicians to access the abdominal cavity
and the uterus for treatment with Imagyn's microsurgical instruments. The
Ovation systems are designed to enable the physician to atraumatically access,
navigate and visualize the entire length of the fallopian tubes. Imagyn's
product systems are designed to offer significant advantages for physicians,
patients and health care payors. For physicians, Imagyn's systems facilitate
improved diagnosis and enhanced practice management. Imagyn believes that the
MicroLap and MicroSpan systems require limited training for physicians familiar
with standard laparoscopy and hysteroscopy techniques, although more training
will be required for use of the Ovation systems. For patients, Imagyn's systems
reduce trauma and the risk of complications and shorten recovery times as
compared to traditional, more invasive procedures. For payors, Imagyn's systems
can reduce cost, provide earlier, definitive diagnosis and increase patient
satisfaction.
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THE FEMALE REPRODUCTIVE SYSTEM
The female reproductive system includes the uterus, the fallopian tubes and
the ovaries. The uterus is a pear-shaped organ connected to the fallopian tubes
and to the vagina. The interior wall of the uterus consists of a layer of soft,
spongy tissue called the endometrium. The base or neck of the uterus is called
the cervix, which serves as the point of exit and entry from the vagina to the
uterus. Under normal conditions, the cervix is virtually closed (less than one
millimeter in diameter), providing a natural barrier between the vagina and the
uterus. Because the cervix is extremely sensitive, especially to any dilation,
access through the cervix into the uterine cavity for diagnostic and operative
procedures can be difficult and extremely painful.
On each side of the uterus is a fallopian tube, which extends outward
toward the ovaries. The junction of the uterus and each fallopian tube is called
an ostium. The fallopian tube is the channel through which the egg enters the
uterus during the monthly menstrual cycle. It is also the conduit for sperm to
reach the egg and is the site where fertilization occurs. Fallopian tubes are
long and narrow, contain many folds, and are fragile and delicate. The fallopian
tubes are lined with epithelial cells whose ciliary motion assists the sperm and
egg in their migration. Each fallopian tube is 7-14 centimeters long and only
1-3 millimeters in diameter. The fallopian tubes may become blocked or diseased,
preventing conception.
Disorders of the female reproductive system include pelvic pain and related
disorders, uterine disorders and infertility.
PELVIC PAIN AND RELATED DISORDERS
The prevalence of pelvic pain in women is widespread, with approximately 7
million outpatient gynecology visits annually in the United States related to
symptoms of pelvic pain. Pelvic pain can often be intense and persistent and can
severely impair a woman's health and lifestyle. It is often difficult to
accurately isolate the location and diagnose the cause of discomfort since many
women with pelvic pain may suffer from several disorders or multiple disease
sites. For example, scar tissue from infection or prior surgery may mask
endometrial lesions which may lead a physician to an inaccurate or incomplete
diagnosis. Pelvic pain, in both acute and chronic forms, can be caused by a
number of serious conditions including endometriosis, adhesions and pelvic
inflammatory disease.
Endometriosis, a common cause of pelvic pain and also a significant factor
contributing to infertility, is a disorder in which abnormal growths of
endometrial tissue are present outside of the uterus. Endometrial lesions are
usually found on the reproductive organs and adjacent tissues in the pelvic
cavity. It is estimated that 5 million women suffer from endometriosis in the
United States. Endometriosis is one of the most common gynecological causes for
hospitalization of women of reproductive age.
Scar tissue, or pelvic adhesions, which can form as a result of
endometriosis, infection, prior surgery, hemorrhage or tissue injury, is another
common cause of pelvic pain. Pelvic adhesions form in the healing process of
more than half of abdominal surgeries. Early intervention after surgery has been
demonstrated to reduce the risk of formation of dense, permanent adhesions.
Pelvic adhesions can also lead to serious long-term complications such as
infertility and intestinal obstruction. Post-operative adhesions may affect up
to 2 million women in the United States.
Pelvic inflammatory disease, another common cause of pelvic pain, is a
genital tract infection that is often a complication of sexually transmitted
diseases. It can cause scarring of the fallopian tubes as the infection ascends
into the uterus and tubal structures. In its most serious form, it can lead to
infertility and ectopic (tubal) pregnancy, a life-threatening condition. It is
estimated that pelvic inflammatory disease affects more than 1 million women
each year in the United States.
Current Diagnosis and Treatment
Diagnosis and identification of the cause or causes of pelvic pain is
difficult. Since there are currently no accurate non-invasive diagnostic tests
available, visual inspection of the abdomen and pelvic cavity by means of
laparoscopic surgery is the current method of choice for diagnosing pelvic pain.
In a traditional laparoscopic surgery procedure, the patient is typically placed
under general anesthesia. In order to create a space between
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the abdominal wall and the internal organs to facilitate the insertion of
instruments, the patient's abdomen is insufflated, or inflated, with a
significant quantity of carbon dioxide gas delivered through a specialized
needle, known as a Veress needle. After the patient is properly insufflated, two
to three punctures, each of which can be up to 10 millimeters in diameter, are
made with a sharp, spike-like device called a trocar. A cannula, a hollow,
sleeve-like device, is then placed in the puncture opening. A laparoscope is
placed into the abdomen through one of the cannulas to enable the gynecologist
to view the outer surfaces of the patient's internal organs. Surgical
instruments can be inserted through cannulas placed at the other trocar puncture
sites. Following the procedure, the trocar sites must be closed with sutures and
the patient may require significant recovery time due to the effects of the
puncture wounds, gas insufflation and general anesthesia. Approximately 1
million laparoscopic surgeries are performed annually by gynecologists in the
United States.
During a traditional laparoscopic surgery procedure, the physician examines
the internal abdominal organs in an attempt to locate abnormalities which may be
causing pelvic pain. The physician may also use surgical instruments inserted
into the abdomen to treat some abnormalities, such as by removing adhesions, or
to biopsy (remove a sample of) tissue for subsequent laboratory evaluation. The
administration of general anesthesia during the procedure complicates the
determination of the exact cause of pelvic pain because the anesthetized patient
is unable to provide any feedback to the physician.
The Imagyn MicroLap System for Pelvic Pain
Imagyn's proprietary MicroLap system is designed to enable the physician to
perform laparoscopic procedures outside the hospital. The MicroLap system
includes the proprietary MicroLap microlaparoscope, a specialized disposable
introducer for placement of the microlaparoscope into the abdomen and a broad
line of microsurgical instruments. The 2 millimeter-diameter Microlap has
resolution and light efficiency characteristics which Imagyn believes are
comparable to those of standard 10 millimeter-diameter laparoscopes. The
MicroLap is attached to a light source and medical video camera, allowing the
physician to visually examine the interior of the pelvic cavity in a manner
similar to that of traditional laparoscopic procedures.
In contrast to the traditional laparoscopic surgery procedure, the patient
in a microlaparoscopic procedure is not placed under general anesthesia.
Instead, sedation and local analgesic protocols are used to achieve a level of
sedation commonly termed "conscious sedation." An introducer is inserted into
the patient's abdomen, carrying the Veress needle and providing access to the
abdominal cavity. The patient's abdomen is then partially insufflated to permit
visualization and the insertion of instruments, but with a much smaller quantity
of carbon dioxide gas than is required in traditional laparoscopy. After the
patient is properly insufflated, the Veress needle is withdrawn and the
introducer is kept in place, providing access to the abdominal cavity without
the need for trocar punctures. The MicroLap is then inserted through the
introducer into the abdomen, allowing the physician to visually examine the
abdominal organs, in a manner similar to traditional laparoscopy. The small size
of the MicroLap requires only the very small puncture created by the introducer
to insert the MicroLap into the abdomen. Additional introducer sites may be
created for the insertion of microsurgical instruments. Sutures are not required
to close these small puncture sites, significantly reducing post-surgical
complications due to bleeding and pain at the puncture sites. This combination
of very small diameter puncture sites and the reduced requirement for gas
insufflation enables microlaparoscopic procedures to be performed using the
MicroLap system under conscious sedation rather than general anesthesia. Using
conscious sedation and the MicroLap system, physicians have been able to perform
a wide variety of diagnostic and operative procedures in a surgery center,
office or clinic at a significantly reduced cost and with less patient
discomfort and a typical recovery time of approximately one day.
Additionally, because microlaparoscopy does not require general anesthesia,
the MicroLap system has enabled the development of "conscious pain mapping," a
new diagnostic method for pinpointing the cause of pelvic pain which is
performed while the patient is awake. Through the use of microlaparoscopy and
regional anesthesia, the physician systematically probes the inside of the
woman's pelvis to identify the exact source and location of the pain with the
assistance of feedback from the patient. The Company believes that "conscious
pain mapping" procedures using the MicroLap will significantly improve the
diagnosis and treatment of pelvic pain.
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Studies indicate that diagnostic laparoscopy procedures performed using the
MicroLap system cost approximately $1,250, as compared to the approximately
$5,000 to $7,000 cost of a traditional hospital-based laparoscopic procedure
performed under general anesthesia.
UTERINE DISORDERS
The uterus is prone to a number of common disorders including fibroids and
polyps, as well as endometrial cancer, each of which can lead to serious
complications including abnormal uterine bleeding, significant pain and
infertility. Women may experience one or more of these disorders at the same
time. Industry sources estimate that approximately 9% to 14% of menstruating
women experience abnormal uterine bleeding that prompts them to seek medical
attention at some time in their lives. In 1995, there were approximately 13
million visits to gynecologists for abnormal uterine bleeding in the United
States.
Fibroids, or benign muscular tumors, are among the most common causes of
abnormal uterine bleeding. Fibroids usually grow during the reproductive years
and can produce a variety of problems including hemorrhage, pain and
infertility. Although not all of the approximately 15 million women in the
United States suffering from fibroids are symptomatic, it is estimated that 35%
to 50% of all women with fibroids have symptoms that are serious enough to lead
them to seek medical attention.
Polyps, benign finger-like protrusions of tissue extending into the uterine
cavity, are also a common cause of abnormal uterine bleeding. Approximately 13
million women in the United States develop uterine polyps during their lifetime,
and approximately 25% of these women require medical attention.
Endometrial cancer may also present initially as abnormal uterine bleeding,
particularly in women over the age of 50. Approximately 31,000 new cases of
endometrial cancer were reported in the United States in 1994. Early and
accurate diagnosis is critically important because endometrial cancer can often
be cured if detected and treated at an early stage; however, if undetected and
untreated, endometrial cancer can lead to serious complications or death.
Current Diagnosis and Treatment
Definitive diagnosis of uterine disorders requires direct visual inspection
of the uterine cavity and tissue biopsy of suspicious areas. The standard
procedures for collecting an adequate biopsy sample of uterine tissue for
diagnosis are dilatation and curettage ("D&C") and hysteroscopy. D&C is a blind
procedure in which the physician dilates the cervix, places a surgical scraping
device, known as a curette, into the uterus and scrapes the uterine lining to
remove tissue for examination by a pathologist. Because D&C is performed without
visual guidance, it is difficult for the physician to sample the entire uterine
lining and, as a result, significant abnormalities may be missed. It is
estimated that, in most cases, approximately half of the uterine cavity is
actually sampled and as many as 30% of lesions may be missed. D&C is usually
performed in a hospital under intravenous sedation or general anesthesia. The
procedure can lead to a number of serious complications including hemorrhage,
infection and perforation and scarring of the uterus. An estimated 500,000
diagnostic D&C procedures are performed annually in the United States.
The need to visualize the uterus for accurate diagnosis of uterine
disorders led to the development of hysteroscopy. In traditional hysteroscopy,
the physician dilates the patient's cervix and inserts a device known as a
hysteroscope through the cervix into the uterus. The hysteroscope is attached to
a light source and camera allowing the physician to visually examine the uterine
lining. The physician can also introduce surgical instruments through the cervix
to selectively sample or remove suspicious lesions. Introducer sheaths used in
current hysteroscopy procedures, which accommodate both the hysteroscope and
surgical instruments, range in size from approximately 5 to 7 millimeters. The
cervical dilation necessitated by the diameter of these devices can result in
significant pain and discomfort for the patient. Hysteroscopy has historically
been performed in the hospital under general anesthesia. Industry sources
estimate that approximately 500,000 hysteroscopic procedures are performed
annually in the United States.
Current treatments for uterine disorders include various drug therapies and
surgical approaches. Treatment of uterine bleeding usually begins with drug
therapy and, if necessary, proceeds to more invasive
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surgical methods. Current surgical procedures for abnormal uterine bleeding
include D&C, hysterectomy, myomectomy (fibroid removal by open surgery),
endometrial resection, and endometrial ablation (coagulation of the
endometrium).
The Imagyn MicroSpan System for Uterine Disorders
Imagyn's diagnostic and operative MicroSpan microhysteroscopy system is
designed specifically for use outside the hospital. Imagyn's new proprietary
uterine access device enables the physician to atraumatically access the uterus
without the need for cervical dilation. Once positioned, the micro-access
device, with its very low profile, will permit the simultaneous use of the
microhysteroscope and Imagyn's specialty diagnostic and operative microsurgical
instruments.
Without the need for painful dilation of the cervix prior to insertion of
the device, the patient can remain comfortable with only local anesthesia.
Microhysteroscopy can be performed in a low-stress environment such as the
physician's office and the patient will typically require only a short
post-operative recovery period, in some cases as little as 30 minutes. Patients
can usually resume normal activities by the following day.
For the physician, the MicroSpan system reduces the amount of time required
for procedures and provides the flexibility to perform both diagnostic and
operative procedures in the office. The MicroSpan system provides high
resolution and light efficiency comparable to traditional, large diameter
hysteroscopes. The design of Imagyn's proprietary micro-access device will
enable the physician to use surgical instruments of the same diameter used in
standard hysteroscopy procedures for effective tissue sampling and removal of
many uterine lesions including adhesions, polyps and small fibroids. The ability
to use such effective surgical instruments in conjunction with the
microhysteroscope will allow physicians to treat many uterine disorders with
accurate micro-invasive procedures, thus reducing the need for more invasive
surgical procedures.
Industry sources estimate that the cost of a D&C procedure under general
anesthesia is approximately $2,400 to $3,000. Imagyn estimates that the cost of
a standard hysteroscopy procedure under general anesthesia is approximately
$2,600 to $3,500 and that an office-based microhysteroscopy procedure will cost
approximately $650 to $1,000.
INFERTILITY
Infertility is one of the most common and emotionally traumatic of
reproductive disorders. Female infertility appears to be increasing because of
both the increase in diseases which damage the fallopian tubes and the
increasing tendency of women to defer childbearing until later in life when
fertility begins to decline naturally. In general, couples who have not
conceived after one year of unprotected intercourse are considered infertile. In
the United States, recent government data estimates that approximately 5 million
women of child-bearing age suffer from an impaired ability to have children.
Despite the limited availability of reimbursement for infertility diagnosis and
assisted reproductive procedures such as intrauterine insemination and in-vitro
fertilization, approximately $2 billion is spent on the treatment of infertility
annually in the United States.
The causes of infertility can be complex and are often difficult to
identify. A recent study indicates that abnormalities of the fallopian tubes are
responsible for 30% to 50% of infertility cases. The fallopian tubes are the
sites where fertilization occurs and at least one fallopian tube must be open to
permit the passage of sperm to provide fertilization of the egg and enable the
fertilized egg to pass to the uterus. The fallopian tubes are very narrow and
tortuous, delicate and difficult to access. As a result, they do not lend
themselves to easy study and treatment. Current non-surgical techniques for
diagnosing and treating fallopian tube disorders often do not adequately or
accurately delineate the nature, extent and location of tubal pathology.
Current Diagnosis and Treatment
Currently, there are two diagnostic procedures utilized by physicians to
determine whether the fallopian tubes are patent (open) or occluded. The most
commonly performed diagnostic procedure is hysterosalpingography ("HSG"), which
involves the high-pressure injection of an x-ray contrast medium (or dye)
transcervically into the uterus to allow the physician to observe and evaluate
the flow of dye through the
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fallopian tubes under x-ray fluoroscopy. This procedure is often painful,
primarily due to the high-pressure injection process, and is also highly
inaccurate, with as many as 25% of HSG cases being inaccurately classified as
blocked (false positive). Nevertheless, due in part to the absence of more
accurate, non-invasive diagnostic techniques, over 200,000 HSGs are performed
annually in the United States.
Due to the frequent inaccuracy of HSG, in the event that an HSG indicates a
blockage of the fallopian tube, the physician will likely perform an additional
procedure, known as laparoscopic chromopertubation. This procedure is similar to
HSG, but involves the use of a laparoscope surgically positioned in the abdomen
to observe the flow of transcervically-injected dye through the fallopian tubes.
This procedure has a lower rate (12%) of false positive diagnoses of tubal
blockage, but involves the potential complications associated with the more
invasive laparoscopic surgical procedure. The Company estimates that there are
approximately 180,000 chromopertubations performed annually in the United
States.
Although HSG and laparoscopic chromopertubation can provide some diagnostic
information regarding the patency of fallopian tubes, these procedures do not
provide any information regarding the health of the interior of the fallopian
tubes, which can be a significant factor contributing to infertility. Recently,
a procedure known as falloposcopy has been developed, in which a catheter device
containing a visualization scope is inserted through the cervix into the
fallopian tubes to enable the physician to visualize the interior of the
fallopian tube. One such system uses a guidewire-based catheter device in
conjunction with other procedures, such as laparoscopy, hysteroscopy or
ultrasound, to assist in guiding the catheter into and through the fallopian
tubes. Because falloposcopy enables the physician to visualize the interior of
the fallopian tube and assess its health, use of falloposcopy can enable
physicians to make more informed recommendations to patients regarding the next
course of action. Such courses of action could include tubal surgery, assisted
reproductive techniques such as in-vitro fertilization or further attempts at
natural conception.
Several surgical approaches are currently used to address infertility.
These procedures include laparotomy, or open abdominal surgery, and laparoscopic
surgery. Both of these procedures are performed in the hospital under general
anesthesia and, as a result, involve several risks, including infection. In
addition, the recovery period is long, extending to many weeks for patients
undergoing laparotomy. Furthermore, the effectiveness of these procedures is
limited as pregnancy is achieved in only approximately 20% to 25% of surgical
cases. As a result of the invasiveness and limited efficacy of these procedures,
few such procedures are performed in the United States and there is no
well-accepted method for opening blocked fallopian tubes.
Consequently, rather than undergo tubal surgery, many patients attempt
in-vitro fertilization. In-vitro fertilization involves drug-induced
superovulation, harvesting of multiple eggs through an aspiration needle
inserted into the ovary and fertilization of the harvested eggs with semen in a
laboratory test-tube fertilization procedure. Embryos are then transferred into
the uterus using a catheter placed through the cervix. In-vitro fertilization is
costly, with a single harvest and transfer, known as a cycle, costing an average
of $7,800, and is generally not reimbursed by third-party payors. Furthermore,
many patients undergo multiple cycles. The drugs administered to induce
superovulation are powerful and can have significant side effects. Finally, the
success rates for in-vitro fertilization are low. However, notwithstanding the
cost, lack of reimbursement, need to administer powerful drugs and limited
efficacy, approximately 38,000 in-vitro fertilization procedures are performed
annually in the United States.
The Imagyn Ovation Systems
Imagyn's Ovation falloposcopy system and Ovation tubal recanalization
system are designed to enable the physician to access, navigate and view the
entire length of the fallopian tube using a flexible catheter and small scope.
Unlike HSG and chromopertubation, the Ovation falloposcopy system enables the
physician to view and accurately evaluate the patency and overall health of the
interior of the fallopian tube. Due to the unique self-steering characteristics
of the Ovation falloposcopy and tubal recanalization systems, visual guidance
with hysteroscopy or ultrasound, which is required with other falloposcopy
systems, is not required nor is there the need for concurrent laparoscopic
manipulation of the fallopian tube. The Ovation falloposcopy system has been
specifically designed to facilitate fallopian tube diagnosis in the physician's
office.
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The Ovation tubal recanalization system has been shown in a controlled,
multi-center clinical trial in Japan to unblock occluded fallopian tubes. Imagyn
has received approval from the Japanese Ministry of Health and Welfare to market
the Ovation tubal recanalization system for fallopian tube recanalization.
Imagyn has developed a modified version of the Ovation system for use in
intrauterine insemination ("IUI"), a procedure in which sperm are introduced
into the uterine cavity. The Ovation IUI system permits the traversal of the
cervix for the purpose of delivering sperm into the uterine cavity without
trauma to the delicate lining of the uterus in those cases in which the cervix
is very narrow and difficult to access.
TUBAL STERILIZATION
Tubal ligation, a procedure for fallopian tube sterilization, involves
surgically cutting and cauterizing the fallopian tubes. Tubal ligation is chosen
as a permanent contraceptive method by approximately 800,000 women annually in
the United States.
Current Tubal Ligation Procedure
Tubal ligation is most commonly performed in the hospital, under general
anesthesia, by means of traditional laparoscopic surgery in which surgical
devices are used to isolate and close the fallopian tube. Current tubal ligation
procedures require multiple large trocar punctures which must be sutured closed
at the conclusion of the procedure, gas insufflation to inflate the pelvic
cavity and general anesthesia. Patients are subjected to pain associated with
the trocar punctures and gas insufflation as well as the risks and possible
complications associated with general anesthesia.
The Imagyn MicroLap System for Tubal Sterilization
The MicroLap system enables physicians to visualize the performance of
tubal sterilization outside the hospital under conscious sedation, reducing
procedure time and cost, as well as recovery time and patient discomfort. A
recently published study has indicated that office-based tubal ligation can
reduce the cost of the procedure to approximately $1,000, as compared to the
approximately $6,000 to $8,000 cost of a hospital-based tubal ligation
procedure.
ADVANTAGES OF IMAGYN'S PRODUCT SYSTEMS
Imagyn's product systems enable the micro-invasive diagnosis and treatment
of a broad continuum of gynecological and reproductive disorders outside the
hospital, thereby reducing the cost, trauma and complications associated with
operating room procedures. Imagyn's product systems have been designed to meet
the needs of physicians, patients and payors.
Addressing the Needs of Physicians
- Improved diagnosis. -- Imagyn's product systems provide physicians with
the necessary visualization and access to facilitate more accurate diagnosis of
gynecological and reproductive disorders. For example, the Ovation falloposcopy
system is designed to allow physicians to view and accurately evaluate the
patency and overall health of the interior of the fallopian tubes.
- Minimal training threshold. -- Imagyn believes that the MicroLap and
MicroSpan product systems require only minimal training for physicians. For
example, physicians using the MicroLap will employ the same procedural
techniques as are used in traditional laparoscopy. Because falloposcopy is a
relatively new procedure, more training will be required for use of the Ovation
falloposcopy system.
- Enhanced practice management. -- Imagyn's product systems are designed to
be used in the office and with reduced procedure time, resulting in increased
physicians' practice productivity. For example, the Company believes that the
procedure using the MicroLap system outside the hospital takes one-half to one-
third the time required for traditional diagnostic laparoscopy in an operating
room.
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Addressing the Needs of Patients
- Reduced trauma. -- Imagyn's small profile product systems reduce access
trauma, thereby reducing pain and the number and size of puncture wounds. For
example, due to the small size of the MicroLap, only very small punctures are
required to insert it into the abdomen and sutures are not required to close the
puncture sites.
- Fewer complications. -- Imagyn's product systems are designed to be used
without general anesthesia, enabling patients to avoid many of the risks and
complications associated with current invasive procedures. For example, the
small diameter of the MicroSpan system eliminates the need for dilation of the
cervix so the patient will remain comfortable with only local anesthesia,
thereby avoiding complications of general anesthesia such as allergic reaction,
pneumonia, nausea, and respiratory depression.
- Faster recovery. -- Imagyn's product systems generally enable patients to
return to normal activities within a 24-hour period following a procedure. For
example, a patient undergoing a MicroLap procedure can generally resume normal
activities the next day, while several days of recuperation are often necessary
for women undergoing traditional laparoscopy.
Addressing the Needs of Payors
- Lower cost. -- Imagyn's product systems can deliver significant cost
savings to all payors by moving procedures from the hospital to offices, clinics
and outpatient settings, eliminating the need for general anesthesia, and
reducing the potential for costly complications. For example, the MicroLap
system has been shown to reduce costs for diagnostic laparoscopy by as much as
80% when performed in a physician's office rather than a hospital.
- Earlier, definitive diagnosis. -- Imagyn's product systems facilitate
earlier, definitive diagnosis, reducing the likelihood that costly diagnostic
procedures will need to be repeated and that unnecessary operative procedures
will be performed. For example, the MicroLap system can be used to perform
"conscious pain mapping" to accurately identify the sources of pelvic pain
thereby eliminating the need for further diagnostic or unnecessary operative
procedures or expensive drug therapies.
- Higher patient satisfaction. -- Imagyn's product systems provide
time-efficient and micro-invasive care. Imagyn believes that patients will be
drawn to those providers who can reduce recovery time and risk through the
adoption of micro-invasive procedures.
The MicroLap system, the MicroSpan system and the Ovation system represent
new approaches for the diagnosis and treatment of gynecological and reproductive
disorders and for tubal sterilization. Market acceptance of the MicroLap system,
the MicroSpan system and the Ovation systems will be dependent upon, among other
things, physicians' determinations that Imagyn's product systems and the
procedures in which they are intended to be used are safe and effective
alternatives to current hospital-based procedures and demonstrate clinical
utility, and can be used in a cost-effective manner. In addition, due to the
small size of Imagyn's micro-access devices, Imagyn's product systems are
generally not appropriate for use in procedures which involve the removal of
substantial amounts of tissue or organs, such as the laparoscopic removal of the
gall bladder. In addition, procedures using Imagyn's product systems should be
avoided with patients who have a heightened risk of uncontrollable bleeding, are
pregnant, have advanced cardiovascular disease or are excessively obese.
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PRODUCT SYSTEMS
The following table summarizes the portfolio of Imagyn's current product
systems:
<TABLE>
<CAPTION>
REGULATORY STATUS US. MARKETING STATUS INT'L MARKETING STATUS
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
MicroLap System
- - Microlaparoscope 510(k) clearances received Imagyn currently marketing USSC currently marketing
- - Disposable introducer products products in selected
- - Microsurgical USSC currently marketing markets
instruments products
Micro-Span System
- - Microhysteroscope 510(k) clearances received Limited product launch in Imagyn anticipates launch
- - Disposable micro-access Q4 1996 in selected European
devices markets in Q1
- - Microsurgical 1997
instruments
Ovation Systems
FALLOPOSCOPY
- - Linear everting catheter 510(k) clearance Imagyn anticipates launch Direct and distributor
application in sales
- - Falloposcope submitted in September Q2 1997 in Europe and Australia
1996;
- - Irrigation pump 501(k) clearance received
in January 1997
TUBAL RECANALIZATION
- - Linear everting catheter Japanese approval received Imagyn does not currently Japanese market
- - Falloposcope intend to market for this introduction by Terumo in
- - Irrigation pump indication in U.S. 1996
INTRAUTERINE INSEMINATION
- - Linear everting catheter 510(k) clearance received Imagyn anticipates launch Imagyn anticipates launch
in in
- - Transfer catheter 1997 1997
</TABLE>
MicroLap System
The MicroLap system includes a proprietary microlaparoscope, the MicroLap,
disposable introducers (for placement of the MicroLap and microsurgical
instruments into the abdomen) and a broad line of microsurgical instruments for
use with the system. The MicroLap is a reusable laparoscope which, at slightly
less than 2 millimeters in diameter, is 80% smaller than conventional 10
millimeter-diameter laparoscopes. Imagyn's proprietary micro-optics technology
has enabled the development of small-diameter laparoscopes having resolution and
light efficiency characteristics which Imagyn believes are comparable to those
of conventional laparoscopes of much larger diameter. By combining unique
micro-lens design with fused image fiber bundle technology, Imagyn has achieved
up to five times the illumination and up to three times the resolution of
similar sized microlaparoscopes. Additionally, Imagyn's optics design provides
consistent and uniform edge-to-edge focus. Despite its small size, the MicroLap
is as durable as traditional rod or fixed lens laparoscopes due to its fiber
optic construction. The MicroLap is designed to be utilized by physicians in a
manner similar to larger laparoscopes. The MicroLap is compatible with all
existing medical video cameras and light sources and does not require any
additional specialized or ancillary equipment for its use.
Imagyn's disposable introducers facilitate atraumatic insertion and secure
placement of the MicroLap and microsurgical instruments through the abdominal
wall. The introducer is designed to be placed through the abdominal wall in a
single step with a standard Veress needle and without the need for a trocar or a
separate puncture site for insufflation. The introducer's anchoring system
prevents inadvertent withdrawal during the procedure and allows the introducer
to be pulled up tightly against the interior wall of the abdomen, thereby
providing maximum working area in the abdomen. The introducer incorporates a
side port for gas insufflation and a one-way check valve to prevent gas leakage.
Typically, several introducers are used during a microlaparoscopy procedure, one
for the MicroLap and others to permit the insertion of microsurgical
instruments.
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Imagyn has also designed a broad line of stainless steel, reusable
microsurgical instruments, all of which are 2 millimeters in diameter and
compatible with the MicroLap introducer. Imagyn's current line of microsurgical
instruments includes several graspers and scissors, a biopsy punch for tissue
sampling, irrigation and aspiration cannulae, palpation probes and monopolar
electrocautery probes for the cauterization and removal of small endometrial
lesions and adhesions.
For fiscal years 1994, 1995 and 1996, the MicroLap products accounted for
14%, 54% and 93%, respectively, of Imagyn's total revenues.
Clinical and Regulatory Status.
Imagyn has received 510(k) marketing clearances for the MicroLap
microlaparoscope, MicroLap introducer and a variety of microsurgical instruments
for general laparoscopic procedures. USSC, which has exclusive distribution
rights in international markets (excluding China and India), has responsibility
for individual regulatory approvals in those markets.
MicroSpan System
The MicroSpan system is comprised of a microhysteroscope, a proprietary
disposable micro-access device and a line of microsurgical instruments. Because
the microhysteroscope utilizes the proprietary micro-optic technology used in
the MicroLap, it is significantly smaller than current rod, or fixed, lens
hysteroscopes. The disposable micro-access device provides simultaneous
transcervical access to the uterus for both the microhysteroscope and
microsurgical instruments without the need for the cervical dilation required by
currently available hysteroscopy systems. Imagyn has also designed a line of
reusable hysteroscopic microsurgical instruments to be used with the MicroSpan
system. These instruments include several graspers and scissors, a biopsy punch
for tissue sampling, palpation probes and monopolar electrocautery probes for
the cauterization and removal of small fibroids, polyps and adhesions. The
MicroSpan system is compatible with all existing medical video cameras and light
sources and does not require any additional specialized or ancillary equipment
for its use.
Clinical and Regulatory Status.
Imagyn has received 510(k) marketing clearances for the MicroSpan
microhysteroscope and microhysteroscopic micro-access devices. Imagyn plans to
seek regulatory approval in those countries outside the United States in which
it intends to sell these products. There can be no assurance as to when or
whether such approvals will be received.
Ovation Systems
Imagyn has developed the Ovation falloposcopy system for falloposcopy, the
Ovation tubal recanalization system for tubal recanalization and the Ovation IUI
system for intrauterine insemination. The Ovation falloposcopy and tubal
recanalization systems consist of a proprietary 0.5 millimeter diameter,
flexible falloposcope, a proprietary catheter, and a specially designed
irrigation pump. The linear everting catheter is designed to enable the
physician to access, navigate and view the entire length of the fallopian tube
and incorporates three elements: an inner delivery catheter, an outer catheter
and an everting balloon membrane. A sliding mandrel straightens and stiffens the
catheter tip for placement through a non-dilated cervix and an integral
falloposcope controller provides one-finger control of the advancement and
withdrawal of the falloposcope. The linear everting catheter's curved ball tip
is designed to enable the catheter to atraumatically engage the tubal ostium,
facilitating unguided access to the fallopian tubes from within the uterus. The
combination of these elements in a single device, together with the linear
everting catheter's unique "unrolling" design, allows for complete fallopian
tube access and visualization without the need for concurrent laparoscopic
guidance or hysteroscopic placement through the cervix, and without the need for
ancillary devices, such as guidewires for accessing the fallopian tubes. The
Ovation falloposcopy and tubal recanalization systems are compatible with all
existing medical video cameras and light sources and does not require any
additional specialized or ancillary equipment for its use.
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After the catheter tip is placed through the cervix, the tip is rotated
toward either the right or left fallopian tube to engage the tubal ostium. Fluid
pressure is applied to the everting balloon membrane by means of an inflation
device and, in combination with the manual advancement of the inner delivery
catheter, propels the everting balloon membrane forward into the fallopian tube.
As the balloon membrane gently unrolls from the inside out, it carries the
falloposcope forward without exerting any shear force against the delicate
lining of the fallopian tube. In contrast to guidewire-based catheter access
systems, the linear everting catheter's unique unrolling mechanism enables it to
traverse the tortuous tubal anatomy without the need to push guidewires through
the fallopian tube or independently manipulate the fallopian tube with
laparoscopic or other ancillary assistance. Once the Ovation system is
positioned, it is designed to enable the physician to view the entire length of
the fallopian tube as the catheter and falloposcope are withdrawn by rerolling
the catheter's everting balloon membrane.
The Ovation IUI system is a modified catheter that incorporates Imagyn's
linear everting catheter technology for IUI, a procedure in which sperm are
introduced into the uterine cavity. The Ovation IUI system permits traversal of
the cervix in those cases in which the cervix is very narrow and difficult to
access without trauma to the delicate lining of the uterus. Following placement
of the Ovation IUI system through the cervix, the everting balloon membrane is
unrolled a pre-set distance into the uterus. A transfer or delivery catheter
containing sperm is placed through the central channel of the catheter and the
balloon membrane is slowly peeled back, exposing the tip of the transfer
catheter. The sperm are then expelled into the uterine cavity.
For fiscal years 1994, 1995 and 1996, the Ovation products accounted for
86%, 46% and 7%, respectively, of Imagyn's total revenues.
Clinical and Regulatory Status.
In August 1995, the Ovation tubal recanalization system was approved for
marketing for tubal recanalization in Japan by the Japanese Ministry of Health
and Welfare, and an application for reimbursement approvals within the Japanese
health care system is pending. Imagyn has also received regulatory clearances in
Germany, the United Kingdom, Australia and several additional international
markets for the Ovation falloposcopy system. The Japanese approval was based on
a multi-center clinical study involving women who had experienced over four
years of infertility. Of the 60 patients in the study who had been diagnosed
with bilateral tubal blockages by HSG and laparoscopic chromopertubation or some
other modality, 49 patients, or 82%, had tubal patency demonstrated by
falloposcopy and confirmed with an HSG procedure two months after undergoing
tubal recanalization with the Ovation tubal recanalization system. Of the 55
patients in the Japanese clinical study who were followed after tubal
recanalization to determine pregnancy prognosis, 17 patients, or 31%, became
pregnant during a period of up to two years following the tubal recanalization
procedure. This post-tubal recanalization pregnancy rate compares with an
approximately 20% pregnancy rate for in-vitro fertilization in Japan.
The Ovation falloposcopy and tubal recanalization systems have also
undergone clinical evaluation in Australia. The diagnostic information obtained
through falloposcopy of 200 infertility patients enabled physicians to make more
informed recommendations regarding subsequent courses of action. This resulted
in a change in clinical management in approximately 70% of cases, with many
patients being advised to again attempt natural conception. Of the 192 patients
followed after falloposcopy, 67 achieved pregnancy within two years, 42 of whom
achieved pregnancy naturally. As a result, unnecessary and costly assisted
reproductive procedures were avoided.
In September 1996, the FDA advised Imagyn that its Ovation falloposcopy
system could be eligible for 510(k) clearance review. In September 1996, Imagyn
submitted a 510(k) clearance application to the FDA for its Ovation falloposcopy
system. On January 31, 1997, Imagyn received 510(k) marketing clearance for its
Ovation falloposcopy system.
Imagyn received 510(k) clearance for the Ovation IUI system in May 1995 and
is currently conducting market evaluation prior to commencement of commercial
sales and distribution of the Ovation IUI system for this application.
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MARKETING, SALES AND DISTRIBUTION
Imagyn's marketing and distribution strategy consists of two key elements:
(i) focusing its direct sales and marketing resources on gynecology group
practices, surgery centers and infertility specialists and (ii) establishing
strategic marketing alliances with major medical products companies to
accelerate sales growth, increase geographic market coverage and access
particular markets and customers that can be more effectively addressed by the
sales organizations of these companies.
There are approximately 33,000 practicing gynecologists in the United
States, approximately 33% of whom perform laparoscopic surgery, approximately
15% of whom are skilled in hysteroscopy and approximately 80% of whom provide
some type of infertility services to their patients. Imagyn intends to focus its
direct sales activities on the approximately 1,400 larger gynecology group
practices, the approximately 1,700 outpatient surgery centers and the
approximately 1,000 infertility specialists in the United States which Imagyn
believes represent the highest concentration of demand for Imagyn's products.
Gynecology practices consisting of five or more physicians typically have a
sufficient number of patients to support an office-based micro-surgery practice.
Imagyn believes outpatient surgery centers are seeking new procedures that can
be performed in their facilities. Imagyn believes infertility specialists, most
of whom are associated with the approximately 300 infertility centers in the
United States, are seeking new approaches to diagnose and address infertility
problems.
Imagyn plans to build a specialized regional sales force in the United
States to market its products directly to gynecology group practices, surgery
centers and infertility specialists. At December 31, 1996, Imagyn's direct field
sales force consisted of ten employees. Imagyn's direct sales force will also
provide training in the applications for and the use of its products, as well as
financial models of clinical practice designed to demonstrate to payors and
physicians the cost advantages of using Imagyn's products.
In January 1997, Imagyn entered into an exclusive provider agreement with
Medical Alliance, Inc. ("MAI") under which MAI will use the MicroSpan
microhysteroscopy system in its physician office mobile surgical business. MAI
provides temporary surgical facilities for use in conjunction with physicians'
offices in 46 states, thereby providing Imagyn with expanded access to the
physician office market. Under the terms of the exclusive provider agreement,
Imagyn's MicroSpan system win be the system of choice for microhysteroscopy
procedures under these managed care contracts.
In addition to selling directly to physicians and administrators in these
target markets, Imagyn plans to develop relationships with opinion leaders in
these markets by sponsoring workshops and conferences to promote the discussion
of clinical issues and treatments. Imagyn also plans to generate acceptance of
its products by establishing training programs at leading medical institutions,
such as its training centers for the use of its MicroLap system at Yale
University Medical School and Baylor College of Medicine.
Imagyn intends to focus a substantial portion of its sales and marketing
efforts on facilitating the acceptance and adoption of its procedure-specific
systems by third-party payor organizations. Imagyn plans to take advantage of
current trends in managed health care, under which the traditional
fee-for-service system is being replaced by integrated health care delivery
systems, preferred provider organizations ("PPOs") and health maintenance
organizations ("HMOs"), by improving patient care, reducing trauma and
facilitating the movement of procedures that have historically been performed in
the hospital to physicians' offices, clinics and outpatient surgery centers.
Imagyn also intends to sponsor patient education programs and increase
women's awareness of the benefits of Imagyn's micro-invasive product systems.
Internationally, Imagyn currently markets the Ovation systems in the United
Kingdom, Germany and Australia through a limited number of direct sales
personnel who are assisted by agents. The Ovation systems are marketed by
distributors in Italy, Austria and Spain. The distribution agreements with
distributors of the Ovation systems grant the distributors the exclusive right
to sell the Ovation systems within defined territories in exchange for covenants
prohibiting them from marketing medical devices that compete directly with these
products. The distributors purchase the products from Imagyn at a discount from
list price in transactions
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denominated in United States dollars. The enduser prices are determined by the
distributors and vary from country to country.
In 1996, Imagyn entered into an agreement with Medlink Europe BV, a Dutch
company, whereby Medlink has been appointed to serve as Imagyn's master
distributor for its MicroSpan products in Europe. Under the agreement, Medlink
Europe will purchase products directly from Imagyn and contract with
subdistributors for the sale of Imagyn's products to end users in selected
European countries.
Imagyn has only limited experience marketing and selling its products, and
does not have experience marketing and selling its products in commercial
quantities. Establishing marketing and sales capability sufficient to support
sales in commercial quantities will require significant resources and will be
time-consuming, and there can be no assurance that Imagyn will be able to
recruit and retain qualified marketing personnel, direct sales personnel or
contract sales representatives in a timely manner or that future sales and
marketing efforts of Imagyn will be successful. There can be no assurance that
Imagyn will be successful in establishing marketing, sales and distribution
channels in the United States or internationally. The failure to establish and
maintain effective distribution channels for Imagyn's products, or to retain
qualified sales personnel to support commercial sales of Imagyn's products,
would have a material adverse effect on Imagyn's business, financial condition
and results of operations.
STRATEGIC MARKETING ALLIANCES
United States Surgical Corporation
In October 1995, Imagyn entered into an agreement with United States
Surgical Corporation ("USSC") pursuant to which USSC was granted exclusive
international marketing rights for Imagyn's MicroLap system in all international
markets (excluding China and India). USSC was also granted, on a co-exclusive
basis with Imagyn, marketing rights to the MicroLap system in the United States.
Under the terms of the agreement, Imagyn will manufacture private label products
for USSC for sale and distribution in the United States and international
markets. USSC is required to obtain appropriate international product
registrations and regulatory approvals in those markets in which USSC plans to
distribute the MicroLap system, except that Imagyn Company is required, at its
expense, to obtain a CE mark for the system. USSC is also responsible for all
sales and marketing expenses in connection with the sale of MicroLap systems.
Furthermore, USSC is subject to minimum annual purchase requirements. Imagyn's
agreement with USSC may be terminated by USSC upon six months notice at any time
after October 23, 1997. Imagyn may terminate the agreement at any time if USSC
introduces products which compete with the MicroLap microlaparoscope.
USSC has a substantial sales force that markets products primarily for use
in hospital-based surgical procedures. Because most laparoscopy procedures are
currently performed in a hospital, Imagyn believes that the ability to expose
physicians to the MicroLap system in a hospital setting will accelerate the
adoption of the MicroLap system by physicians and will facilitate the movement
of microlaparoscopy procedures out of the hospital. Therefore, Imagyn believes
that the efforts of its direct sales organization, which will be focused on
gynecology group practices, surgery centers and infertility specialists, will be
complementary to the sales and marketing efforts of USSC.
Terumo Corporation
In August 1995, Terumo Corporation ("Terumo") obtained Japanese regulatory
approval for use of the Ovation tubal recanalization system pursuant to an
agreement between Imagyn and Terumo for the distribution and licensed
manufacture of the Ovation systems in Japan. Under the agreement, Terumo, a
Japan-based multinational hospital products supplier, has been granted sales and
distribution rights for the Ovation systems in Japan. Under the agreement,
Terumo is responsible for obtaining Japanese regulatory and reimbursement
approvals as well as for the cost of all sales and marketing activities for
these products in Japan. Terumo has applied to the Japanese Ministry of Health
and Welfare for reimbursement approval of the Ovation tubal recanalization
system in Japan. Through August 1997, Terumo may purchase products, denominated
in United States dollars, from Imagyn at a discount from United States list
price and resell the products to hospitals, clinics and physicians. The end-user
price is determined solely at the discretion of
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Terumo. At the end of this two year period, Imagyn is obligated to transfer the
manufacturing know-how necessary to permit Terumo to manufacture the Ovation
catheters and falloposcopes for sale in Japan. Terumo is required to pay Imagyn
royalties on the sales of these products until such time as the Japanese patents
covering these products expire. Terumo may, at its option, continue to purchase
other ancillary products from Imagyn that are used in connection with the
Ovation systems. In August 1996, the Company's agreement with Terumo was amended
to grant Terumo with additional distribution rights for the Ovation system in
certain Asian markets.
Imagyn is dependent upon USSC and Terumo for marketing, sales and
distribution of the products covered by their respective agreements in their
respective territories. Imagyn is dependent upon Terumo for regulatory and
reimbursement approvals in Japan, and, although Terumo has obtained approval of
the linear everting system for tubal recanalization, there can be no assurance
that Terumo will comply with the conditions of such approval or that Terumo will
be able to obtain reimbursement approvals in Japan. Imagyn is dependent upon
USSC to obtain appropriate international product registrations and regulatory
approvals in those markets in which USSC plans to distribute the MicroLap
system, except that Imagyn is obligated, at its expense, to obtain a CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European Union Medical Device Directives, for the MicroLap
system. Imagyn is dependent upon Terumo and USSC to support reimbursement
approval for their respective products in their respective territories. In the
event that USSC and Terumo are unable to obtain necessary regulatory approvals
for their respective products in their respective territories, fail to devote
sufficient resources to promote Imagyn's products, or fail to support
reimbursement approvals, sales of the products covered by the agreements with
USSC and Terumo could be materially and adversely affected, which in turn would
have a material adverse effect on Imagyn's business, financial condition and
results of operations. Imagyn has also agreed to indemnify USSC and Terumo
against claims of infringement of intellectual property rights. Furthermore,
Imagyn's rights to terminate the agreements with USSC and Terumo are limited,
and, accordingly, Imagyn may be unable to establish alternative marketing or
distribution arrangements if the agreements with USSC and Terumo are not
successful. The failure or loss of strategic alliances with USSC and Terumo, or
Imagyn's inability to enter into future necessary strategic alliances, would
have a material adverse effect on Imagyn's business, financial condition and
results of operations.
RESEARCH AND DEVELOPMENT
Imagyn's research and development activities are performed in-house by a
group consisting of 12 engineers and technicians. The efforts of the research
and development group are supplemented by outside physician experts and
consultants. Imagyn also makes use of technical and engineering consultants as
required.
In microlaparoscopy, Imagyn is developing new electrocautery and other
microsurgical instruments to broaden its MicroLap product line and the
applications for the MicroLap system. Enhancements under development for
Imagyn's microhysteroscopy technology include microhysteroscopic biopsy and
electrocautery devices. In addition, Imagyn is directing research and
development efforts toward enhancing its proprietary micro-access technology for
both microhysteroscopy and microlaparoscopy. Imagyn is also developing new
applications for its proprietary linear everting catheter technology as well as
a curved proboscis tip for the Ovation falloposcopy system that is designed to
improve visualization during falloposcopy.
The product development process is time-consuming and costly, and there can
be no assurance that any new product development will be successfully completed,
that necessary regulatory clearances or approvals will be granted by the FDA or
international regulatory authorities on a timely basis, or at all, or that any
new products developed and introduced by Imagyn will receive market acceptance.
Failure by Imagyn to develop, obtain necessary regulatory clearances or
approvals for, or successfully market new products, could have a material
adverse effect on Imagyn's business, financial condition and results of
operations.
Imagyn's research and development expenditures totaled approximately $2.7
million, $1.8 million and $1.8 million in the years ended December 31, 1996,
1995 and 1994, respectively.
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MANUFACTURING
Imagyn manufactures its proprietary microlaparoscopes, microhysteroscopes,
falloposcopes, linear everting catheters and micro-access devices in its clean
room facilities in Laguna Niguel, California.
Components are purchased from a variety of vendors, subjected to stringent
quality specifications and assembled by Imagyn's highly skilled manufacturing
technicians into finished products. Final assembly and packaging is currently
performed by Imagyn in-house and sterilization is performed by an outside
vendor. The manufacturing processes for microlaparoscopes, microhysteroscopes
and linear everting catheters are complex and require precision in producing,
assembling and testing components and finished products. Many of the steps in
the assembly process, such as grinding and polishing lenses and optical fibers,
are performed under a microscope, requiring up to 80x magnification.
Imagyn has limited manufacturing capacity and may be required to increase
both its in-house manufacturing capability and the size of its manufacturing
facilities. Although Imagyn expanded its manufacturing facilities in 1996, there
can be no assurance that such facilities will be adequate or that Imagyn may be
able to attract, train and retain the required personnel, including personnel
skilled in micro-optics assembly processes. Imagyn may need to obtain
alternative manufacturing facilities or to establish contract manufacturing for
its products. Delays associated with, or inability to establish, such capacity
could have a material adverse affect on Imagyn's business, financial condition
and results of operations.
Certain of the components used in Imagyn's product systems, including the
optic image fiber used in the MicroLap, a similar version of which will also be
used in the MicroSpan and the medical video camera and light source used in
connection with the Ovation tubal recanalization system, are currently purchased
from single sources. Currently, Imagyn has a supply agreement with the MicroLap
image fiber supplier; however, there can be no assurance that such supplier will
be able to or will continue to supply image fibers to Imagyn in the amounts and
at the times needed by Imagyn or that other disruptions in supply will not
occur. The number of manufacturers capable of making such optical image fibers
is limited and, to date, Imagyn has not qualified additional suppliers for such
optical image fibers. Imagyn believes it can qualify an additional source for
such optical image fiber; however, there can be no assurance as to when or
whether Imagyn will be able to qualify such supplier. Imagyn's prior supplier of
Ovation medical video cameras and light sources ceased manufacturing such
products in late 1995 as a result of financial difficulties, which resulted in a
temporary inability of Imagyn to supply such components to Terumo. As a result,
Imagyn was unable to ship Ovation medical video cameras and light sources to
Terumo for a period of approximately six months. Although Imagyn has qualified a
replacement supplier, there can be no assurance that future supply disruptions
for such components will not occur. Imagyn also uses a single vendor for
sterilization of its products, and disruptions in sterilization of finished
products could adversely affect Imagyn. Furthermore, there can be no assurance
that Imagyn will not encounter future component shortages or other disruptions
in supply of materials or services. Delays associated with any future raw
materials or component shortages could have a material adverse effect on
Imagyn's business, financial condition and results of operations, particularly
as Imagyn scales up its manufacturing activities.
Imagyn's products are complex devices designed for use inside and around
the organs of the female reproductive system. To date, Imagyn has only limited
experience regarding the reliability of its products in the field. Component
failures, manufacturing errors or design defects could result in an unsafe
condition or injury to the patient. If any such failures or defects were
material, Imagyn could be required to undertake a market withdrawal or recall of
products. Even if regulatory approvals are obtained, there can be no assurance
that a market withdrawal or product recall will not occur. Costs of a market
withdrawal or product recall could be significant and could have a material
adverse effect on Imagyn's business, financial condition and results of
operations.
PATENTS, TRADE SECRETS AND LICENSES
Imagyn's ability to compete effectively win depend in part on its ability
to develop and maintain proprietary aspects of its technology. Imagyn seeks to
protect its proprietary position aggressively by, among
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other things, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business.
As of December 31, 1996, Imagyn held 13 issued United States patents and 3
issued foreign patents and had 13 United States and 10 foreign patent
applications pending, covering various aspects of Imagyn's product systems.
Imagyn's issued United States patents cover technology underlying the Ovation
systems. The expiration dates of these patents range from October 2011 to May
2014.
In addition to its patents and patent applications, Imagyn holds a license
from Baxter and Fogarty, the inventor of the linear everting catheter, that
grants Imagyn the exclusive, perpetual, worldwide use of patented technology and
know-how related to the linear everting catheter technology in the fields of
obstetrics, gynecology, and infertility, in exchange for royalty payments. As of
December 31, 1996, Baxter and Fogarty held, and Imagyn has been granted the
exclusive license for, 11 issued United States patents and numerous issued
foreign patents and pending applications covering aspects of linear everting
catheter technology. The license agreement requires that Baxter maintain and
prosecute all patents and patent applications relating to the linear everting
catheter technology.
No assurance can be given that any patents from pending patent applications
or from any future patent applications will be issued, that the scope of any
patent protection will exclude competitors or provide competitive advantages to
Imagyn, that any of Imagyn's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by Imagyn. Furthermore, there can be no
assurance that others have not developed or will not develop similar products,
duplicate any of Imagyn's products or design around Imagyn's patents. In
addition, others may hold or receive patents or file patent applications which
contain claims having a scope that covers products developed by Imagyn.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that Imagyn will not become
subject to patent infringement litigation or an interference proceeding declared
by the United States Patent and Trademark Office ("USPTO") to determine the
priority of inventions. The defense and prosecution of patent suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to Imagyn, to protect Imagyn's trade secrets or know-how or to determine
the enforceability, scope, and validity of the proprietary rights of others.
Any litigation or interference proceedings involving Imagyn would result in
substantial expense to Imagyn and significant diversion of effort by Imagyn's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which Imagyn may become a party could subject Imagyn
to significant liabilities to third parties or require Imagyn to seek licenses
from third parties. Although patent and intellectual property disputes in the
medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to Imagyn on satisfactory terms, if at
all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent Imagyn from manufacturing and
selling its products, which would have a material adverse effect on Imagyn's
business, financial condition and results of operations.
In addition to patents, Imagyn relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
individuals by the Imagyn during the course of the relationship with Imagyn is
to be kept confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering service to Imagyn shall
be the exclusive property of Imagyn. There can be no assurance that proprietary
information or confidentiality agreements with employees, consultants and others
will not be breached, that the Company will have adequate remedies for any
breach, or that Imagyn's trade secrets will not otherwise become known to or
independently developed by competitors.
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GOVERNMENT REGULATION
United States
The research, development, testing, manufacture, labeling, storage,
distribution and marketing of Imagyn's products are subject to extensive and
rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. Imagyn's products are regulated in the United States as
medical devices by the FDA under the Federal Food, Drug, and Cosmetic Art ("FDC
Act") and most require clearance or approval by the FDA prior to
commercialization. In addition, certain material changes or modifications to
medical devices also are subject to regulatory review and clearance or approval.
Under the FDC Act, the FDA regulates the research, clinical testing,
manufacturing, safety, labeling, storage, record keeping, distribution, sale and
promotion of medical devices in the United States. The testing for, preparation
of and subsequent review of applications by the FDA and foreign regulatory
authorities is expensive, lengthy and uncertain. The failure by Imagyn to comply
with FDA requirements could result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, the government's refusal to grant, or withdrawal of, premarket
clearance or premarket approval for devices, and criminal prosecution.
The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an Investigational Device Exemption ("IDE")
application must be approved prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA,
clinical trials may begin at a specified number of investigational sites
involving a specified maximum number of patients, as approved by the FDA. The
clinical trials are required to be conducted under the auspices of an
Institutional Review Board ("IRB"). During the IDE study, the FDA has authority
to review, limit, or terminate the study at any time. Discontinuance of the
study could have a material adverse effect on Imagyn's business, financial
condition and results of operations.
Before a new medical device may be introduced into the market in the United
States, the manufacturer or distributor generally must obtain marketing
clearance from the FDA through either a 510(k) premarket notification or a
premarket approval ("PMA") application. If the manufacturer or distributor can
establish, among other things, that a device is "substantially equivalent" in
that it has the same intended use and the same technological characteristics as
the predicate device or has different technological characteristics that do not
raise different questions of safety and efficacy than the predicate device, the
manufacturer or distributor may seek clearance to market the device by
submitting a 510(k) premarket notification. Following submission of the 510(k)
premarket notification, the manufacturer or distributor may not place the device
into commercial distribution unless and until a finding of substantial
equivalence is issued by the FDA. In response to a 510(k) premarket
notification, the FDA may declare that the device is substantially equivalent to
a predicate device and allow the proposed device to be marketed in the United
States. Alternatively, the FDA may require further information, including
clinical data, to make its determination regarding substantial equivalence, or
the FDA may determine that the proposed device is not substantially equivalent
to the predicate device, and require the manufacturer or distributor to submit a
PMA. An FDA request for additional information or a determination that the
device is not substantially equivalent would delay market introduction of the
products that are the subject of the 510(k) premarket notification.
In September 1996, the FDA advised Imagyn that its Ovation falloposcopy
system could be eligible for 510(k) clearance review. In September 1996, Imagyn
submitted a 510(k) clearance application to the FDA for its Ovation falloposcopy
system. On January 31, 1997, Imagyn received 510(k) marketing clearance for its
Ovation falloposcopy system.
As of December 31, 1996, Imagyn had received thirteen 510(k) clearances for
certain diagnostic and/or therapeutic indications of its microlaparoscopy,
microhysteroscopy and linear everting catheter intrauterine insemination product
systems.
If the manufacturer or distributor cannot establish that a proposed device
is substantially equivalent to a legally marketed predicate device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
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extensive data, including laboratory, preclinical and clinical trial data to
prove the safety and efficacy of the device, as well as extensive manufacturing
information. If the FDA determines, upon initial review, that a submitted PMA
application is sufficiently complete to permit substantive review, the FDA will
accept the PMA application for filing. FDA review of a PMA application generally
takes approximately two years or more from the date of acceptance for filing,
but review times vary depending upon FDA resources and workload demands and the
complexity of PMA submissions. There can be no assurance that the FDA will
review and approve the PMA in a timely manner, if at all. Failure to obtain PMA
approvals could have a material adverse effect on Imagyn's business, financial
condition and results of operations. Additionally, as one of the conditions for
approval, the FDA will inspect the manufacturing establishment at which the
subject device will be manufactured to determine whether the quality control and
manufacturing procedures conform to GMP regulations. If granted, the PMA
approval may include significant limitations on the indicated uses for which the
device may be marketed.
There can be no assurance that Imagyn will be able to obtain necessary
510(k) clearances or PMA approvals to market new products in the United States
for their intended uses on a timely basis, if at all, and delays in receipt of
or failure to receive such approvals, the loss of previously received approvals,
or failure to comply with existing or future regulatory requirements could have
a material adverse effect on Imagyn's business, financial condition and results
of operations.
Imagyn is also required to register with the FDA and with state agencies
such as the California Department of Health Services ("CDHS") as a medical
device manufacturer, and to list its products with the FDA. Consequently,
Imagyn's facilities will be inspected periodically by both the FDA and CDHS to
determine whether Imagyn manufactures its products in compliance with FDA Good
Manufacturing Practices ("GMP") and other applicable regulations. In November
1995, Imagyn's facility was inspected by the FDA for a routine GNP inspection.
The FDA noted several observations, to which Imagyn responded. Imagyn has
received FDA confirmation of the adequacy of its responses.
Imagyn is also required, upon commercialization, to provide information to
the FDA concerning any death or serious injury that its medical devices may have
allegedly caused or contributed to, as well as any product malfunction that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. Also, if safety or efficacy problems occur after the product
reaches the market, the FDA may take steps to prevent or limit further marketing
of the product. In addition, the FDA prohibits the marketing of approved devices
for uses other than those specifically cleared for marketing by the FDA. Failure
to comply with applicable FDA regulations can result in FDA warning letters, FDA
refusal to approve or clear products, revocation or withdrawal of approvals
previously granted, civil penalties, product seizures, injunctions, recalls,
operating restrictions and criminal prosecution and penalties. Consequently,
failure by Imagyn to comply with regulatory requirements could have a material
adverse effect on Imagyn's business, financial condition and results of
operations.
The promotion of most products regulated by the FDA is subject to the
jurisdiction of the FDA, Federal Trade Commission and related state authorities.
Imagyn also is subject to various federal, state and local laws and regulations
relating to occupational safety, laboratory and manufacturing practices, and the
use, handling and disposal of hazardous or potentially hazardous substances.
There can be no assurance that Imagyn will not be required to incur significant
costs in the future to comply with such laws or will be able to continue to
comply with such laws and regulations, which are subject to change.
FDA regulations regarding the research, development, testing, manufacture,
labeling, storage, distribution and marketing of Imagyn's products are subject
to change. Imagyn cannot predict what effect, if any, such changes might have on
its business, financial condition or results of operations.
International
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and
requirements for licensing may differ significantly from FDA requirements. Some
countries have historically permitted human
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studies earlier in the product development cycle than regulations in the United
States permit. Other countries, such as Japan, have requirements similar to
those of the United States. This disparity in the regulation of medical devices
may result in slower product clearance in certain countries than in others. Many
countries in which Imagyn operates or intends to operate either do not currently
regulate medical devices or have minimal device registration requirements;
however, these countries may develop more extensive regulations in the future
that could adversely affect Imagyn's ability to market its products.
Pursuant to Imagyn's distributorship agreement with USSC, USSC is required
to obtain appropriate international regulatory registrations and approvals in
those markets in which USSC plans to distribute Imagyn's MicroLap system, except
that Imagyn is required to obtain a CE mark for the system.
In August 1995, following completion of a clinical trial, Terumo received
import approval from the Japanese Ministry of Health for the sale and
distribution of Imagyn's linear everting catheter system in Japan for use in
fallopian tube recanalization.
Imagyn has received registrations and approvals to market its Ovation
systems in Australia, Austria, France, Germany, Italy, Singapore, South Korea,
Taiwan, the United Kingdom, Switzerland, Denmark and The Netherlands.
All of the medical devices currently manufactured by Imagyn which are
distributed in the European Union ("EU") will be subject to the Medical Devices
Directive ("MDD") when the transition period for the MDD expires on June 13,
1998. To comply with the MDD, Imagyn will need to obtain the right to affix the
CE mark on its medical devices. The right to affix the CE mark must be obtained
from one of the organizations in the EU, known as "Notified Bodies," which are
designated by individual member states as competent to grant to companies the
right to affix the CE mark on their medical devices. The CE mark will show that
Imagyn is entitled to market its medical devices in the EU because they meet all
the essential requirements of the MDD. The CE mark will permit Imagyn's medical
devices to circulate freely throughout the EU. Without receipt of the right to
affix the CE mark on its medical devices, Imagyn's medical devices will not be
able to be marketed anywhere in the EU. Imagyn is currently in the process of
taking the steps that will be necessary to comply with the essential
requirements of the MDD, but there can be no assurance that by taking these
steps, Imagyn will be granted the right to affix the CE mark on any of its
medical devices by a Notified Body.
In the EU, some accessories to Imagyn's products, such as cameras, pumps
and light sources, are subject to the Electromagnetic Compatibility Directive
("EMC Directive") or similar laws of EU member states. The transition period for
the EMC Directive expired on December 31, 1995. Due to the volume of electrical
and electronic devices of all types, including medical devices, which must be
tested in order to determine whether they comply with the EMC Directive's
requirements, many companies have not been able to complete their testing and
review obligations through the Notified Bodies that must confirm EMC Directive
compliance. In acknowledgment of industry delays, an informal understanding has
been reached between member states of the EU and EU Commission officials that
enforcement/compliance actions relating to the EMC Directive will similarly be
delayed until July 1, 1998.
Export sales of investigational PMA devices or devices not cleared for
commercial sale in the United States are subject to FDA export permit
requirements. In order to obtain an export permit, the exporter must provide the
FDA with documentation from the medical device regulatory authority of the
country in which the purchaser is located, stating that the sale of the device
is not a violation of that country's medical device laws. Imagyn has received
certain export approvals for the Ovation systems for Australia, The Netherlands,
Denmark, France, Italy, Norway, Sweden and Switzerland, and is seeking export
approvals for other countries. Recently proposed FDA regulations would eliminate
export approval requirements for export of investigational devices that are the
subjects of FDA-approved IDEs to certain countries that have expressed approval
of the importation of such devices. There can be no assurance, however, that the
final regulations will contain the same language as the proposed regulations,
and the final regulations may revise the proposed regulations in such a way that
could adversely affect Imagyn's existing or future export operations.
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THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, physicians and other health care providers
that purchase medical devices, such as Imagyn's products, generally rely on
third-party payors, principally private health insurance plans and, to a lesser
extent, federal Medicare and state Medicaid, to reimburse all or part of the
cost of the procedure in which the medical device is being used.
Reimbursement in the United States for procedures performed in hospitals,
ambulatory care centers or physicians' offices using Imagyn's microlaparoscopy
products is currently available from most third-party payors, including most
major private health care insurance plans and Medicaid, under existing procedure
codes. However, there is currently no specific reimbursement code for
office-based microlaparoscopy procedures. Third-party reimbursement for Imagyn's
products will be dependent upon decisions by individual health maintenance
organizations, private insurers and other payors. Imagyn believes that
procedures performed using Imagyn's MicroSpan system could be reimbursed in the
United States under existing procedure codes for diagnostic and therapeutic
hysteroscopy procedures. However, there can be no assurance that such procedure
codes will be available with respect to Imagyn's products or that the
reimbursement under these codes will be adequate. To the extent cost containment
measures imposed by third party payors adversely affect the hospital and private
practice markets, demand for and pricing of Imagyn's products could be adversely
affected as well.
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 person. Imagyn is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors. Imagyn
anticipates that hospital administrators and physicians would justify the use of
its products by the attendant cost savings and clinical benefits that Imagyn
believes would be derived from the use of its products. However, there can be no
assurance that this will be the case. Furthermore, Imagyn could be adversely
affected by changes in reimbursement policies of government or private health
care payors, particularly to the extent any such changes affect reimbursement
for the procedure in which Imagyn's products are used. Failure by physicians,
hospitals and other users of Imagyn's products to obtain sufficient
reimbursement from health care payors for the procedure in which Imagyn's
products are used or adverse changes in government and private third-party
payors' policies toward reimbursement for such procedures could have a material
adverse effect on Imagyn's business, financial condition and results of
operations.
Reimbursement systems in international markets vary significantly by
country and, within some countries, by region. Reimbursement approvals must be
obtained on a country-by-country basis. Many countries have government managed
health care systems that determine whether reimbursement will be granted for new
medical devices and procedures, as well as private insurance systems.
Broad-based foreign market acceptance of Imagyn's MicroLap, MicroSpan and
Ovation systems will depend in part on the availability and level of
reimbursement in the international markets targeted by Imagyn. Imagyn's Ovation
falloposcopy system has been approved for reimbursement in Australia and
Germany. Terumo recently applied to the Japanese Ministry of Health and Welfare
for reimbursement approval of the Ovation tubal recanalization system in Japan.
The process of obtaining reimbursement approvals can be lengthy and
unpredictable, and there can be no assurance that Imagyn will obtain
reimbursement approvals in Japan or in any other country within a particular
time, for a particular amount, or at all. Even if reimbursement approval is
obtained, due to the pressure of rising health care costs in many countries,
there can be no assurance that such approval will not be limited or withdrawn at
any time. Failure to obtain or maintain such approvals for some or all of
Imagyn's products could have a material adverse effect on Imagyn's business,
financial condition and results of operations.
Physician adoption of Imagyn's products and physician advocacy of
reimbursement of procedures performed using them will be necessary in order to
obtain reimbursement from government and private payors for procedures performed
using Imagyn's products. The availability of reimbursement will depend on the
clinical efficacy and cost of Imagyn's products and systems. There can be no
assurance that reimbursement for Imagyn's products will be available in the
United States or in international markets under either government or private
reimbursement systems, or that physicians will support and advocate
reimbursement for use of
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Imagyn's systems for a uses intended by Imagyn. Failure by physicians, hospitals
and other users of Imagyn's products to obtain sufficient reimbursement from
health care payors or adverse changes in government and private third-party
payors' policies toward reimbursement for procedures performed using Imagyn's
products would have a material adverse effect on Imagyn's business, financial
condition and results of operations.
COMPETITION
The medical device industry and the market for treatment of gynecological
disorders and infertility, in particular, are intensely competitive and
characterized by rapidly evolving technology. Compared to traditional
laparoscopes and hysteroscopes, Imagyn believes that the principal competitive
factors are product performance, cost-effectiveness, degree of invasiveness,
patient recovery time and level of side effects. Imagyn's proprietary
micro-optics technology provides visualization and product performance
comparable to traditional laparoscopes and hysteroscopes, and when used in
combination with Imagyn's micro-access devices are less invasive than products
used in traditional laparoscopy and hysteroscopy procedures. As a result,
Imagyn's systems can be used without general anesthesia, thus reducing patient
recovery time and risk of complications. Imagyn believes that less-invasive
procedures performed with Imagyn's MicroLap and MicroSpan systems will be
substantially less traumatic and costly than more invasive, traditional surgical
procedures currently in widespread use.
Competition in the market for micro-invasive diagnosis and treatment of
gynecological disorders is intense and is expected to increase. Imagyn believes
that the principal competitive factors in the markets for microlaparoscopes and
microbysteroscopes are quality of visualization, product performance, durability
and compatibility with capital equipment already owned by the user. Imagyn
believes that it competes favorably with respect to each of these factors,
particularly with regard to visualization and product performance. A number of
Imagyn's competitors are currently marketing products for use in such
less-invasive procedures. Olympus America, Inc., Origin Medsystems, Inc., a
subsidiary of Guidant Corporation, Medical Dynamics, Inc., Circon-Cabot Corp.,
and Karl Storz Instrument Co., are currently marketing laparoscopes with
diameters ranging from 1.2 millimeters to 3.0 millimeters. Circon-Cabot Corp.
currently markets a microhysteroscope.
Competition in the market for falloposcopy and tubal recanalization is also
expected to increase. Conceptus, Inc. is currently pursuing FDA approval of a
guidewire-based falloposcopy system. Imagyn believes that the principal
competitive factors in this market will be product performance and ability to
perform procedures in a non-hospital setting without the concurrent use of
laparoscopy. Imagyn believes it competes favorably with respect to each of these
factors.
Imagyn also faces potential competition from medical device or
pharmaceutical manufacturers that currently market or may be developing other
medical devices or drugs, such as hormonal therapies, for the treatment of
uterine disorders. Other companies may choose to enter these markets at a later
date and would represent competition for Imagyn. In addition, Imagyn competes
with other companies for sites to conduct clinical trials.
Most of Imagyn's competitors have significantly greater financial,
technical, research, marketing, sales, distribution and other resources than
Imagyn. There can be no assurance that Imagyn's competitors will not succeed in
developing technologies and products that are more effective or less costly than
any which have been or are being developed by Imagyn or that would render
Imagyn's technologies or products obsolete or not competitive, or that such
competitors will not succeed in obtaining regulatory approval for, introducing
or commercializing any such products prior to Imagyn. There can be no assurance
that Imagyn will be able to compete successfully or that competition will not
have a material adverse effect on Imagyn's business, financial condition or
results of operations.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical devices entail significant
risk of financial exposure to product liability claims. Although Imagyn has not
experienced any product liability claims to date, there can be no assurance that
Imagyn will be able to avoid significant product liability claims and potential
related
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adverse publicity. Imagyn maintains product liability insurance with coverage
limits of $25,000,000 per occurrence and an annual maximum of $25,000,000, which
Imagyn believes is comparable to that maintained by other companies of similar
size serving similar markets. However, there can be no assurance that such
coverage limits are adequate to protect Imagyn from any liabilities it might
incur in connection with the development, manufacture and sale of its products.
Product liability insurance is expensive and in the future may not be available
to Imagyn on acceptable terms, if at all. A successful product liability claim
or series of claims brought against Imagyn in excess of its insurance coverage
could have a material adverse effect on Imagyn's business, financial condition
and results of operations.
EMPLOYEES
As of June 30, 1997, Imagyn had 93 full-time employees, 11 of whom were
engaged in research and development activities, seven in regulatory and quality
assurance, 48 in manufacturing, 19 in sales and marketing, and eight in finance
and administration. None of Imagyn's employees is covered by a collective
bargaining agreement, and Imagyn believes that it maintains good relations with
its employees.
PROPERTIES
Imagyn currently leases approximately 26,000 square feet of facilities in
Laguna Niguel, California. These facilities comprise Imagyn's administrative
offices and manufacturing and warehouse operations. The leases for these
facilities extend through 1998. Imagyn believes that this space is adequate for
its current needs, and that it will be able to renew its leases and obtain
additional space if necessary.
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MANAGEMENT OF IMAGYN
The directors and executive officers of Imagyn, who are elected by the
board of directors and their ages as of July 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ---- ------------------------------------------------------
<S> <C> <C>
Franklin D. Brown(5)........... 53 President, Chief Executive Officer and Chairman of the
Board
J.C. MacRae.................... 45 Vice President and Chief Financial Officer
Susan E. Dube.................. 50 Vice President, Marketing and Corporate Development
Christopher F. Bova............ 39 Vice President of United States Sales
Manuel Garcia-Jurado........... 55 Vice President, Operations
Kristine F. Lahman............. 44 Vice President of Regulatory Affairs, Quality
Assurance and Clinical Programs
Keith V. Tholin................ 47 Vice President, Market Development
Gary M. Woker.................. 47 Vice President of Research and Development
David W. Chonette(1)(3)........ 62 Director
Samuel D. Colella(2)(5)........ 58 Director
Elizabeth B. Connell, MD.(4)... 71 Director
Mark B. Logan(2)(3)............ 58 Director
Richard S. Schneider,
PhD.(1)(4)................... 56 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Class I director.
(4) Class II director.
(5) Class III director.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each Class I, Class II and Class III director serves for a one, two
or three year period, respectively, or until his or her successor is elected and
qualified. Thereafter, directors will serve for staggered three year terms.
FRANKLIN D. BROWN joined Imagyn as President, Chief Executive Officer and
Chairman of the Board in October 1994 and has served as a Director of Imagyn
since that time. Mr. Brown, who has over 25 years of health care experience,
previously served as President and Chief Executive Officer of Pharmacia Deltec,
Inc. ("Pharmacia Deltec"), a manufacturer of medical devices for ambulatory drug
delivery, from 1986 until he joined Imagyn. Pharmacia Deltec is currently SIMS
Deltec, a subsidiary of Smiths Industries plc. Prior to Pharmacia Deltec, he
held a variety of general management, sales and marketing positions in the
health care industry, including President of the Healthcare Group of Pharmacia
Inc., a biomedical/pharmaceutical company. Mr. Brown is currently a director of
Xillix Technologies, a publicly-held Canadian company that develops and markets
cancer detection products. In 1991, Mr. Brown was awarded an Ernst & Young
Entrepreneur of the Year Award for the Midwest region for the success of
Pharmacia Deltec. Mr. Brown holds an M.B.A. from the University of Michigan and
a B.A. from Western Michigan University.
J.C. MACRAE joined Imagyn as Vice President and Chief Financial Officer in
June 1992. Since November 1993, Mr. MacRae has also served as a director of
Imagyn International, Inc., a wholly owned subsidiary of Imagyn. From April 1991
until he joined Imagyn, Mr. MacRae served as an independent consultant to
several medical device manufacturers, including Imagyn. From 1987 to April 1991,
Mr. MacRae was employed by Retroperfusion Systems, Inc., a manufacturer of
cardiovascular devices, serving as Chief Financial Officer from 1987 to 1990 and
President from January 1990 to April 1991. From 1984 to 1987, he was Vice
President and Treasurer of Cruttenden Roth Incorporated, an investment banking
and venture capital firm. From 1981 to 1984 he was Vice President and Chief
Financial Officer of VLI Corporation, a publicly-held manufacturer of women's
health products. Mr. MacRae holds an M.B.A. from California State University
Fullerton and a B.A. from the University of California Irvine.
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SUSAN E. DUBE joined Imagyn as Vice President of Business Development in
January 1996 and has served as Vice President, Marketing and Business
Development since August 1996. Ms. Dube has over 20 years of experience in
health care, with a particular emphasis on women's health. From August 1995 to
December 1995 Ms. Dube served as a consultant for LifeScience Economics, Inc., a
health care consulting company, during which time she consulted for Imagyn. From
June 1994 until August 1995, Ms. Dube served as President and Chief Executive
Officer of BioInterventions, Inc., a women's pharmaceutical company. From August
1993 to April 1994 she served as an independent consultant to a number of health
care companies. From May 1991 to August 1993, she was Executive Vice President
and Chief Operating Officer of Adeza Biomedical, Inc., a women's health
diagnostic company. Ms. Dube was Vice President of Ventures at Brigham and
Women's Hospital in Boston from 1985 to April 1991. Ms. Dube holds an M.B.A.
from Harvard University and a B.A. from Simmons College.
CHRISTOPHER F. BOVA joined Imagyn as Vice President of United States Sales
in August 1995. From 1986 until he joined Imagyn, Mr. Bova served in a variety
of sales and sales management positions with Pharmacia Deltec and SIMS Deltec.
Most recently he was Director of Sales of the vascular access division of SIMS
Deltec. Mr. Bova holds a B.A. from Muskingum College.
MANUEL GARCIA-JURADO joined Imagyn as Vice President, Operations in January
1997. From October 1997 until he joined Imagyn, Mr. Garcia-Jurado served as Vice
President, Operations for Medication Delivery Devices, a medical device
manufacturer. From July 1993 to October 1994, Mr. Garcia-Jurado was Director of
Operations for the Cardiac Assist Division of Datascope Corporation. From 1990
to 1993, Mr. Garcia-Jurado served as Vice President, Manufacturing for InterFlo
Medical Corporation, a medical device manufacturer. Mr. Garcia-Jurado holds a
B.S. in Engineering from the National University of Mexico.
KRISTINE F. LAHMAN has served as Imagyn's Vice President of Regulatory
Affairs, Quality Assurance and Clinical Programs since May 1995. From February
1993 until she joined Imagyn, Ms. Lahman was Vice President of Clinical and
Regulatory Affairs of Pharmacia, Inc., Ophthalmics Division, a manufacturer of
ophthalmic surgical products. From 1991 until February 1993, Ms. Lahman served
as Director of Clinical and Regulatory Affairs for Baxter Healthcare Corp.,
Critical Care Division, a medical device manufacturer. From 1988 to 1991, Ms.
Lahman served as Vice President of Clinical and Regulatory Affairs of IatroMed,
Inc., a manufacturer of orthopedic medical devices. From 1980 to 1988 she
directed the clinical and regulatory groups of Syntex Ophthalmics, Inc., a
division of Syntex Corporation specializing in ophthalmic medical devices. Ms.
Lahman holds a B.A. from Northwestern University.
KEITH V. THOLIN joined Imagyn as Vice President of Clinical Marketing in
October 1989 and has served as Vice President, Market Development since August
1996. From 1988 until he joined Imagyn, Mr. Tholin served as General Partner of
Advance Marketing Decisions, a biomedical marketing firm. From 1981 to 1988, Mr.
Tholin also served in various business development and marketing management
positions with Baxter Edwards, a manufacturer of medical devices for cardiology,
cardiovascular and orthopedic applications. Mr. Tholin holds an M.B.A. from the
University of Chicago and a B.S. from the University of Illinois.
GARY M. WOKER has served as Imagyn's Vice President of Research and
Development since December 1990. From 1989 until he joined Imagyn, Mr. Woker
served as Vice President of Engineering of MCM Laboratories, Inc., a
manufacturer of medical laser devices. From 1986 to 1989, Mr. Woker was Vice
President of Engineering and co-founder of California Laboratories Inc., also a
manufacturer of medical laser devices. From 1982 to 1986, Mr. Woker served as
Manager of New Product Development for Cooper Lasersonics, also a medical laser
manufacturer. Mr. Woker holds a B.S. from California Polytechnic University.
DAVID W. CHONETTE has served as a director of Imagyn since January 1990.
Since 1986, Mr. Chonette has been a general partner of Brentwood Associates, a
venture capital firm. Prior to 1986, Mr. Chonette served as President of
American Edwards Laboratories, a division of American Hospital Supply
Corporation. Mr. Chonette is a director of KeraVision, Inc., an optical device
company, and Biopsys Medical, Inc., a breast cancer biopsy device company. Mr.
Chonette holds a B.S. in Engineering from the Massachusetts Institute of
Technology.
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SAMUEL D. COLELLA has served as a director of Imagyn since January 1990.
Since 1984, Mr. Colella has been a general partner of Institutional Venture
Partners, a venture capital firm. From 1971 to 1984, Mr. Colella served as
President of Spectra-Physics, Inc., a laser manufacturer. Mr. Colella also
serves as a director of Biosys, Inc., a biopesticide company, Genta, Inc., a
drug delivery/antisense company, Pharmacopeia, Inc., a pharmaceutical discovery
company, Vivus, Inc., a manufacturer of therapeutic products for erectile
dysfunction, and Onyx Pharmaceuticals, a molecular oncology company. Mr. Colella
holds an M.B.A. from Stanford University and a B.S. in Business and Engineering
from the University of Pittsburgh.
ELIZABETH B. CONNELL, M.D. has served as a director of Imagyn since January
1994. Since 1981, Dr. Connell has been a professor of Gynecology and Obstetrics
at Emory University School of Medicine. She has served as a Chairperson of the
FDA Obstetrics and Gynecology Devices Panel from 1988 to 1992; as a member of
the FDA Panel on Review of Obstetrical and Gynecological Devices from 1976 to
1979; and as a member of the FDA Obstetrics and Gynecology Advisory Committee
from 1970 to 1978. Dr. Connell also serves as a director of UroMed Corp., and
Gynecare, Inc., both medical device companies. Dr. Connell holds an M.D. from
the University of Pennsylvania and a B.A. from the University of Pennsylvania.
MARK B. LOGAN has served as a director of Imagyn since October 1996. Since
November 1994, Mr. Logan has been Chairman of the Board, President and Chief
Executive Officer of VISX, Incorporated, a medical device manufacturer of
products for the ophthalmology market. From January 1992 until July 1994, Mr.
Logan was Chairman of the Board, President and Chief Executive Officer of Insmed
Pharmaceuticals, Inc., a biopharmaceutical company. From 1985 to 1992, Mr. Logan
was a Principal Associate with McManis Associates, Inc., a Washington, D.C.
based research and management firm specializing in the health care field. From
1981 to 1985, Mr. Logan served as President, Health Care and Consumer Group, of
Bausch & Lomb, Inc. and was a member of Bausch & Lomb's board of directors. Mr.
Logan holds a B.A. from Hiram College and a P.M.D. from Harvard University.
RICHARD S. SCHNEIDER, PH.D. has served as a director of Imagyn since
September 1995. Since August 1990, Dr. Schneider has been a general partner of
Domain Associates, a venture capital firm. Prior to joining Domain Associates,
Dr. Schneider served as Vice President of 3i Ventures Corporation, a venture
capital firm, form April 1986 to July 1990. From 1983 to 1989, he was President
of Biomedical Consulting Associates. From 1967 to 1983, Dr. Schneider was Vice
President and founder of Syva Company, a diagnostics company that was part of
Syntex Corporation, a pharmaceutical company. Dr. Schneider also serves as a
director of Landec Corporation, a polymer applications research and design
company. Dr. Schneider holds a Ph.D. in organic chemistry from the University of
Wisconsin, completed post-doctoral studies at the Massachusetts Institute of
Technology, attended the Stanford Graduate School of Business and holds a B.S.
degree in Chemistry from the University of California, Berkeley.
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<PAGE> 130
PRINCIPAL IMAGYN STOCKHOLDERS
The following table sets forth certain information known to Imagyn with
respect to the beneficial ownership of its Common Stock as of July 31, 1997, by
(i) each person who is known by Imagyn to own beneficially more than five
percent of the outstanding shares of Imagyn Common Stock, (ii) each of Imagyn's
directors, (iii) each executive officer and (iv) all directors, and executive
officers as a group. Unless otherwise indicated, officers and directors can be
reached at Imagyn's principal executive offices. A total of 8,061,999 shares of
Imagyn Common Stock were issued and outstanding as of July 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES APPROXIMATE
NAME AND ADDRESS BENEFICIALLY OWNED(1) PERCENT OWNED(2)
- ---------------------------------------------------------- --------------------- ----------------
<S> <C> <C>
Entities affiliated with Institutional Venture
Partners(3)............................................. 890,958 11.1%
Samuel D. Colella
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
BankAmerica Ventures(4)................................... 546,590 6.8%
950 Tower Lane, Suite 700
Foster City, CA 94404
Entities affiliated with Domain Associates(5)............. 546,589 6.8%
Richard S. Schneider, Ph.D.
One Palmer Square, Suite 515
Princeton, NJ 08542
Biotechnology Investments Limited(6)...................... 546,589 6.8%
Post Office Box 58
St. Julian's Court, St. Peter's Port
Guernsey, Channel Islands
Franklin D. Brown(7)...................................... 339,735 4.2%
Susan E. Dube(8).......................................... 33,959 *
Gary M. Woker(9).......................................... 76,712 *
J.C. MacRae(10)........................................... 58,233 *
Kristine F. Lahman(11).................................... 23,627 *
Keith V. Tholin(12)....................................... 95,434 1.2%
Christopher F. Bova(13)................................... 33,752 *
Manuel Garcia-Jurado...................................... 0 *
David W. Chonette(14)..................................... 212,064 2.6%
Samuel D. Colella(15)..................................... 896,996 11.1%
Elizabeth B. Connell, M.D.(16)............................ 12,981 *
Mark B. Logan(17)......................................... 4,736 *
Richard S. Schneider, Ph.D.(18)........................... 1,099,216 13.6%
Appaloosa Management L.P.(19)............................. 292,950 3.6%
All Directors and Executive Officers as a group (13
persons)(20)............................................ 2,887,445 34.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) The number of shares of Common Stock beneficially owned includes the shares
issuable pursuant to stock options that may be exercised within 60 days
after July 31, 1996. Shares issuable pursuant to such options are not
deemed outstanding for purposes of computing the percentage of any other
person.
(3) Includes 877,588 shares beneficially owned by Institutional Venture
Partners IV, L.P. and 13,370 shares beneficially owned by Institutional
Venture Management IV, L.P. Samuel D. Colella, a director of Imagyn, is a
general partner of the General Partner of Institutional Venture Partners
IV, L.P. and
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<PAGE> 131
Institutional Venture Management IV, L.P. Mr. Colella disclaims beneficial
ownership of the shares beneficially owned by such entities except to the
extent of his proportionate partnership interest therein.
(4) Includes 491,930 shares beneficially owned by BankAmerica Ventures and
54,660 shares beneficially owned by BA Venture Partners IV, L.P.
(5) Includes 528,105 shares beneficially owned by Domain Partners III, L.P. and
18,484 shares beneficially owned by DP III Associates, L.P. Richard S.
Schneider, a director of Imagyn, is a general partner of One Palmer Square
Associates III, L.P., the general partner of Domain Partners III, L.P. and
DP III Associates, L.P. Dr. Schneider has indirect beneficial ownership of
these shares. Dr. Schneider disclaims beneficial ownership of the shares
beneficially owned by such entities except to the extent of his
proportionate partnership interest therein.
(6) Old Court Limited is the record holder of the shares as custodian for
Biotechnology Investments Limited.
(7) Includes 11,666 shares issuable upon exercise of options exercisable within
60 days of July 31, 1997 held by Mr. Brown and 328,069 shares beneficially
owned by Mr. Brown subject to a repurchase option in favor of Imagyn. Such
repurchase option lapses with respect to 114,824 shares in September 1996
and 8,886 shares each month thereafter.
(8) Includes 8,000 shares beneficially owned by Ms. Dube and 25,959 shares
issuable upon exercise of options exercisable within 60 days of July 31,
1997 held by Ms. Dube.
(9) Includes 76,712 shares issuable upon exercise of options exercisable within
60 days of July 31, 1997 held by Mr. Woker.
(10) Includes 9,090 shares beneficially owned by Mr. MacRae and 49,143 shares
issuable upon exercise of options exercisable within 60 days of July 31,
1997 held by Mr. MacRae.
(11) Includes 23,627 shares issuable upon exercise of options exercisable within
60 days of July 31, 1997 held by Ms. Lahman.
(12) Includes 56,704 shares beneficially owned by Mr. Tholin and 38,730 shares
issuable upon exercise of options exercisable within 60 days of July 31,
1997 held by Mr. Tholin.
(13) Includes 28,126 shares beneficially owned by Mr. Bova and 5,626 shares
issuable upon exercise of options exercisable within 60 days of July 31,
1997 held by Mr. Bova.
(14) Includes 204,972 shares held by Brentwood Associates V, L.P. and 1,054
shares beneficially owned by Mr. Chonette and 6,038 shares issuable upon
exercise of options exercisable within 60 days of July 31, 1997 held by Mr.
Chonette. Mr. Chonette, a director of Imagyn, is a general partner of the
General Partner of Brentwood Associates V, L.P. Mr. Chonette disclaims
beneficial ownership of the shares beneficially owned by Brentwood
Associates V, L.P., except to the extent of his proportionate partnership
interest therein.
(15) Includes 877,588 shares beneficially owned by Institutional Venture
Partners IV, L.P. and 13,370 shares beneficially owned by Institutional
Venture Management IV, L.P. Samuel D. Colella, a director of Imagyn, is a
general partner of the General Partner of Institutional Venture Partners
IV, L.P. and Institutional Venture Management IV, L.P. Mr. Colella
disclaims beneficial ownership of the shares beneficially owned by such
entities except to the extent of his proportionate partnership interest
therein. Also includes 6,038 shares issuable upon exercise of options
exercisable within 60 days of July 31, 1997, held by Mr. Colella.
(16) Includes 12,981 shares issuable upon exercise of options exercisable within
60 days of July 31, 1997 held by Dr. Connell.
(17) Includes 4,736 shares issuable upon exercise of options exercisable within
60 days of July 31, 1997 held by Mr. Logan.
(18) Includes 528,105 shares beneficially owned by Domain Partners III, L.P. and
18,484 shares beneficially owned by DP III Associates, L.P. Richard S.
Schneider, a director of Imagyn, is a general partner of One Palmer Square
Associates III, L.P., the general partner of Domain Partners III, L.P. and
DP III Associates, L.P. Dr. Schneider has indirect beneficial ownership of
these shares. Dr. Schneider
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<PAGE> 132
disclaims beneficial ownership of the shares beneficially owned by such
entities except to the extent of his proportionate partnership interest
therein. Also includes 546,589 shares beneficially owned by Biotechnology
Investments Limited. Old Court Limited is the record holder of the shares
as custodian for Biotechnology Investments Limited. Pursuant to a
contractual agreement, Domain Associates is the U.S. venture capital
advisor to Biotechnology Investments Limited. Dr. Schneider is a general
partner of Domain Associates. Domain Associates has neither voting nor
investment power over Biotechnology Investments Limited and Dr. Schneider
and Domain Associates disclaim beneficial ownership of the Biotechnology
Investments Limited shares. Dr. Schneider disclaims beneficial ownership of
shares held by One Palmer Square Associates III, L.P. except to the extent
of his proportionate partnership interest therein. Also includes 6,038
shares issuable upon exercise of options exercisable within 60 days of July
31, 1997.
(19) Information obtained from filings made with the Securities and Exchange
Commission. The address for Appaloosa Management L.P. is 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078. David A. Tepper is deemed to
beneficially own the shares beneficially owned by Appaloosa Management L.P.
Mr. Tepper is the President and sole stockholder of Appaloosa Partners,
Inc., the general partner of Appaloosa Management L.P. Appaloosa Management
L.P. purchased an additional 140,650 shares of Imagyn Common Stock after
July 31, 1997.
(20) Includes 267,294 shares issuable upon exercise of options exercisable
within 60 days of July 31, 1997 held by Directors and Executive Officers.
DESCRIPTION OF IMAGYN CAPITAL STOCK
The authorized capital stock of Imagyn consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. The following summaries of
certain provisions of the Common Stock and Preferred Stock do not purport to be
complete and are subject to, and qualified in their entirety by, the provisions
of the Imagyn's Certificate of Incorporation.
COMMON STOCK
As of July 31, 1997, there were 8,061,999 shares of Common Stock
outstanding held by 88 stockholders of record.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available for that
purpose. In the event of a liquidation, dissolution or winding up of Imagyn, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue shares of Preferred Stock in one or more
series and to designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of the Common Stock. It is
not possible to state the actual effect of the issuance of any shares of
Preferred Stock upon the rights of holders of the Common Stock until the Board
of Directors determines the specified rights of the holders of such Preferred
Stock. However, the effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
impairing the liquidation rights of the Common Stock and delaying or preventing
a change in control of Imagyn without further action by the stockholders. Imagyn
has no present plans to issue any shares of Preferred Stock.
Imagyn has adopted a Preferred Shares Rights Agreement (the "Imagyn Rights
Plan") which is designed to deter coercive or certain takeover tactics, to
prevent a person or group from gaining control of
127
<PAGE> 133
Imagyn without offering fair value to all Imagyn stockholders and to deter other
abusive takeover tactics which are not in the best interests of Imagyn
stockholders. In November 1996, Imagyn executed the Imagyn Rights Plan with its
transfer agent and declared a dividend of one right for each outstanding share
of Imagyn Common Stock entitling the holder to purchase one one-thousandth of a
share of Series A Preferred Stock of Imagyn at a purchase price of $50.00
(subject to adjustment) (the "purchase price"). The rights only become
exercisable ten days following the public announcement that a person or group of
affiliated persons has acquired 15% or more of the outstanding Imagyn Common
Stock or ten business days following the commencement of, or announcement of an
intention to make, a tender or exchange offer with respect to 15% or more of the
outstanding Imagyn Common Stock. The rights expire on November 7, 2006 and can
be redeemed by Imagyn for $.01 per right at any time prior to the tenth day
following the acquisition of 15% or more of the Imagyn Common Stock (or such
later date as is determined by the continuing directors). If, subsequent to the
rights becoming exercisable, Imagyn is acquired in a merger or other business
combination or 50% or more of the assets or earning power of Imagyn is sold, the
rights, if not redeemed, will then entitle the holder to buy shares of common
stock of the acquiring corporation (or Imagyn if Imagyn is the surviving
corporation) with a value equal to twice the purchase price.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Imagyn is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging takeover attempts that
might result in a premium over the market price for the shares of Common Stock
held by stockholders.
Imagyn's Certificate of Incorporation provides that the Board of Directors
will be divided into three classes of directors with each class serving a
staggered three-year term. The classification system of electing directors may
tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of Imagyn and may maintain the incumbency of the
Board of Directors, as the classification of the Board of Directors generally
increases the difficulty of replacing a majority of the directors. Imagyn's
Certificate of Incorporation also eliminates the right of stockholders to act by
written consent without a meeting. The Certificate of Incorporation and Bylaws
do not provide for cumulative voting in the election of directors. The
authorization of undesignated Preferred Stock makes it possible for the Board of
Directors to issue Preferred Stock with voting or other rights or preferences
that could impede the success of any attempt to change control of Imagyn. These
and other provisions may have the effect of delaying or preventing hostile
takeovers or delaying changes in control or management of Imagyn. The amendment
of any of these provisions would require approval by holders of at least 66 2/3%
of the outstanding Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Imagyn Common Stock is Norwest
Bank Minnesota, N.A. Its telephone number is (800) 468-9716.
128
<PAGE> 134
LEGAL MATTERS
The validity of the shares of Urohealth Common Stock to be issued in Merger
and the federal income tax consequences of the Merger will be passed on for
Urohealth by Morrison & Foerster LLP. Wilson Sonsini Goodrich & Rosati is acting
as counsel for Imagyn in connection with certain legal matters relating to the
Merger, including the federal income tax consequences of the Merger.
EXPERTS
The consolidated financial statements of Urohealth as of March 31, 1996 and
1997, and for the year ended June 30, 1995, for the nine months ended March 31,
1996 and for the year ended March 31, 1997, included in the Joint Proxy
Statement of Urohealth and Imagyn, which is referred to and made a part of this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included elsewhere
herein. Such report is based in part on the report included elsewhere herein of
Coopers & Lybrand L.L.P., independent accountants, with respect to the
consolidated financial statements of Microsurge, Inc., as of March 31, 1996 and
1997 and for the year ended December 31, 1995, the nine months ended March 31,
1996 and the year ended March 31, 1997 (not separately included or incorporated
herein), and the report included elsewhere herein of KPMG Peat Marwick LLP,
independent auditors, with respect to the consolidated financial statements of
Dacomed Corporation for the year ended June 24, 1995 (not separately included or
incorporated by reference herein). The consolidated financial statements
referred to above are included herein in reliance upon such reports given upon
the authority of such firms as experts in accounting and auditing.
The financial statements of X-Cardia Corporation as of December 31, 1996
and for the period from inception (February 13, 1996) to December 31, 1996,
included in the Joint Proxy Statement of Urohealth and Imagyn, which is referred
to and made a part of this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein. Such consolidated financial statements are
included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Richard-Allan Medical Industries,
Inc. as of June 30, 1995 and March 31, 1996, and for the years ended June 30,
1994 and 1995 and for the nine months ended March 31, 1996, included in the
Joint Proxy Statement of Urohealth and Imagyn, which is referred to and made a
part of this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. Such consolidated financial statements are included herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Imagyn as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996,
included in the Joint Proxy Statement of Urohealth and Imagyn, which is referred
to and made a part of this Prospectus and Registration Statement, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their report thereon appearing elsewhere herein. Such consolidated financial
statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
129
<PAGE> 135
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UROHEALTH SYSTEMS, INC.
Report of Independent Auditors........................................................ F-3
Consolidated Balance Sheets as of March 31, 1996 and 1997............................. F-6
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-7
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-8
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-9
Notes to Consolidated Financial Statements............................................ F-10
Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30, 1997
(unaudited)......................................................................... F-28
Condensed Consolidated Statements of Operations for the three months ended June 30,
1996 and 1997 (unaudited)........................................................... F-29
Condensed Consolidated Statements of Cash Flows for the three months ended June 30,
1996 and 1997 (unaudited)........................................................... F-30
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-31
X-CARDIA CORPORATION
Report of Independent Auditors........................................................ F-36
Balance Sheet as of December 31, 1996................................................. F-37
Statement of Operations for the period from inception (2/13/96) through December 31,
1996................................................................................ F-38
Statement of Shareholders' Equity (Deficit) for the period from inception (2/13/96)
through December 31, 1996........................................................... F-39
Statement of Cash Flows for the period from inception (2/13/96) through December 31,
1996................................................................................ F-40
Notes to Financial Statements......................................................... F-41
RICHARD-ALLAN MEDICAL INDUSTRIES, INC.
Report of Independent Auditors........................................................ F-46
Consolidated Balance Sheets as of June 30, 1995 and March 31, 1996.................... F-47
Consolidated Statements of Operations for the years ended June 30, 1994 and 1995 and
for the nine months ended March 31, 1996............................................ F-48
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1994 and
1995 and for the nine months ended March 31, 1996................................... F-49
Consolidated Statements of Cash Flows for the years ended June 30, 1994 and 1995 and
for the nine months ended March 31, 1996............................................ F-50
Notes to Consolidated Financial Statements............................................ F-51
Condensed Consolidated Balance Sheets as of March 31, 1996 and June 30 1996........... F-58
Condensed Consolidated Statements of Operations for the three months ended June 30,
1995 and 1996....................................................................... F-59
Condensed Consolidated Statements of Cash Flows for the three months ended June 30,
1995 and 1996....................................................................... F-60
Notes to Condensed Consolidated Financial Statements.................................. F-61
</TABLE>
F-1
<PAGE> 136
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
IMAGYN MEDICAL, INC.
Report of Independent Accountants..................................................... F-62
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-63
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996................................................................................ F-64
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1994, 1995 and 1996............................................................. F-65
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996................................................................................ F-66
Notes to Consolidated Financial Statements............................................ F-67
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)..... F-79
Consolidated Statements of Operations for the three months and six months ended June
30, 1996 and 1997 (unaudited)....................................................... F-80
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1997
(unaudited)......................................................................... F-81
Notes to Interim Consolidated Financial Statements.................................... F-82
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................... F-85
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997.......... F-86
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the three
months ended June 30, 1997.......................................................... F-87
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended
March 31, 1997...................................................................... F-88
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months
ended March 31, 1996................................................................ F-89
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended
June 30, 1995....................................................................... F-90
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.............. F-91
</TABLE>
F-2
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
UROHEALTH Systems, Inc.
We have audited the accompanying consolidated balance sheets of UROHEALTH
Systems, Inc. as of March 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the year ended June 30, 1995, the nine months ended March 31, 1996 and the year
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits. We did not audit the financial
statements of Microsurge, Inc., a wholly-owned subsidiary, as of March 31, 1996
and 1997 and for the year ended December 31, 1995, the nine months ended March
31, 1996 and the year ended March 31, 1997 and of Dacomed Corporation, a
wholly-owned subsidiary, for the year ended June 24, 1995, which statements
reflect total assets constituting 16.5% and 3.9% of consolidated total assets as
of March 31, 1996 and 1997, respectively, and net sales constituting 27%, 8%,
and 8% of consolidated net sales for the year ended June 30, 1995, the nine
months ended March 31, 1996 and the year ended March 31, 1997, respectively.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included in the
consolidated financial statements for such entities, is based solely on the
reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of UROHEALTH Systems, Inc. at
March 31, 1996 and 1997, and the consolidated results of its operations and its
cash flows for the year ended June 30, 1995, the nine months ended March 31,
1996 and the year ended March 31, 1997 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Orange County, California
July 8, 1997
F-3
<PAGE> 138
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.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 9, 1997
F-4
<PAGE> 139
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.
KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
October 10, 1995
F-5
<PAGE> 140
UROHEALTH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, PRO FORMA
---------------------- MARCH 31,
1996 1997 1997
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS (NOTE 5)
Current assets:
Cash and equivalents............................................ $ 3,345 $ 2,591 $ 34,007
Short-term investments.......................................... 243 -- --
Receivables, net of allowance for doubtful accounts of $1,744
and $1,896 in 1996 and 1997, respectively..................... 8,074 17,272 17,272
Income tax receivable........................................... -- 377 377
Advances to officers............................................ -- 114 114
Inventories..................................................... 6,702 20,945 20,945
Distributor inventories......................................... -- 6,307 6,307
Prepaid expenses................................................ 1,715 2,278 2,278
Deferred debt issuance costs.................................... 614 -- --
-------- --------- ---------
Total current assets.............................................. 20,693 49,884 81,300
Restricted cash................................................... 96 48 19,228
Receivables -- long term.......................................... -- 2,722 2,722
Property and equipment, net....................................... 9,084 26,035 26,035
Patents and intangibles, net of accumulated amortization of $2,102
and $2,646 in 1996 and 1997, respectively....................... 2,401 6,285 6,285
Loans to officers................................................. -- 550 550
Deposits and other assets......................................... 688 2,232 2,232
Deferred debt issuance costs...................................... -- 5,986 9,305
Goodwill.......................................................... 393 43,417 43,417
-------- --------- ---------
$ 33,355 $ 137,159 $ 191,074
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities........................ $ 10,541 $ 20,882 $ 20,882
Compensation and employee benefits.............................. 2,042 3,250 3,250
Restructuring liabilities....................................... 1,345 6,192 6,192
Short-term debt................................................. 9,549 14,518 5,268
Current portion of long-term debt............................... 546 3,328 3,328
-------- --------- ---------
Total current liabilities......................................... 24,023 48,170 38,920
Long-term liabilities:
Long-term debt.................................................. 8,272 98,292 53,292
Senior subordinated notes, net of discount...................... -- -- 108,278
Restructuring liabilities, less current portion................. 823 822 822
Other liabilities............................................... 185 4,149 4,149
Commitments and contingencies (Notes 1, 7 and 15)
Minority interest in consolidated subsidiary...................... 1,073 237 237
Redeemable convertible preferred stock............................ 3,554 -- --
Common stockholders' equity (deficiency):
Preferred stock, $0.001 par value Authorized shares -- 5,000,000
Issued and outstanding shares -- none......................... -- -- --
Common stock, $0.001 par value
Authorized shares -- 50,000,000
Issued and outstanding shares -- 15,230,000 and 23,807,000, at
March 31, 1996 and 1997, respectively....................... 15 24 24
Warrants........................................................ 3,000 5,359 7,080
Additional paid-in capital...................................... 75,975 150,468 150,468
Foreign currency translation adjustment......................... (98) (14) (14)
Deficit......................................................... (83,467) (170,348) (172,182)
-------- --------- ---------
Total common stockholders' equity (deficiency).................... (4,575) (14,511) (14,624)
-------- --------- ---------
$ 33,355 $ 137,159 $ 191,074
======== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 141
UROHEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................... $ 49,250 $ 42,953 $ 90,695
Cost of sales........................................... 18,529 14,964 41,083
-------- -------- --------
Gross profit............................................ 30,721 27,989 49,612
Operating expenses:
Selling, general and administrative................... 41,057 37,056 57,691
Research and development.............................. 5,406 2,777 4,997
Restructuring charges................................. 1,200 5,456 12,000
Write-off of purchased research and development....... 5,312 -- 47,232
Direct acquisition costs.............................. 851 4,232 3,600
Settlement of litigation.............................. 300 -- --
-------- -------- --------
Total operating expenses................................ 54,126 49,521 125,520
-------- -------- --------
Loss from operations.................................... (23,405) (21,532) (75,908)
Other income (expense):
Minority interest consisting of accrued dividends on
preferred stock of subsidiary...................... (78) (55) (25)
Interest income....................................... 394 101 339
Interest expense...................................... (367) (1,059) (8,143)
Other................................................. 5 (48) --
-------- -------- --------
Loss before taxes and extraordinary item................ (23,451) (22,593) (83,737)
Provision (benefit) for income taxes.................... 1,386 431 (227)
-------- -------- --------
Loss before extraordinary item.......................... (24,837) (23,024) (83,510)
Extraordinary item (early extinguishment of debt)....... -- -- (2,973)
-------- -------- --------
Net loss................................................ $(24,837) $ (23,024) $(86,483)
======== ======== ========
Net loss per share:
Loss before extraordinary item........................ $(24,837) $ (23,024) $(83,510)
Dividends and accretion on redeemable convertible
preferred stock.................................... (45) (579) (398)
-------- -------- --------
Loss attributable to common stockholders before
extraordinary item................................. (24,882) (23,603) (83,908)
Extraordinary item.................................... -- -- (2,973)
-------- -------- --------
Net loss attributable to common stockholders.......... $(24,882) $ (23,603) $(86,881)
======== ======== ========
Loss per share before extraordinary item.............. $ (1.70) $ (1.58) $ (4.31)
======== ======== ========
Net loss per share.................................... $ (1.70) $ (1.58) $ (4.47)
======== ======== ========
Weighted average number of shares used to compute net
loss per share........................................ 14,672 14,980 19,453
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 142
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-8
<PAGE> 143
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-9
<PAGE> 144
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-10
<PAGE> 145
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-11
<PAGE> 146
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
(CONTINUED)
loss of $315,000 of Dacomed for the period from July 1, 1994 to October 31, 1994
were included in both the June 30, 1994 and 1995 consolidated results of
operations. Net sales of approximately $1,100,000 and net income of $74,000 of
Allstate for the period from July 1, 1994 to December 31, 1994 were included in
both the June 30, 1994 and 1995 consolidated results of operations.
No adjustments were required to be made to the net assets of the combining
enterprises to conform accounting practices and there was no effect on net
income previously reported.
During the year ended March 31, 1997, in transactions accounted for as
purchases, the Company acquired: Richard-Allan Medical Industries, Inc.
(Richard-Allan); X-Cardia Corporation (X-Cardia); The Intermed Group (Intermed);
certain assets from O.R. Concepts, Inc. (O.R. Concepts) and three other
immaterial businesses. Richard-Allan and the O.R. Concepts assets; are engaged
in the development, manufacture and marketing of surgical products and supplies;
X-Cardia is developing cardiac monitoring products; and Intermed develops,
manufactures and markets disposable medical products. The aggregate initial
purchase price for these entities, including direct acquisition costs, was $39.7
million in cash, $3.0 million in debt, and 3,622,000 shares of the Company's
common stock valued at $44.0 million. In allocating the total purchase price for
these acquisitions, it was determined that acquired in-process research and
development costs aggregating $37.0 million related to the Richard-Allan and
X-Cardia acquisitions should be immediately expensed and the balance of the
total purchase price for all of the transactions allocated to the fair value of
the net assets acquired, including $44.6 million which was assigned to goodwill
and relates to all transactions, except X-Cardia, that is being amortized over a
period of 25 years. Independent valuations were obtained in connection with the
Richard-Allan and X-Cardia acquisitions and were used as aids in the allocation
of the purchase price for these entities. The Company agreed to make additional
payments in connection with the X-Cardia acquisition of up to $21 million upon
achievement of clinical and patent approval milestones. There can be no
assurance that the milestones will be achieved. In addition, the Company is
obligated to pay a percentage of sales for a four-year period after commercial
introduction of the first product using the acquired X-Cardia technology.
These entities have been included in the Company's consolidated operating
results from their respective dates of acquisition. Unaudited pro forma
operating results assuming the acquisition of Richard-Allan had taken place as
of July 1, 1995 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
MARCH 31, MARCH 31,
1996 1997
----------- ----------
<S> <C> <C>
Net sales........................................... $ 58,658 $ 99,122
Loss before extraordinary item...................... (26,444) (88,045)
Net loss............................................ (26,444) (91,018)
Net loss per share.................................. (1.58) (4.52)
</TABLE>
The unaudited pro forma results including the other business acquisitions
accounted for as purchases do not differ materially from those presented above.
Additionally, during the year ended March 31, 1997, the Company purchased
five in-process research and development projects that did not constitute
businesses, and expensed the aggregate purchase price of $10.2 million as
acquired in-process research and development costs.
Prior year business combinations accounted for as purchases include
Laparomed Corporation, which was acquired by Advanced on July 27, 1994 in
exchange for 236,000 shares of the Advanced common stock and Urohealth of
Kentucky, Inc., which was acquired by the Company on March 17, 1995 in exchange
for 25,000 shares of the Company's common stock and assumption of debt
aggregating $137,000. The pro forma effect of these acquisitions is immaterial.
The consolidated results of operations for the fiscal year ended
F-12
<PAGE> 147
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 generally recognized upon
the dates of shipment to customers. Revenue from sales of certain introductory
products containing return privileges where the amount of future returns cannot
be reasonably estimated is recognized upon acceptance by the customer after date
of shipment. With respect to certain distributor initial stocking orders shipped
during 1997 to new distributors, the Company will recognize revenue on those
orders upon establishment of a sales and payment history by those distributors,
thereby establishing that collection of the sales price is reasonably assured.
The Company grants its distributors limited stock balancing rights whereby
inventory previously purchased may be returned for credit against purchases of
other Company products. It also generally provides the ultimate customers for
its products with a right to return products they find unsatisfactory within 30
days after purchase. Sales revenue and cost of sales reported in the
consolidated statements of operations are net of estimated provisions,
determined based on experience, for costs or losses that may be incurred in
connection with sales returns.
Cash and Equivalents
Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.
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.
F-13
<PAGE> 148
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Maintenance and repairs are charged to expense as incurred,
and renewals and betterments are capitalized. Depreciation and amortization are
provided on the straight line method over the assets estimated useful lives.
Estimated useful lives range from five to seven years for office equipment, five
to ten years for equipment and tooling, ten years for molds and three to five
years for vehicles. For leasehold improvements, the useful life is determined to
be the original term of the lease.
Patents, Intangibles and Goodwill
Intangible assets consisting of patents, trademarks and goodwill are
amortized on a straight-line basis over various periods up to twenty-five years.
Intangible assets are reviewed if the facts and circumstances suggest that they
may be impaired. An intangible asset is deemed to be impaired when the
unamortized balance exceeds the undiscounted estimated future cash flows from
the related assets.
Asset Impairment
Following adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of" by the Company in the first quarter of fiscal 1996, the Company
tests for and records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than assets' carrying amount.
Asset impairment is recognized on long-lived assets held for sale when the
estimated fair value less costs to sell is less than the assets carrying amount.
As a result of the Company's decision to deemphasize its participation in
incontinence clinics, the Company recorded in the fourth quarter of fiscal 1997
a $347,000 charge relating to the impairment of the goodwill recorded on the
acquisition of Urohealth of Kentucky.
Advertising Expense
Advertising and promotion costs are expensed when incurred. Such costs in
fiscal 1995, 1996 and 1997 were $1,261,000, $895,000 and $1,612,000,
respectively.
Research and Development Expense
Research and development expenses are charged to operations as incurred.
Warranty and Product Liability Costs
Estimated warranty costs, insurance deductible amounts associated with
product liability claims, and an amount for incurred but not reported product
liability incidents are accrued in the period revenue is recognized from the
sale of products. Actual costs are charged against the accrual when paid.
Per Share Information
Net loss per share is based on net loss attributable to common stockholders
and the weighted average number of shares of common stock outstanding during the
periods presented. Common stock equivalents and other potentially dilutive
securities have not been included in the calculation as they are anti-dilutive.
F-14
<PAGE> 149
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
128 redefines the standards for computing earnings per share and is effective
for the Company on March 31, 1998. The Company has not yet determined the impact
that the adoption of SFAS No. 128 will have on future earnings per share
calculations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Such estimates primarily relate to the collectibility of
accounts receivable, inventory obsolescence and estimates of future cash flows
used to evaluate whether conditions are present that would require asset
impairment charges to be recognized. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 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>
F-15
<PAGE> 150
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES (CONTINUED)
Distributor inventories are comprised of initial stocking orders shipped
during fiscal 1997 to new distributors for which revenue recognition has been
deferred. (See Note 2 -- Revenue Recognition.)
5. DEBT
Short-term debt
Short-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
--------- ---------
<S> <C> <C>
Line of credit under Credit Agreement, interest at 9.75%....... $ -- $ 9,250
Line of credit under Credit Agreement, repaid in May 1996...... 5,500 --
Convertible subordinated notes at 9.25%, due August 1997....... 2,276 5,268
Line of credit with a bank, repaid in May 1996................. 1,623 --
Line of credit with a bank, repaid October 1996................ 150 --
------ -------
$ 9,549 $14,518
====== =======
</TABLE>
To finance the cash portion of the Richard-Allan acquisition, the Company
obtained a $35.0 million bank credit facility. The facility originally consisted
of a $20.0 million dollar term loan and a $15.0 million revolving line of
credit, which was subsequently increased to $16.5 million in November 1996. A
portion of the proceeds from the public equity offering in November 1996 were
used to reduce the term loan by $6.5 million. The credit facility is secured by
substantially all the assets of the Company has a five-year term and bears
interest at a rate of approximately 9.75% at March 31, 1997. Additionally, the
Company is required to meet certain financial covenants. In March 1997, the
Company's term and revolving credit facility was amended to provide for maximum
borrowings of $55.0 million, consisting of $45.8 million of term loans and $9.2
million of revolving loans. As of March 31, 1997, the Company had outstanding
borrowings of $54.3 million under this facility.
In February 1996, Microsurge entered into a credit agreement with a group
of lenders ("Purchasers") who agreed to purchase a series of convertible
subordinated notes ("the Notes") up to $3,268,180 upon the request of the
Company. In August 1996, the agreement was amended to provide for total advances
of $5,268,180. The Company received advances of $2,334,414 in February and March
1996, $933,766 in June 1996 and $2,000,000 in August 1996. The Notes bear
interest at 9.25% and mature on August 28, 1997. The Company may prepay amounts
outstanding on the Notes without penalty at any time after an Investor Sale (as
defined below) and prior to maturity date. Upon the closing, or series of
closings, in which Microsurge sells capital stock of Microsurge for gross
proceeds of $10,000,000 or more (an "Investor Sale"), the Notes will become
convertible, at the option of the Purchasers, into the same type and class of
stock issued in connection with the Investor Sale. Any outstanding principal
amount of the Notes plus accrued interest may convert at a conversion price
equal to 60% of the price per share paid by the purchasers of capital stock in
connection with the Investor Sale (the "Investor Sale Price"). The Company has
no plans to undertake any action that would constitute an Investor Sale and
expects to retire the notes for cash at maturity.
On November 22, 1995, the Company entered into a $10.0 million Credit
Agreement consisting initially of a $6.0 million term loan and a $4.0 million
revolving line of credit. The revolving line of credit under the Credit
Agreement was increased to $5.5 million in March 1996 and to $10.5 million in
April 1996. Interest on all borrowings under the Credit Agreement was at the
bank's prime rate plus 4.0% (plus 2.0% in the event of default). The Credit
Agreement was repaid with proceeds from the sale of convertible subordinated
debentures in May 1996. In connection with this repayment, the Company incurred
an extraordinary loss of $2.9 million resulting from the early repayment of this
debt.
F-16
<PAGE> 151
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
In connection with the initial borrowings under the Credit Agreement, the
Company granted a warrant to purchase 366,667 shares of the Company's common
stock at $9.15 per share. The warrant expires on November 22, 2000. In
connection with subsequent increases of amounts available under the line of
credit and significant covenant modifications, the Company granted a warrant to
purchase 350,000 shares of the Company's common stock at $9.15 per share. The
warrant expires on April 12, 2001.
On April 10, 1997, the Company used proceeds from the sale of the Senior
Subordinated Notes (see below) to repay all amounts outstanding under the
Company's term and revolving credit facility. Concurrently with the repayment of
the existing credit facility, the Company entered into an amended and restated
$50 million revolving credit facility with its senior lender. The new credit
facility is secured by substantially all of the Company's assets and contains
the same basic covenants as in the prior facility.
Long-term debt
Long-term debt consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
--------- ---------
<S> <C> <C>
Convertible subordinated debentures............................ $ -- $ 50,000
Term loan under Credit Agreement, repaid April 10, 1997........ -- 45,000
Term loan under Credit Agreement, repaid May 13, 1996.......... 6,000 --
Bank note, interest at 8.75%, repaid in April 1996............. 326 --
Bank note, interest at 8.75%, repaid in April 1996............. 221 --
Bank note dated December 21, 1992, due in 180 monthly
installments with interest at 8.75% collateralized by a
building..................................................... 175 167
Bank note dated August 15, 1996, interest at 8.25%. Note is
collateralized by a building and matures on August 15, 2006.
The entire balance is due on maturity........................ -- 3,000
Bank note dated August 15, 1996, interest at 6.25%. Note
matures on April 17, 1997. The entire balance is due on
maturity..................................................... -- 3,000
Bank note dated April 29, 1994, due in 36 monthly installments
with interest at 8.75%; collateralized by equipment.......... 41 14
Bank note dated February 11, 1994, repaid May 1996............. 29 --
Various notes payable with interest from 8.5% to 10%, due dates
through August 1, 1997, secured by equipment................. 19 40
Convertible subordinated notes................................. 1,284 --
Capital leases................................................. 723 399
------ --------
8,818 101,620
Less current maturities........................................ 546 3,328
------ --------
$ 8,272 $ 98,292
====== ========
</TABLE>
On May 3, 1996, the Company authorized the issuance of $50.0 million of
8.75% convertible subordinated debentures (the "Debentures") and warrants to
purchase 250,000 shares of the Company's common stock at $12.88 per warrant,
subject to anti-dilution adjustments. The Debentures are convertible at any time
and are subject to certain registration rights. The Debentures mature in May
2006 and interest is payable quarterly in arrears. The warrants expire in five
years. The Debentures are redeemable at the option of the Company after two
years, if the average market price of the Company's common stock is above $22.00
for 60 consecutive days, or after three years without regard to the Company's
common stock price. The redemption price is equal to 105% of the principal
amount decreasing annually to the principal amount in
F-17
<PAGE> 152
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT (CONTINUED)
2004, plus accrued and unpaid interest. The Debentures are convertible into
common stock at $10.90 per share, subject to further anti-dilution adjustments,
are subordinate to all future senior borrowings and will have voting rights on
all matters on an "as converted" basis. The holders of the Debentures must
approve any dividend, payment or other distribution to stockholders, as well as
any redemption of shares of common stock, options or warrants of the Company or
any subsidiary other than the preferred stock issued by Urohealth (California).
The Company has various capital equipment leases with future minimum lease
payments for years ending March 31, 1998, 1999, 2000, and 2001 of $301,000;
$102,000; $43,000; and $2,000, respectively. Pursuant to a capital lease
agreement entered into during 1993 and as amended in 1994, the Company
maintained $96,000 and $48,000 in restricted cash at March 31, 1996 and 1997.
Senior Subordinated Notes
On April 10, 1997, the Company completed the sale of $110 million of its
12 1/2% Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. The Notes bear interest, payable semi-annually, at
12 1/2% per annum, subject to increase if certain obligations are not satisfied,
and mature on April 1, 2004. There are no mandatory redemption or sinking fund
payments required on the Notes. The Company is entitled to redeem the Notes on
or after April 1, 2001 for an amount equal to the principal amount of the Note,
accrued but unpaid interest through the redemption date, the redemption premium
and liquidated damages, if any. In the event of a Change of Control (as defined
in the Indenture), each holder of a Note is entitled to require the Company to
purchase such holder's Notes at 101% of the principal amount of the Notes, plus
accrued but unpaid interest to the date of repurchase and liquidated damages, if
any.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The Indenture governing the Notes contains certain covenants, including among
other matters limitations on the ability of the Company to: (i) incur additional
indebtedness; (ii) incur certain liens; (iii) engage in certain transactions
with affiliates; (iv) engage in unrelated lines of business; or (v) engage in
mergers, consolidations or similar transactions. The Company used $19.2 million
of the proceeds from the sales of the Notes to purchase government securities
(the "Pledged Securities") which that have been pledged for the benefit of the
holders of the Notes. The scheduled interest and principal payments on the
Pledged Securities is in an amount sufficient to pay when due the first three
scheduled interest payments on the Notes.
The Company is a holding company with no material assets or operations
other than its investments in its subsidiaries. The Notes are guaranteed by all
of the Company's domestic and material foreign subsidiaries. The guarantees are
full, unconditional, and joint and several. All of the guarantor subsidiaries
are wholly-owned by the Company. Assets, equity, income and cash flows of all
other subsidiaries of the Company that have not guaranteed the Notes are less
than two percent of the respective consolidated amounts and are inconsequential,
individually and in the aggregate to the Company. The Company has not included
separate financial information for the guarantors, since the Company believes
that such information is not material to investors.
In connection with the issuance of the Notes, the Company issued with each
$1,000 principal amount of Notes, a warrant entitling the holder to purchase
4.44 shares of Common Stock of the Company (or 9.06 shares, if a certain level
of EBITDA for fiscal 1998 is not achieved) at an exercise price of $9.50 per
share. The warrants are exercisable on or after June 30, 1998 and expire April
1, 2004.
F-18
<PAGE> 153
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-19
<PAGE> 154
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-20
<PAGE> 155
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-21
<PAGE> 156
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-22
<PAGE> 157
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-23
<PAGE> 158
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 limitations for the subsidiaries
Urohealth (California), Advanced, Laparomed and Microsurge, as described below.
F-24
<PAGE> 159
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
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.
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.
F-25
<PAGE> 160
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-26
<PAGE> 161
UROHEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The results of operations for the first three quarters of fiscal 1997 were
restated primarily to reflect the delayed recognition of revenues relating to
distributor initial stocking orders ($2,465,000 in Q3), the delayed recognition
of revenue relating to the shipment of introductory products ($661,000 in Q1,
$855,000 in Q2 and $55,000 in Q3), reductions of overhead capitalized in
inventory ($143,000 in Q1, $349,000 in Q2 and $978,000 in Q3) and increased
sales return allowances ($53,000 in Q1, $53,000 in Q2 and $115,000 in Q3).
<TABLE>
<CAPTION>
QUARTERS
---------------------------------------------
FISCAL 1997 -- INCLUDING MICROSURGE FIRST SECOND THIRD FOURTH
------------------------------------------ ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............................... $17,318 $ 21,581 $28,891 $ 22,905
Gross profit............................ 11,198 13,575 16,898 7,941
Loss from operations.................... (287) (29,168) (57) (46,396)
Net loss................................ (4,263) (30,555) (2,452) (49,213)
Loss per share.......................... (0.29) (1.68) (0.11) (2.17)
</TABLE>
The operating results for the fourth quarter of fiscal 1997 include the
writeoff of acquired in-process research and development of $21,732,000, costs
of restructuring certain operations of $8,000,000, costs associated with the
Microsurge merger of $3,600,000, the writeoff of $1,916,000 in discontinued
product inventory, $197,000 in cost associated with the abandoned Relax project,
and $347,000 relating to the impairment of goodwill on the Company's Urohealth
of Kentucky subsidiary.
15. SUBSEQUENT EVENTS
Pending Acquisition
On April 19, 1997, the Company entered into a definitive agreement pursuant
to which the Company would acquire Imagyn Medical, Inc. ("Imagyn") in a
stock-for-stock merger (the "Merger"). The Merger is expected to be accounted
for as a pooling of interests and each share of Imagyn common stock will be
exchanged for 1.0358 shares (subsequently increased to 1.40 shares) of Common
Stock of the Company. The consummation of the Merger is subject to approval by
the Company's and Imagyn's stockholders, and other customary closing conditions.
No assurances can be given that the Merger will be successfully consummated.
Securities Litigation
In July 1997, several complaints were filed against the Company, certain of
its officers and directors and, in certain complaints, the lead underwriters of
the Company's November 1996 public offering requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages. The suits were filed in the United States
District Court for the Central District of California. All of the suits are
based on substantially the same facts and have been brought on behalf of
purchasers of Common Stock of the Company during various periods between July
18, 1996 and July 1, 1997. No proceedings have taken place in any of the suits,
and no provision for any liability that may result from the ultimate resolution
of this matter has been included in the accompanying consolidated financial
statements.
F-27
<PAGE> 162
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents.................................................. $ 2,591 $ 5,750
Receivables, net of allowance for doubtful accounts of $1,684 and
$1,695 on March 31, 1997 and June 30, 1997, respectively........... 17,272 22,044
Income tax receivable................................................. 377 377
Advances to officers.................................................. 114 9
Inventories........................................................... 20,945 29,728
Distributor inventories............................................... 6,307 6,307
Prepaid expenses...................................................... 2,278 3,849
--------- ---------
Total current assets.................................................... 49,884 68,064
Restricted cash......................................................... 48 19,327
Receivables -- long term................................................ 2,722 2,383
Property and equipment, net............................................. 26,035 27,421
Patents and intangibles, net of accumulated amortization of $2,646 and
$3,573 on March 31, 1997, and June 30, 1997, respectively............. 6,285 6,099
Loans to officers....................................................... 550 2,041
Deposits and other assets............................................... 2,232 1,753
Deferred debt issuance costs............................................ 5,986 9,734
Goodwill................................................................ 43,417 42,867
--------- ---------
$ 137,159 $ 179,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 20,882 $ 20,679
Compensation and employee benefits.................................... 3,250 2,911
Restructuring liabilities............................................. 6,192 5,482
Short-term debt....................................................... 14,518 5,268
Current portion of long-term debt..................................... 3,328 3,216
--------- ---------
Total current liabilities..................................... 48,170 37,556
Long-term liabilities:
Long-term debt........................................................ 98,292 53,269
Senior subordinated notes, net of discount............................ -- 108,340
Restructuring liabilities, less current portion....................... 822 678
Other liabilities..................................................... 4,149 3,822
Minority interest in consolidated subsidiary............................ 237 --
Common Stockholders' Equity:
Common stock -- $0.001 par value
Authorized shares -- 50,000,000
Issued and outstanding shares -- 23,807,000 and 23,825,000 at March
31, 1997 and June 30, 1997, respectively.......................... 24 24
Warrants.............................................................. 5,359 7,080
Additional paid-in capital............................................ 150,468 150,638
Foreign currency translation adjustment............................... (14) 44
Deficit............................................................... (170,348) (181,762)
--------- ---------
Total common stockholders' equity (deficiency)................ (14,511) (23,976)
--------- ---------
$ 137,159 $ 179,689
========= =========
</TABLE>
See accompanying notes.
F-28
<PAGE> 163
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JUNE
JUNE 30, 30,
1996 1997
-------- -------
<S> <C> <C>
Net sales............................................................. $ 17,318 $25,237
Cost of sales......................................................... 6,120 11,702
-------- -------
Gross profit.......................................................... 11,198 13,535
Operating expenses:
Selling, general and administrative................................. 10,685 16,863
Research and development............................................ 800 1,665
-------- -------
Total operating expenses.............................................. 11,485 18,528
Loss from operations.................................................. (287) (4,993)
Other income (expense):
Minority interest consisting of accrued dividends on preferred stock
of subsidiary.................................................... (18) (4)
Interest income..................................................... 59 389
Interest expense.................................................... (1,044) (5,433)
Other............................................................... -- 450
-------- -------
Loss before taxes and extraordinary item.............................. (1,290) (9,591)
Provision (benefit) for income taxes.................................. -- --
-------- -------
Loss before extraordinary item........................................ (1,290) (9,591)
Extraordinary item (early extinguishment of debt)..................... (2,973) (1,823)
-------- -------
Net loss.............................................................. $ (4,263) $(11,414)
======== =======
Net loss per share:
Loss before extraordinary item...................................... $ (1,290) $(9,591)
Dividends and accretion on redeemable convertible preferred stock... 398 --
-------- -------
Loss attributable to common stockholders before extraordinary
item............................................................. (1,688) (9,591)
Extraordinary item.................................................. (2,973) (1,823)
-------- -------
Net loss attributable to common stockholders........................ $ (4,661) $(11,414)
======== =======
Loss per share before extraordinary item............................ $ (0.10) $ (0.40)
======== =======
Net loss per share.................................................. $ (0.29) $ (0.48)
======== =======
Weighted average number of common shares used to compute loss per
share............................................................... 16,210 23,822
======== =======
</TABLE>
See accompanying notes.
F-29
<PAGE> 164
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
JUNE 30, 1996 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (4,263) $ (11,414)
Non cash items included in net loss:
Extraordinary expense......................................... 2,433 1,823
Depreciation and amortization................................. 649 2,535
Amortization of deferred debt issuance costs.................. 271 414
Accretion and accrued interest on convertible notes........... 42 --
Loss on retirement/write-off of assets........................ -- 37
Accrued dividend on preferred stock in subsidiary............. 17 4
Deferred income taxes......................................... -- --
Provision for doubtful accounts............................... (180) 27
Other......................................................... 10 (91)
Changes in operating assets and liabilities...................... (7,789) (16,225)
-------- --------
Net cash used in operating activities.................... (8,810) (22,890)
Cash flows from investing activities:
Purchase of property and equipment, net.......................... (3,642) (3,119)
Purchase of patents.............................................. (56) (170)
Payments for acquisition of businesses, net of cash acquired..... (2,784) --
Proceeds from sale or maturity of marketable securities.......... 243 --
Restricted cash.................................................. -- (19,178)
Purchase of technology........................................... (250) --
Loans and advances to officers................................... -- (1,345)
-------- --------
Net cash used in investing activities.................... (6,489) (23,812)
Cash flows from financing activities:
Deferred financing fees paid..................................... (4,911) (5,924)
Issuance of common stock......................................... 814 170
Proceeds from Senior Subordinated Notes.......................... -- 110,000
Proceeds from long-term debt..................................... 35,234 --
Principal payments of long-term debt............................. (14,047) (54,385)
-------- --------
Net cash provided by financing activities................ 17,090 49,861
-------- --------
Net increase in cash............................................... 1,791 3,159
Cash, beginning of period.......................................... 3,345 2,591
-------- --------
Cash, end of period................................................ $ 5,136 $ 5,750
======== ========
Cash paid for interest........................................... $ 396 $ 5,389
======== ========
Cash paid for taxes.............................................. $ -- $ --
======== ========
</TABLE>
See accompanying notes.
F-30
<PAGE> 165
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. INTERIM REPORTING
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles (GAAP) and
include the accounts of Urohealth Systems, Inc. (the "Company") and its
subsidiaries. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements have been restated
to reflect business combinations accounted for using the pooling of interests
method.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's condensed consolidated financial position as of June 30,
1997, its condensed consolidated results of operations for the three month
period ended June 30, 1997 and June 30, 1996, and its condensed consolidated
cash flows for the three month period ended June 30, 1997 and June 30, 1996.
Adjustments consist of normal recurring accruals except for the extraordinary
loss on early extinguishment of debt in the accompanying unaudited condensed
consolidated statements of operations. The results of operations for the three
month period ended June 30, 1997 are not necessarily indicative of those to be
expected for the entire year.
These condensed consolidated financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K, as amended, for the year ended March 31, 1997, as filed
with the Securities and Exchange Commission.
Significant intercompany accounts and transactions have been eliminated in
consolidation and certain amounts have been reclassified in prior periods to
conform to the current presentation.
In interim periods the Company defers and amortizes over the fiscal year
certain administrative costs to more appropriately reflect the benefits realized
during the course of the fiscal year.
Financial information presented reflects the March 31, 1997 merger with
Microsurge, Inc., which has been accounted for as a pooling of interests.
The results of operations previously reported by the Company and those of
Microsurge included in the accompanying interim consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1996
------------------
(IN THOUSANDS)
<S> <C>
Net sales:
Urohealth........................................ $ 16,027
Microsurge....................................... 1,291
-------
$ 17,318
-------
Net loss:
Urohealth........................................ $ (2,572)
Microsurge....................................... (1,691)
-------
$ (4,263)
=======
</TABLE>
F-31
<PAGE> 166
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
2. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding during the periods presented. Common stock equivalents
have not been included in the calculation because they are anti-dilutive. Net
loss per common share for the three months ended June 30, 1996 reflects $295,000
of warrants issued to induce the conversion of the redeemable convertible
preferred stock.
3. INVENTORIES
Inventories are carried at the lower of cost or net realizable value. Cost
is determined on the first-in, first-out basis (in thousands).
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
---------- ---------
<S> <C> <C>
Raw materials and supplies..................... $ 8,731 $12,157
Work in progress............................... 2,942 3,146
Finished goods................................. 9,272 14,425
------- -------
$ 20,945 $29,728
======= =======
Distributor inventories........................ $ 6,307 $ 6,307
======= =======
</TABLE>
4. DEBT
On April 10, 1997, the Company completed the sale of $110 million of its
12.5% Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. The notes bear interest, payable semi-annually, at
12.5% per annum, subject to increase if certain obligations are not satisfied,
and mature on April 1, 2004. There are no mandatory redemption or sinking fund
payments required on the Notes.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The indenture governing the Notes contains certain covenants which limit some of
the Company's ability to engage in certain transactions.
The Company used $19.2 million of the proceeds from the sale of the Notes
to purchase government securities (the "Pledged Securities") that have been
pledged for the benefit of the holders of the Notes. The scheduled interest and
principal payments on the Pledged Securities is an amount sufficient to pay when
due the first three scheduled interest payments on the Notes.
The Company is a holding company with no material assets or operations
other than its investments in its subsidiaries. The Notes are guaranteed by all
of the Company's domestic and material foreign subsidiaries. The guarantees are
full, unconditional, and joint and several. All of the guarantor subsidiaries
are wholly-owned by the Company. In connection with the Notes, the Company
issued with each $1,000 principal amount of Notes, a warrant entitling the
holder to purchase 4.44 shares of Common Stock of the Company (or 9.06 shares,
if a certain EBITDA for fiscal 1998 is not achieved) at an exercise price of
$9.50 per share. The warrants are exercisable on or after June 30, 1998 and
expire April 1, 2004.
The Company used $54.2 million of the net proceeds from the offering to
repay amounts outstanding under the Company's term and revolving credit
facility. Concurrently with the consummation of the sale of the Notes, the
Company entered into a new $50 million revolving credit facility with the
Company's senior lender (the "Senior Credit Facility"). The Senior Credit
Facility is secured by substantially all of the Company's assets and matures in
March 2002. The Company is required to meet certain financial covenants under
the Senior Credit Facility and available amounts under the revolving credit
facility are based on eligible
F-32
<PAGE> 167
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
4. DEBT (CONTINUED)
inventory and accounts receivable. The Company was not in compliance with
certain financial covenants under its Senior Credit Facility for the quarter
ended June 30, 1997, but was granted a waiver through September 15, 1997 by its
senior lender that permits borrowings equal to the lesser of the $15.0 million
and 80% of eligible accounts receivable under the facility. As of June 30, 1997,
the Company's borrowing eligibility was approximately $13.4 million of which
$5.0 million was borrowed subsequent to June 30, 1997. As of June 30, 1997, the
Company had working capital of approximately $30.5 million.
The Company recorded during the quarter an extraordinary loss of $1.8
million in connection with the early retirement of bank debt of $54.2 million on
April 10, 1997 from its previous bank credit facility.
5. RESTRUCTURING
During the year ended June 30, 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the Plan)
under which it has refocused the Company's strategic direction. Through June 30,
1997, cash payments have reduced the components of the restructuring accrual to
$5,000.
The Company's restructuring plan to consolidate redundant facilities and
reduce personnel resulting from the mergers with Dacomed Corporation, Osbon
Medical Systems, Ltd. and Advanced Surgical, Inc. was initiated in December
1995. The remaining restructuring accrual at June 30, 1997 relates primarily to
terminated employee severance and facility lease obligations, which are expected
to be paid in cash.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH JUNE 30,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1997
------------- -------- ------- ----------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs........ $ 2,620 $ -- $1,822 $(730) $ 68
Facility reduction costs......... 2,836 1,199 1,865 730 502
------ ------ ------ ----- ----
$ 5,456 $1,199 $3,687 $ -- $570
====== ====== ====== ===== ====
</TABLE>
In September 1996, the Company established a restructuring plan to
eliminate redundant manufacturing facilities resulting from Richard-Allan,
Intermed and O.R. Concepts acquisitions and their consolidation with some of the
existing manufacturing locations.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH JUNE 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction cost....................... $ 2,412 $ -- $1,196 $1,216
Facility reduction costs....................... 1,588 -- 263 1,325
------ --- ------ ------
$ 4,000 $ -- $1,459 $2,541
====== === ====== ======
</TABLE>
F-33
<PAGE> 168
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
5. RESTRUCTURING (CONTINUED)
In March 1997, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from mergers with Osbon and
Microsurge. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through June 30,
1997 are summarized in the table below. Non-cash charges consist of the
write-down of existing assets to their estimated net realizable value.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH JUNE 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs...................... $ 7,067 $ -- $4,405 $2,662
Facility reduction costs....................... 933 473 78 382
------- ---- ------ ------
$ 8,000 $473 $4,483 $3,044
======= ==== ====== ======
</TABLE>
Although subject to future adjustment, management of the Company believes
that restructuring liabilities as of June 30, 1997 are adequate to complete the
various restructuring plans.
6. CAPITAL STOCK
The minority interest in Urohealth, Inc. (California) consisted of 42,000
shares of its Series A preferred stock. As of June 20, 1997, these shares were
redeemed or exchanged for shares of common stock. The redemption price was $6.41
per share, consisting of the redemption price of $5.00 per share plus accrued
and unpaid dividends and a $.20 per share redemption premium.
In April 1997, the Company granted its Chief Executive Officer and its
Chief Operating Officer options to purchase 1,500,000 and 50,000 shares,
respectively, exercisable at $8.50 per share, the market price of the Company's
common stock on the grant date. The options vest over a three year period.
7. INCOME TAXES
The Company did not record an income tax provision or benefit for the
quarter ended June 30, 1997 since the realization of tax benefits of operating
losses is not assured.
8. CONTINGENCIES
In July 1997, several complaints were filed against the Company, certain of
its officers and directors and, in certain complaints, the lead underwriters of
the Company's November 1996 public offering, requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages.
The suits were filed in the United States District Court for the Central
District of California. All the suits are based on substantially the same facts
and have been brought on behalf of purchasers of Common Stock of the Company
during various periods between July 18, 1996 and July 1, 1997. No proceedings
have taken place in any of the suits, and no provision for any liability that
may result from the ultimate resolution of this matter has been included in the
accompanying consolidated financial statements.
In addition, the Company is involved from time to time in various claims
and legal actions in the ordinary course of business. No provision for any
liability that may result from the ultimate resolution of such matters has been
included in the accompanying consolidated financial statements.
F-34
<PAGE> 169
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
9. PENDING ACQUISITION
On April 19, 1997, the Company entered into a definitive agreement pursuant
to which the Company would acquire Imagyn Medical, Inc. ("Imagyn") in a stock
for stock merger (the "Merger"). The Merger is expected to be accounted for as a
pooling of interests and each share of Imagyn common stock will exchanged for
1.4 shares of Common Stock of the Company. The consummation of the Merger is
subject to approval by the Company's and Imagyn's stockholders, and other
customary closing conditions. No assurances can be given that the Merger will be
successfully consummated.
10. SUBSEQUENT EVENTS
On August 5, 1997, the Company received United States Patent Office
approval covering its Endotracheal Cardiac Output Monitoring technology. This
technology was acquired in the X-Cardia acquisition completed in February 1997.
The devices under development incorporate this patented technology into a
standard endotracheal tube allowing for continuous cardiac output monitoring of
patients undergoing surgery or on respiratory support.
Based upon the issuance of the patent, the Company is obligated to pay the
former X-Cardia shareholders on or prior to October 3, 1997, $16.5 million in
cash and $1.5 million in Urohealth Common Stock.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
-------- --------
<S> <C> <C>
Receivables............................................. $ (2,289) $ (4,460)
Inventories............................................. (2,995) (8,692)
Prepaid expenses........................................ (597) (1,092)
Accounts payable and accrued liabilities................ (1,193) (468)
Compensation and employee benefits...................... 96 (339)
Restructuring liabilities............................... (726) (854)
Deposit and other assets................................ (60) --
Other liabilities....................................... (25) (320)
-------- --------
$ (7,789) $(16,225)
======== ========
</TABLE>
F-35
<PAGE> 170
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
X-Cardia Corporation
We have audited the accompanying balance sheet of X-Cardia Corporation (a
development stage company) as of December 31, 1996 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the period from
inception (February 13, 1996) to December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of X-Cardia Corporation (a
development stage company) at December 31, 1996 and the results of its
operations and its cash flows for the period from inception (February 13, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
February 5, 1997
F-36
<PAGE> 171
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets -- cash and cash equivalents...................................... $ 830,979
Property and equipment, net...................................................... 30,035
Advances to Cybro Medical, Ltd................................................... 150,000
----------
$1,011,014
==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable................................................................. $ 11,926
Accrued liabilities.............................................................. 136,765
----------
Total current liabilities.............................................. 148,691
Convertible notes and accrued interest........................................... 1,017,100
Commitments
Shareholders' equity (deficit):
Preferred stock, 15,000,000 shares authorized, issuable in series:
Series A preferred stock; 13,000,000 shares authorized; 5,344,500 shares
issued and outstanding; aggregate liquidation preference of $5,344,500 as of
December 31, 1996........................................................... 460,751
Common stock, 25,000,000 shares authorized; none issued and outstanding........ --
Notes receivable from shareholders............................................. (751)
Deficit accumulated during the development stage............................... (614,777)
----------
Total shareholders' equity (deficit)............................................. (154,777)
----------
$1,011,014
==========
</TABLE>
See accompanying notes.
F-37
<PAGE> 172
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Operating expenses:
Research and development....................................................... $ 353,856
General and administrative..................................................... 255,131
---------
Total operating expenses......................................................... 608,987
---------
Loss from operations............................................................. (608,987)
Interest expense................................................................. (17,100)
Interest income.................................................................. 11,310
---------
Net loss......................................................................... $(614,777)
=========
</TABLE>
See accompanying notes.
F-38
<PAGE> 173
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
NOTES ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE SHAREHOLDERS'
---------------------- ----------------------- FROM DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS STAGE (DEFICIT)
---------- -------- ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at inception
(February 13, 1996)....... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock to
founders in February
1996...................... -- -- 4,504,500 751 (751) -- --
Issuance of common stock to
investors at $0.50 per
share in March 1996....... -- -- 360,000 180,000 -- -- 180,000
Issuance of common stock to
investors at $0.583 per
share in August 1996...... -- -- 420,000 245,000 -- -- 245,000
Issuance of common stock to
investors at $0.583 per
share in October 1996..... -- -- 60,000 35,000 -- -- 35,000
Exchange of one share of
Series A preferred stock
for one share of common
stock in December 1996.... 5,344,500 460,751 (5,344,500) (460,751) -- -- --
Net loss.................... -- -- -- -- -- (614,777) (614,777)
--------- -------- ---------- --------- ----- --------- ---------
Balances at December 31,
1996...................... 5,344,500 $460,751 -- $ -- $ (751) $(614,777) $(154,777)
========= ======== ========== ========= ===== ========= =========
</TABLE>
See accompanying notes.
F-39
<PAGE> 174
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................................... $ (614,777)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation expense........................................................... 2,618
Changes in operating assets and liabilities:
Accounts payable............................................................ 11,926
Accrued interest on convertible note........................................ 17,100
Accrued liabilities......................................................... 136,765
----------
Cash used in operating activities................................................ (446,368)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances on investment........................................................... (150,000)
Expenditures for property and equipment.......................................... (32,653)
----------
Cash used in investing activities................................................ (182,653)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of common stock, net..................................... 460,000
Proceeds from issuance of convertible note....................................... 1,000,000
----------
Cash provided by financing activities............................................ 1,460,000
----------
Net increase (decrease) in cash and cash equivalents............................. 830,979
Cash and cash equivalents at beginning of period................................. --
----------
Cash and cash equivalents at end of period....................................... $ 830,979
==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 175
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Basis of Presentation
X-Cardia Corporation (the "Company") is a development stage company and was
incorporated on February 13, 1996 in the state of California. The Company is
engaged in development of noninvasive cardiac output monitoring devices. The
Company's primary activities since incorporation have been establishing offices
and research facilities, recruiting personnel, conducting research and
development activities, performing business and financial planning and raising
capital.
The Company has sustained operating losses since its inception and would
expect such losses would have continued, however, on February 4, 1997, the
Company entered into the Agreement and Plan of Merger with Urohealth Systems,
Inc. ("Urohealth"). Subject to the terms of the Merger, the Company is to be
merged with a wholly owned subsidiary of Urohealth, with Urohealth to be the
surviving corporation in the Merger (see Note 7). If the merger contemplated by
management is not consummated, management will have to seek other sources of
capital or reevaluate its operating plans to attempt to provide the Company the
means to continue as a going concern.
In September 1996, the board of directors of the Company authorized a stock
split, in which one share of common stock was exchanged for six shares of common
stock. Following shareholder approval, the stock split was effected on November
19, 1996. All share and per share amounts included in the financial statements
have been retroactively adjusted to reflect the stock split.
On December 27, 1996, the board of directors and the shareholders approved
the exchange of one share of common stock for one share of Series A preferred
stock. The exchange was effected on December 31, 1996.
Cash, Cash Equivalents and Short-Term Investments
The Company's cash and cash equivalents are maintained in demand deposit
and money market accounts with a commercial bank. The Company considers all
highly liquid investments with a maturity of three months or less from the date
of purchase to be cash equivalents.
Depreciation and Amortization
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, which is generally three
to five years.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, stock-based compensation is measured
using either the intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25") or the fair-value method described in SFAS 123.
Beginning in 1996, the Company implemented SFAS 123 using the intrinsic value
method. Accordingly, adoption of the SFAS 123 had no material effect on the
Company's financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-41
<PAGE> 176
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Furniture............................................... $ 29,211
Office equipment........................................ 3,442
--------
32,653
Less accumulated depreciation and amortization.......... (2,618)
--------
$ 30,035
========
</TABLE>
3. CONVERTIBLE NOTE AND COMMON STOCK PURCHASE AGREEMENT
On September 30, 1996, the Company entered into a convertible note and
common stock purchase agreement for the sale of 2,000,000 shares of its common
stock to be completed in two closings. The first closing, which took place on
September 30, 1996, involved the issuance of a convertible note for $1,000,000,
which note is automatically converted into 1,000,000 shares upon the completion
of the second closing initially scheduled to occur on March 31, 1997. If the
second closing is not consummated, the principal is repayable on or before
September 30, 2001. Interest accrues on the unpaid principal amount at a rate of
6.84% per annum and is payable beginning March 31, 1997 (see Note 7).
4. RELATED PARTY TRANSACTIONS
Consulting Agreement
The Company has engaged a shareholder and director to provide consulting
services related to its proprietary technology. For these services and for the
contribution of related patents, the Company has incurred fees totaling $43,750
for the period from inception (February 13, 1996) to December 31, 1996.
Facilities Sublease
The Company subleases its facilities from a company owned by the Company's
president and chief executive officer under a noncancelable operating sublease.
The facilities lease expires on September 14, 2001. Future minimum lease
payments under the operating leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
1997..................................... $13,266
1998..................................... 13,266
1999..................................... 13,266
2000..................................... 13,266
2001..................................... 9,397
-------
Total...................................... $62,461
=======
</TABLE>
Rent expense for the period from inception (February 13, 1996) to December
31, 1996 was approximately $7,829.
F-42
<PAGE> 177
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. SHAREHOLDERS' EQUITY
Preferred Stock
The board of directors has the authority to issue 15,000,000 shares of
preferred stock, currently designated as Series A. Each share of Series A
preferred stock outstanding is convertible at the option of the holder into one
share of common stock, subject to adjustment, upon the occurrence of certain
specified events, and automatically converts upon the consummation of a public
offering of common stock.
Each share of Series A preferred stock entitles its holder to one vote for
each common share into which such shares would convert. Dividends at the rate of
$0.10 per share if and as declared by the board of directors are payable to the
preferred shareholders in preference to any dividends for common stock declared
by the board of directors. Dividends are non-cumulative. No dividends have been
declared as of December 31, 1996.
The holders of the Company's Series A preferred stock are entitled to an
amount per share equal to the original issue price, in liquidation, plus an
amount equal to all declared but unpaid dividends, prior and in preference to
any distribution of the holders of common stock. As of December 31, 1996, the
aggregate liquidation value of the Series A preferred stock is $5,344,500.
In the event of a merger, consolidation or sale of the Company's assets, as
defined, the holders of preferred stock are entitled to receive the liquidation
preference for such shares plus any declared but unpaid dividends in preference
to the holders of common stock.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") was adopted by the board
of directors in November 1996, approved by the shareholders in December 1996. As
of December 31, 1996, a total of 1,000,000 shares of common stock have been
reserved for issuance under the Plan. The Plan provides for the granting to
employees, directors and consultants of the Company, incentive stock options and
nonstatutory stock options.
The exercise price of all stock options granted under the Stock Plan must
be at least 100% of the fair value of the common stock of the Company on the
grant date. The term of an incentive stock option may not exceed 10 years from
the date of grant. An option shall be exercisable on or after each vesting date
in accordance with the terms set forth in the option agreement. No options were
granted out of the Plan in 1996.
Stock Option Grants Outside the Plan
In March, August and September 1996, the Company granted options to
purchase 184,500 shares of Series A preferred stock to employees and
consultants. The exercise price for all such options was $0.50, which price
represented the fair value of the underlying stock on the respective grant
dates. The stock option terms vary between the individual grants, and the terms
were approved by the board of directors.
Stock Compensation
During 1996, the Company adopted SFAS 123. In accordance with the
Statement, the Company applies APB 25 in accounting for option grants to
employees and, accordingly, does not recognize compensation expense for options
granted to employees with an exercise price equal to the fair value of the
underlying stock on the grant date.
F-43
<PAGE> 178
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. SHAREHOLDERS' EQUITY (CONTINUED)
Under SFAS 123, options granted to nonemployees must be accounted for at
fair value. The fair value of stock options granted to nonemployees was
immaterial and, therefore, no value was recorded in the financial statements.
For disclosure purposes, the Company used the minimum value method to
determine the fair value of stock options granted in 1996 using the following
weighted average assumptions: risk free interest rate of 5.91% and a weighted
average expected option life of 3.19 years. The effect of applying the minimum
value method of SFAS 123 in determining the fair values of stock options granted
in 1996 did not result in pro forma net loss that is materially different from
the amount reported. Therefore, such pro forma information is not presented
herein. Future pro forma results of operations may be materially different from
actual amounts reported.
A summary of the Company's stock option activity related to options granted
outside of the Plan and related information for the period from inception
(February 13, 1996) to December 31, 1996 follows. No options were granted under
the Plan in 1996:
<TABLE>
<CAPTION>
SERIES A WEIGHTED
PREFERRED STOCK AVERAGE
OPTIONS EXERCISE PRICE
--------------- --------------
<S> <C> <C>
Outstanding at beginning of period............... -- $ --
Options granted.................................. 184,500 $ 0.50
Options exercised................................ -- $ --
Options forfeited................................ -- $ --
------- ------
Outstanding at December 31, 1996................. 184,500 $ 0.50
======= ======
</TABLE>
The weighted-average remaining contractual life of those options is
approximately 9.5 years. As of December 31, 1996, 40,000 options were
exercisable.
6. INCOME TAXES
At December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $600,000. The net operating loss carryforward will
expire beginning in 2011, if not utilized.
Utilization of net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization.
As of December 31, 1996, the Company had a deferred tax asset of
approximately $200,000 which relates primarily to net operating loss
carryforwards and capitalized research and development costs. The net deferred
tax asset has been fully offset by a valuation allowance.
7. SUBSEQUENT EVENTS
On January 2, 1997, the Company entered into a share purchase agreement
with Cybro Medical, Ltd. ("Cybro") in which the Company purchased 80% of the
outstanding stock of Cybro, an Israeli research and development company engaged
in the development of blood oxygen saturation monitors. The purchase price was
$125,000. Concurrently, the Company entered into an option agreement under which
the Company may purchase the remaining (20%) of the outstanding stock of Cybro
upon the occurrence of specific events. The Company wired $150,000 to an escrow
account on December 30, 1996 in contemplation of the closing of the
F-44
<PAGE> 179
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
7. SUBSEQUENT EVENTS (CONTINUED)
transaction and to advance to Cybro cash to fund operating expenses after the
transaction. This amount is included under the caption "Advances to Cybro
Medical, Ltd." in the balance sheet as of December 31, 1996. Upon the completion
of the acquisition in 1997, the entire $150,000 was charged to in-process
research and development expense.
In January and February 1997, the Company granted employees options to
purchase 30,500 shares of the Company's common stock and consultants options to
purchase 125,000 shares of the Company's common stock at an exercise price of
$0.25. The deemed fair value of the underlying shares on the grant date was
$4.00, therefore, the aggregate value of the options to employees was deemed to
be approximately $114,000, based on the intrinsic-value method. The valuation
related to stock options granted to nonemployees was deemed to be approximately
$469,000. The Company used the minimum-value method to determine the fair value
of stock options to nonemployees at the grant date using the following weighted
average assumptions: risk-free interest rate of 6.0% and a weighted average
expected option life of 0.25 years. The Company will recognize as expense the
aggregate valuation for these employee and nonemployee option grants over the
option life.
Also in January 1997, the Company issued 16,780 shares of common stock to
consultants for services rendered. The Company used the minimum value method to
determine the valuation and recorded $67,000 on the grant date.
In February 1997, the Company accelerated the vesting of certain
outstanding stock options in contemplation of the proposed merger with Urohealth
Systems, Inc. (see below). This change in the options terms resulted in the
establishment of a new measurement date for accounting purposes, and, therefore,
a value of $372,000 was expensed on the new measurement date based on the deemed
fair value of the underlying securities at that date.
On February 4, 1997, the Company entered into a Merger Agreement ("Merger")
with Urohealth Systems, Inc. ("Urohealth"), a Delaware corporation, Urohealth,
Inc. (California) ("Urohealth Sub"), a California corporation and a wholly owned
subsidiary of Urohealth Systems, Inc. Subject to terms of the Merger, the
Company was merged with Urohealth Sub, with Urohealth Sub being the surviving
corporation in the Merger. The Company's common and preferred shareholders
received an aggregate of 1,295,700 shares of Urohealth common stock. In
addition, the shareholders have the right to receive milestone payments totaling
$21 million dependent upon the successful achievement of specified milestones.
The shareholders also have the right to receive additional payments termed
"Earn-Out Consideration" based on the sales of X-Cardia products (as defined in
the agreement) for the four-year period after the first commercial release of an
X-Cardia product. There can be no assurance that Urohealth will have sufficient
funds to make these payments.
In connection with the Merger, the Company amended the Convertible Note and
Common Stock Purchase Agreement of September 30, 1996 to complete the second
closing of the agreement concurrent with the closing of the Merger. In addition,
the Company exercised its call option with respect to the remaining 20% interest
in Cybro.
F-45
<PAGE> 180
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Richard-Allan Medical Industries, Inc.
We have audited the accompanying consolidated balance sheets of
Richard-Allan Medical Industries, Inc. and Subsidiary as of March 31, 1996 and
June 30, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the nine months ended March 31, 1996 and
the years ended June 30, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Richard-Allan
Medical Industries, Inc. and Subsidiary at March 31, 1996 and June 30, 1995 and
the consolidated results of their operations and their cash flows for the nine
months ended March 31, 1996 and the years ended June 30, 1995 and 1994 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kalamazoo, Michigan
August 8, 1996, except Note K as to
which the date is August 14, 1996
F-46
<PAGE> 181
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE
30, MARCH 31,
1995 1996
------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS (NOTE F)
Current assets:
Cash and cash equivalents............................................. $ 3,003 $ 20
Accounts receivable, less allowance for doubtful accounts of $8....... 2,993 3,116
Refundable income taxes............................................... -- 376
Inventories (Note D).................................................. 1,722 1,251
Prepaid expenses...................................................... 131 --
Current assets of discontinued operations (Note B).................... 168 --
------- ------
Total current assets.......................................... 8,017 4,763
Property and equipment:
Land.................................................................. 86 86
Building.............................................................. 67 41
Machinery and equipment............................................... 5,870 6,492
Furniture and fixtures................................................ 1,112 1,208
Property under capital lease (Note E)................................. 509 509
Leasehold improvements................................................ 329 311
Computer software..................................................... 319 336
------- ------
8,292 8,983
Less accumulated depreciation and amortization........................ 4,034 4,575
------- ------
4,258 4,408
Other assets............................................................ 27 64
------- ------
$12,302 $ 9,235
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits................................. $ -- $ 340
Accounts payable...................................................... 3,182 2,315
Compensation and commissions.......................................... 578 578
Income taxes payable.................................................. 2,100 --
Other current liabilities............................................. 549 376
Current maturities of long-term debt.................................. 136 160
------- ------
Total current liabilities..................................... 6,545 3,769
Long-term debt, less current maturities (Note F)........................ 2,157 2,347
Commitments and Contingencies (Note J)
Stockholders' equity (Note F):
Preferred stock $5 par value:
authorized -- 150,000 shares; issued -- 7,534 shares
(1995 -- 9,634).................................................... 48 38
Common stock $1 par value:
authorized -- 50,000 shares; issued -- 4,645 shares
(1995 -- 4,660).................................................... 5 5
Retained earnings..................................................... 3,604 3,118
Treasury stock, at cost:
7,534 shares preferred stock and 113 shares common stock
(1995 -- 9,634 and 128, respectively).............................. (80) (63)
Foreign currency translation adjustments.............................. 23 21
------- ------
Total stockholders' equity.................................... 3,600 3,119
------- ------
$12,302 $ 9,235
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 182
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
---------------------- MARCH 31,
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Net sales................................................ $ 16,852 $ 19,598 $15,705
Cost of sales............................................ 9,566 11,515 8,195
------- --------- -------
Gross profit............................................. 7,286 8,083 7,510
Operating expenses (income):
Selling, general and administrative (Note J):.......... 8,953 12,756 7,450
Research and development............................... 2,421 1,694 765
Distribution fees...................................... (28) -- --
Loss on disposition of property........................ 112 340 --
Interest income........................................ (16) (38) (42)
Interest expense....................................... 602 794 183
Other.................................................. 51 41 9
------- --------- -------
12,095 15,587 8,365
------- --------- -------
Loss from continuing operations before income taxes...... (4,809) (7,504) (855)
Income taxes (credits) (Note I).......................... (742) (3,266) (376)
------- --------- -------
Loss from continuing operations.......................... (4,067) (4,238) (479)
Discontinued operations (Note B):
Income from operations, less applicable income taxes of
$524
and $734 in 1995 and 1994, respectively............. 1,427 1,008 --
Gain on sale, less applicable income taxes of $4,845... -- 9,405 --
------- --------- -------
1,427 10,413 --
------- --------- -------
Net income (loss)........................................ $ (2,640) $ 6,175 $ (479)
======= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 183
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
PREFERRED STOCK COMMON STOCK COMMON RETAINED CURRENCY TOTAL
--------------- --------------- PAID-IN STOCK EARNINGS TREASURY TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIPTIONS (DEFICIT) STOCK ADJUSTMENTS EQUITY
------ ------ ------ ------ -------- ------------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
June 30,
1993.......... 14 $ 68 5 $ 5 $ -- $ -- $ 1,083 $ (114) $ (15) $ 1,027
Net loss........ -- -- -- -- -- -- (2,640) -- -- (2,640)
Issuance of
common
stock......... -- -- 1 1 999 -- -- -- -- 1,000
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Common stock
subscription
by officer
(Note C)...... -- -- -- -- -- 660 -- -- -- 660
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- 30 30
--- ---- --- ---- ------- ----- ------- ----- ----- ------
Balance as of
June 30,
1994.......... 12 58 6 6 999 660 (1,564) (97) 15 77
Net income...... -- -- -- -- -- -- 6,175 -- -- 6,175
Issuance of
common
stock......... -- -- -- -- 1,000 (660) -- -- -- 340
Purchase of
common
stock......... -- -- (1) (1) (1,999) -- (1,000) -- -- (3,000)
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- 8 8
--- ---- --- ---- ------- ----- ------- ----- ----- ------
Balance as of
June 30,
1995.......... 10 48 5 5 -- -- 3,604 (80) 23 3,600
Net loss........ (479) (479)
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- (2) (2)
--- ---- --- ---- ------- ----- ------- ----- ----- ------
Balance as of
March 31,
1996.......... 8 $ 38 5 $ 5 $ -- $ -- $ 3,118 $ (63) $ 21 $ 3,119
=== ==== === ==== ======= ===== ======= ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE> 184
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
-------------------- MARCH 31,
1994 1995 1996
------- -------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $(2,640) $ 6,175 $ (479)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization......................... 492 810 597
Gain on sale of discontinued operations............... -- (14,250) --
Loss on disposition of property....................... 112 340 --
Changes in operating assets and liabilities:
Receivables......................................... (281) 579 46
Income taxes........................................ 2,107 (2,476)
Inventories......................................... (285) (430) 470
Other operating assets.............................. -- (19) 94
Accounts payable.................................... (227) 1,160 (867)
Other operating liabilities......................... 680 (594) 166
------- -------- -------
Net cash used in operating activities...................... (2,149) (4,122) (2,449)
INVESTING ACTIVITIES
Capital expenditures....................................... (1,638) (1,045) (747)
Proceeds from sale of discontinued operations, net of
expenses................................................. -- 14,745 --
------- -------- -------
Net cash provided by (used in) investing activities........ (1,638) 13,700 (747)
FINANCING ACTIVITIES
Principal payments under capital lease obligations......... (62) (75) (56)
Principal payments under long-term debt.................... (118) (4,025) (16)
Net borrowings (repayment) under revolving line-of-credit
agreement................................................ 1,132 (3,632) 278
Proceeds from issuance of long-term debt................... 2,360 3,102 7
Proceeds from issuance of common stock..................... 1,000 1,000 --
Repurchase of common stock................................. (513) (3,000) --
------- -------- -------
Net cash provided by (used in) financing activities........ 3,799 (6,630) 213
Effect of exchange rate changes on cash and cash
equivalents.............................................. 52 (28) --
------- -------- -------
Increase (decrease) in cash and cash equivalents........... 64 2,920 (2,983)
Cash and cash equivalents at beginning of period........... 19 83 3,003
------- -------- -------
Cash and cash equivalents at end of period................. $ 83 $ 3,003 $ 20
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE> 185
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A -- BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Richard-Allan Medical Industries, Inc. and Subsidiary (the Company)
manufactures and markets surgical operating room supplies. The Company markets
these products both domestically and abroad through the use of a direct sales
force and foreign distributors. A division that manufactures and markets
diagnostic reagents used primarily in hospital laboratories was sold in 1995
(see Note B).
Basis of Financial Statement Presentation
The Company has elected to change its fiscal year end to March 31. Fiscal
1996 is a nine month transition period ended March 31, 1996. During the nine
month period ended March 31, 1995, the Company's unaudited results of operations
included: net sales of $14.4 million; gross profit of $5.9 million; income tax
credits of $352,000; and a net loss of $4.8 million.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Richard-Allan Medical Industries (U.K.) Ltd.
(subsidiary). All material intercompany balances and transactions are
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash and cash equivalents reported in the balance sheets equal their fair value.
Accounts Receivable and Concentration of Credit Risk
The Company sells to a large number of domestic and foreign customers. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. An allowance for doubtful accounts is maintained at a
level that management believes is sufficient to cover potential credit losses.
Foreign Currency Translation
The financial statements of the subsidiary have been translated into U.S.
dollars in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 52, Foreign Currency Translation. All balance sheet accounts have
been translated using the exchange rates in effect at the balance sheet dates,
and operations statement accounts have been translated using the average
exchange rates for the respective periods. The gains and losses resulting from
the changes in exchange rates from period to period have been reported as a
separate component of stockholders' equity. The effect on the statements of
operations of transaction gains and losses is insignificant for all periods
presented.
F-51
<PAGE> 186
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for U.S. inventories which approximate
93% and 92% of total inventories at March 31, 1996 and June 30, 1995,
respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
Income Taxes
Deferred income taxes are provided on the difference in earnings determined
for tax and financial reporting purposes. Deferred income taxes have been
calculated under the liability method in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
Income taxes have not been provided on the undistributed earnings of
Richard-Allan Medical Industries (U.K.) Ltd. as it is the Company's intention to
indefinitely reinvest such earnings in the subsidiary's operations and not to
transfer them in the form of a taxable transaction.
Research and Development Expenses
Research and development expenses are charged against income as incurred.
Revenue Recognition
Revenue from sales of manufactured products is recognized upon shipment to
customers (see Note H).
Advertising Expense
Advertising and promotion costs are expensed as incurred.
Reclassification
Certain amounts for 1995 and 1994 have been reclassified to conform with
the 1996 presentation.
NOTE B -- DISCONTINUED OPERATIONS
In May 1995, the Company sold substantially all of the assets and
operations of its laboratory products division. The proceeds from the sale, net
of expenses, were approximately $14.7 million. The 1995 consolidated statement
of operations excludes sales and expenses of the laboratory products division
from continuing operations, and fiscal 1994 results have been restated to
conform with this presentation. Net sales of the laboratory products division
totaled $7,829,000 from July 1994 through May 1995, and $9,014,000 for the year
ended June 30, 1994. The remaining assets of the laboratory products division
have been segregated in the consolidated balance sheet as of June 30, 1995.
NOTE C -- STOCK SUBSCRIPTION
During fiscal 1994 a stockholder made a commitment to purchase common stock
in an amount sufficient to maintain compliance with debt covenants. The amount
of the stock purchase was determined after June 30, 1994 based on financial
statement amounts, and the stock purchase occurred on August 30, 1994. The
purchase has been recorded as a 1994 increase in stockholders' equity, and is a
noncash financing activity for purposes of the 1994 consolidated statement of
cash flows.
F-52
<PAGE> 187
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- INVENTORIES
Inventories from continuing operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Raw materials and work in process................................ $ 695 $ 604
Finished goods................................................... 1,027 647
------ ------
$1,722 $ 1,251
====== ======
</TABLE>
If the first-in, first-out method of valuation had been used for all
inventories by the Company, inventories would have been approximately $237,000
higher than reported at both March 31, 1996 and June 30, 1995.
NOTE E -- LEASES
The Company leases certain land, manufacturing and office facilities and
equipment under noncancelable leases. As of March 31, 1996, future net minimum
lease payments under the capital leases and future minimum rental payments
required under operating leases that have initial or remaining noncancelable
terms in excess of one year were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
TWELVE MONTHS ENDED MARCH 31, CAPITAL LEASES LEASES
------------------------------------------------------------- -------------- ---------
<S> <C> <C>
1997......................................................... $ 47 $ 7
1998......................................................... -- 3
---------- ----------
Total minimum lease payments................................. 47 $10
==========
Less amount representing interest............................ 2
----------
Present value of net minimum lease payments.................. $ 45
==========
</TABLE>
The Company pays property taxes, insurance and maintenance expenses for the
building and land, which are leased from Newhauser Associates, a related party.
Future minimum lease payments are subject to annual adjustments based on cost of
living indices. Additional lease payments resulting from such adjustments
totaled approximately $91,000 in 1994, $93,000 in 1995 and $71,000 for the nine
months ended March 31, 1996.
Total lease expense was approximately $299,000 and $254,000 in 1994 and
1995, respectively and $107,000 for the nine month period ended March 31, 1996.
F-53
<PAGE> 188
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to bank under revolving credit agreement........... $1,679 $ 1,956
Subordinated 12% unsecured note payable to the estate of a former
stockholder for redemption of stock, maturing in annual
installments of $41,963 through July 1997...................... 84 84
12% and 10% unsecured notes payable, maturing at various dates
through July 2000.............................................. 352 359
Non-interest-bearing note (discounted to present value at a rate
of 10%), secured by pledged shares of treasury stock held in
escrow, to a former stockholder for redemption of stock,
maturing in monthly installments varying from $3,000 to $3,500
through October 1, 1999........................................ 79 63
Present value of lease payments under capitalized leases (see
Note E)........................................................ 99 45
------ ------
2,293 2,507
Less current maturities.......................................... 136 160
------ ------
Total long-term debt................................... $2,157 $ 2,347
====== ======
</TABLE>
Effective May 1, 1996, the Company renegotiated the terms of its bank
financing agreement. Under the terms of the amended agreement, the Company has a
$3.1 million revolving line of credit, with interest payable monthly at the
bank's prime rate (8.25% at March 31, 1996) plus 1.5%. Approximately $1.4
million of additional borrowings were available under the line at March 31,
1996, subject to an asset-based lending formula.
All borrowings under the amended bank financing agreement are required to
be paid in full on September 1, 1996, and the bank has stated its intention to
call the debt on that date. This arrangement provides a grace period until that
date for the Company to achieve compliance with certain financial covenants
included in the agreement. The Company is currently in violation of financial
covenants related to, among others, minimum working capital requirements. The
bank financing agreement also restricts the payment of any dividends, other than
dividends payable in Company-owned stock, on any shares of its capital stock.
The bank borrowings are collateralized by substantially all assets of the
Company, a personal guarantee of and life insurance policy on the principal
stockholder, a $1 million guarantee by a former officer and stockholder of the
Company, and a co-guarantee by Newhauser Associates, a related party. The
Company is a co-guarantor of a $1.4 million bank construction loan held by
Newhauser Associates that also expires on September 1, 1996.
As described in Note K, the Company was acquired and became a division of
Urohealth Systems, Inc. in August, 1996. In connection with this transaction,
all of the Company's debt is being refinanced on a long-term basis. Accordingly,
the Company's debt at March 31, 1996 has been classified as long-term, except
for amounts which were expected to be repaid prior to the refinancing.
Interest paid totaled $792,000 in 1994 and $608,000 in 1995, and $185,000
for the nine months ended March 31, 1996. The carrying amount of the Company's
long-term debt approximates its fair value.
F-54
<PAGE> 189
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- EMPLOYEE BENEFIT PLAN
The Company has a qualified profit-sharing plan covering employees with
more than one year of service, who may elect to defer up to 15% of their
compensation. The Company contributes 35% of the participant's deferred salary
to the plan, up to 6% of compensation, and makes additional contributions to the
plan at its discretion. The amount of Company contributions to the plan was
approximately $16,500 in 1994, $88,000 in 1995 and $61,000 for the nine months
ended March 31, 1996.
NOTE H -- DISTRIBUTION AGREEMENTS
Certain international sales of the Company are transacted under the terms
of international distribution agreements with foreign companies which the
Company entered into in 1992, 1993 and 1994. The agreements appoint the
distributor to sell and service all existing and future product lines of the
Company in a particular territory. In exchange for these exclusive distribution
rights, which range from six to twenty years, and for initial services provided
by the Company for the distributor at the time the agreements were entered into,
the distributors paid fees to the Company totaling $28,800 in 1994 and agreed to
market no competing products in the territory during the term of the agreement.
Income recognized by the Company from these distribution agreements was not
significant for the periods presented.
NOTE I -- INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Operating expense accruals..................................... $ 200 $ 205
Financial statement over tax depreciation...................... 61 73
Inventory capitalization for tax purposes...................... 51 20
Other.......................................................... 15 3
----- -----
$ 327 $ 301
===== =====
Valuation allowance for deferred tax assets...................... $ (327) $(301)
===== =====
</TABLE>
The Company had no deferred income tax liabilities at March 31, 1996 or
June 30, 1995.
F-55
<PAGE> 190
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the income tax provision (credit) from continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE NINE MONTHS
30, ENDED
----------------- MARCH 31,
1994 1995 1996
----- ------- -----------
<S> <C> <C> <C>
Current:
Federal............................................ $(734) $(3,266) $(376)
State.............................................. -- -- --
Foreign............................................ (8) -- --
----- ------ -----
$(742) $(3,266) $(376)
===== ====== =====
Deferred:
Federal............................................ $ -- $ -- $ --
State.............................................. -- -- --
Foreign............................................ -- -- --
----- ------ -----
$ -- $ -- $ --
===== ====== =====
</TABLE>
The Company's income tax provision (credit) from continuing operations
differed from the income tax provision (credit) from continuing operations at
the federal statutory rate of 34%, as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------- MARCH 31,
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
Income tax provision (credit) at the statutory
rate.............................................. $(1,635) $(2,551) $(291)
Adjustments:
Increase (decrease) in valuation allowance........ 901 (855) (26)
Effect of favorable tax determinations............ -- -- (82)
Other............................................. (8) 140 23
------- ------- -----
Tax provision (credit).............................. $ (742) $(3,266) $(376)
======= ======= =====
</TABLE>
In 1995, the Company utilized approximately $938,000 and $228,000 of net
operating loss tax benefit and research and development credit carryforwards,
respectively.
Cash paid for purposes of federal income taxes during the nine month period
ended March 31, 1996, was approximately $2.1 million. No cash was paid for
purposes of federal income taxes during the years ended June 30, 1995 and 1994.
F-56
<PAGE> 191
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits and claims in the ordinary course of
business. Management believes that the ultimate resolution of such lawsuits and
claims will not have a material adverse effect on the Company's consolidated
financial position or results of operations. During fiscal 1995 the Company
incurred approximately $2,000,000 in legal fees in successful defense of a
patent infringement suit initiated by a large surgical equipment manufacturer,
which has been included in selling, general and administrative expenses. The
Company is party to a negotiated payment plan for these legal fees. If the
Company maintains payments in accordance with the plan, the law firm has agreed
to reduce the legal fees charged to the Company by $350,000. This expense
reduction will be recognized only after completion of the payment plan and the
forgiveness of fees is realized.
As of March 31, 1996, the Company had entered into various purchase
commitments for tooling equipment of approximately $1 million.
NOTE K -- SUBSEQUENT EVENT
On July 5, 1996, the Company entered into a definitive agreement to be
acquired by Urohealth Systems, Inc. (Urohealth). The sale was consummated on
August 14, 1996, at which time the Company became a division of Urohealth.
Urohealth has made commitments to the Company to provide funding for the
Company's operations for a minimum of twelve months beginning on July 5, 1996.
In addition, Urohealth has entered into a financing arrangement which will be
used to refinance all of the Company's debt with debt having maturities greater
than one year.
F-57
<PAGE> 192
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 20 $ 18
Accounts receivable, less allowance for doubtful accounts of $8..... 3,116 3,472
Refundable income taxes............................................. 376 510
Inventories......................................................... 1,251 1,141
Prepaid expenses.................................................... -- 115
------ ------
Total current assets........................................ 4,763 5,256
Property and equipment, net........................................... 4,408 4,452
Other assets.......................................................... 64 80
------ ------
$ 9,235 $ 9,788
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits............................... $ 340 $ 525
Accounts payable.................................................... 2,315 2,140
Compensation and commissions........................................ 578 879
Other current liabilities........................................... 376 780
Current maturities of long-term debt................................ 160 220
------ ------
Total current liabilities................................... 3,769 4,544
Long-term debt, less current maturities............................... 2,347 2,648
Commitments and Contingencies
Stockholders' equity:
Preferred stock $5 par value:
authorized -- 150,000 shares; issued -- 7,534 shares............. 38 38
Common stock $1 par value:
authorized -- 50,000 shares; issued -- 4,645 shares.............. 5 5
Retained earnings................................................... 3,118 2,597
Treasury stock, at cost:
7,534 shares preferred stock and 113 shares common stock......... (63) (63)
Foreign currency translation adjustments............................ 21 19
------ ------
Total stockholders' equity.................................. 3,119 2,596
------ ------
$ 9,235 $ 9,788
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-58
<PAGE> 193
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE
30,
------------------------
1995 1996
--------- --------
<S> <C> <C>
Net sales........................................................... $ 5,190 $ 5,766
Cost of sales....................................................... 2,984 3,122
---------- ----------
- -
Gross profit........................................................ 2,206 2,644
Operating expenses:
Selling, general and administrative............................... 3,425 2,860
Research and development.......................................... 300 360
Interest expense, net............................................. 142 80
---------- ----------
- -
3,867 3,300
---------- ----------
- -
Loss from continuing operations before income taxes................. (1,661) (656)
Income taxes (credits).............................................. (2,914) (134)
---------- ----------
- -
Income (loss) from continuing operations............................ 1,253 (522)
Discontinued operations:
Income from operations, less applicable income taxes of $172...... 323 --
Gain on sale, less applicable income taxes of $4,845.............. 9,405 --
---------- ----------
- -
9,728 --
---------- ----------
- -
Net income (loss)................................................... $ 10,981 $ (522)
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-59
<PAGE> 194
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1995 1996
-------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ 10,981 $(522)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization....................................... 155 276
Gain on sale of discontinued operations............................. (14,250) --
Loss on disposition of property..................................... 5 --
Changes in operating assets and liabilities:
Receivables....................................................... 1,844 (357)
Income taxes...................................................... 2,107 (134)
Inventories....................................................... 315 112
Other operating assets............................................ (253) (132)
Accounts payable.................................................. (1,993) 9
Other operating liabilities....................................... 373 704
-------- -----
Net cash used in operating activities.................................... (716) (44)
INVESTING ACTIVITIES
Capital expenditures..................................................... (265) (319)
Proceeds from sale of discontinued operations, net of expenses........... 14,746 --
-------- -----
Net cash provided by (used in) investing activities...................... 14,481 (319)
FINANCING ACTIVITIES
Principal payments under capital lease obligations....................... (33) (19)
Principal payments under long-term debt.................................. (3,751) (11)
Net borrowings (repayment) under revolving line-of-credit agreement...... (4,000) 391
Repurchase of common stock............................................... (3,000) --
-------- -----
Net cash provided by (used in) financing activities...................... (10,784) 361
-------- -----
Increase (decrease) in cash and cash equivalents......................... 2,981 (2)
Cash and cash equivalents at beginning of period......................... 22 20
-------- -----
Cash and cash equivalents at end of period............................... $ 3,003 $ 18
======== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-60
<PAGE> 195
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. INTERIM REPORTING
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles (GAAP) and
include the accounts of Richard-Allan Medical Industries, Inc. (the "Company")
and its subsidiary. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's condensed consolidated financial position as of June 30,
1996 and March 31, 1996, its condensed consolidated results of operations for
the three month periods ended June 30, 1996 and June 30, 1995, and its condensed
consolidated cash flows for the three month periods ended June 30, 1996 and June
30, 1995. The results of operations for the three month period ended June 30,
1996 are not necessarily indicative of those to be expected for the entire year.
2. DISCONTINUED OPERATION
In May 1995, the Company sold the assets and operations of its laboratory
products division. The proceeds from the sale, net of expenses, were
approximately $14.7 million. The condensed consolidated statement of operations
for the three months ended June 30, 1995 excludes sales and expenses of the
laboratory products division from continuing operations.
3. INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on last-in, first-out (LIFO) method.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
---------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Finished Goods................................................ $ 647 $ 612
Raw Materials................................................. 604 529
------ ------
$1,251 $ 1,141
====== ======
</TABLE>
4. LITIGATION
The Company is subject to lawsuits and claims in the ordinary course of
business. Management believes that the ultimate resolution of such lawsuits and
claims should not have a material adverse effect on the Company's condensed
consolidated financial position or results of operations.
5. SUBSEQUENT EVENT
On July 5, 1996, the Company entered into a definitive agreement to be
acquired by Urohealth Systems, Inc. (Urohealth). The sale was completed August
14, 1996, at which time the operations of the Company were merged with the
operations of Urohealth Systems, Inc.
F-61
<PAGE> 196
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Imagyn Medical, Inc.
Laguna Niguel, California
We have audited the accompanying consolidated balance sheets of Imagyn
Medical, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Imagyn Medical, Inc. as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
March 4, 1997
F-62
<PAGE> 197
IMAGYN MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 2,359,773 $ 22,333,227
Short-term cash investments................................... 6,980,454 19,019,813
Restricted cash............................................... 131,000 --
Accounts receivable, net of allowance for doubtful accounts of
$60,000 in 1995 and 1996................................... 909,139 2,002,965
Inventories................................................... 1,063,867 2,007,527
Other current assets.......................................... 172,760 713,461
------------ ------------
Total current assets.................................. 11,616,993 46,076,993
Long-term cash investments...................................... -- 4,358,478
Furniture, fixtures and equipment, net.......................... 389,787 1,412,610
Other assets.................................................... 17,642 107,653
------------ ------------
Total assets.......................................... $ 12,024,422 $ 51,955,734
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities.............................................
Accounts payable.............................................. $ 441,868 1,094,758
Accrued salaries and benefits................................. 83,158 386,101
Accrued liabilities........................................... 660,889 585,671
------------ ------------
Total current liabilities............................. 1,185,915 2,066,530
Deferred income................................................. 1,000,000 1,000,000
------------ ------------
Total liabilities..................................... 2,185,915 3,066,530
------------ ------------
Commitments and contingencies (Note 16)
Convertible redeemable preferred stock, 2,715,546 shares issued
and outstanding in 1995....................................... 9,935,981 --
------------ ------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding............... -- --
Common stock, $0.001 par value (in 1996 only), 50,000,000
shares authorized, 1,995,361 and 7,934,995 shares issued
and outstanding in 1995 and 1996, respectively............. 21,395,137 7,935
Additional paid-in capital...................................... -- 74,655,334
Unearned compensation........................................... (753,640) (702,148)
Amounts due from stockholders................................... (195,900) (120,900)
Accumulated deficit............................................. (20,543,071) (24,951,017)
------------ ------------
Total stockholders' equity (deficit).................. (97,474) 48,889,204
------------ ------------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)...................... $ 12,024,422 $ 51,955,734
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-63
<PAGE> 198
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $ 1,004,742 $ 2,242,655 $ 9,370,822
Cost of sales....................................... 1,267,968 1,810,849 6,578,746
----------- ----------- -----------
Gross profit (loss)............................ (263,226) 431,806 2,792,076
----------- ----------- -----------
Sales and marketing expenses........................ 2,317,423 3,295,842 4,039,501
Research and development expenses................... 1,796,563 1,810,759 2,707,744
General and administrative expenses................. 1,107,418 1,252,820 2,277,228
----------- ----------- -----------
5,221,404 6,359,421 9,024,473
----------- ----------- -----------
Other operating income.............................. -- 3,500,000 --
----------- ----------- -----------
Loss from operations........................... (5,484,630) (2,427,615) (6,232,397)
Other income (expense), net:
Interest and other income......................... 175,063 174,114 1,826,051
Interest expense.................................. (234) (391,086) --
----------- ----------- -----------
Other income (expense), net.................... 174,829 (216,972) 1,826,051
----------- ----------- -----------
Loss before provision for income taxes......... (5,309,801) (2,644,587) (4,406,346)
Provision for income taxes.......................... 800 800 1,600
----------- ----------- -----------
Net loss....................................... $(5,310,601) $(2,645,387) $(4,407,946)
========== ========== ==========
Net loss applicable to common stockholders.......... $(5,390,601) $(2,705,387) $(4,407,946)
========== ========== ==========
Net loss per common share and common equivalent
share............................................. $ (1.26) $ (0.59) $ (0.61)
========== ========== ==========
Weighted average common shares and common equivalent
shares outstanding................................ 4,263,000 4,573,000 7,196,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-64
<PAGE> 199
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN UNEARNED
SHARES AMOUNT CAPITAL COMPENSATION
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1994................................................... 303,313 $ 45,517
Common stock issued upon exercise of stock options.......................... 4,062 3,416
Accretion of convertible redeemable preferred stock.........................
Amount due from stockholder, from the sale of common stock.................. 45,903 170,000
Net loss for the year ended December 31, 1994...............................
---------- ------------
Balances, December 31, 1994................................................. 353,278 218,933
Common stock issued upon conversion of preferred stock (less costs of
$90,730).................................................................. 1,076,969 20,091,613
Common stock issued upon exercise of stock options.......................... 1,576 2,953
Cancellation of common stock and amount due from stockholder................ (45,903) (170,000)
Amount due from stockholder from sale of common stock....................... 328,069 72,900
Issuance of bridge financing warrants, subsequently exchanged for common
stock..................................................................... 281,034 331,618
Common stock issued for consulting services................................. 338.00 1,250
Accretion of convertible redeemable preferred stock.........................
Unearned compensation related to stock options granted, net of cancellations
of $14,557................................................................ 845,870 $ (845,870)
Compensation related to stock options vesting............................... 92,230
Net loss for the year ended December 31, 1995...............................
---------- ------------ ------------
Balances, December 31, 1995................................................. 1,995,361 21,395,137 (753,640)
Common stock issued upon exercise of stock options.......................... 64,060 50,461
Common stock issued under the employee stock purchase plan.................. 5,113 35,312
Unearned compensation related to stock options granted...................... 299,043 (299,043)
Compensation related to stock options vesting............................... 350,535
Settlement of stockholder loan.............................................. (7,585) (83,435)
Issuance of common stock (less costs of $4,406,730)......................... 3,162,500 43,030,770
Conversion of convertible redeemable preferred stock into common stock...... 2,715,546 9,935,981
Reclassification of amounts to new common stock par value................... (74,655,334) $74,655,334
Net loss for the year ended December 31, 1996...............................
---------- ------------ ----------- ------------
Balances, December 31, 1996................................................. 7,934,995 $ 7,935 $74,655,334 $ (702,148)
======== =========== ========== ============
<CAPTION>
TOTAL
AMOUNTS STOCKHOLDERS'
DUE FROM ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT (DEFICIT)
------------ ------------ --------------
<S> <C> <C> <C>
Balances, January 1, 1994................................................... $ (123,000) $(12,447,083) $(12,524,566)
Common stock issued upon exercise of stock options.......................... 3,416
Accretion of convertible redeemable preferred stock......................... (80,000) (80,000)
Amount due from stockholder, from the sale of common stock.................. (170,000)
Net loss for the year ended December 31, 1994............................... (5,310,601) (5,310,601)
------------ ------------ --------------
Balances, December 31, 1994................................................. (293,000) (17,837,684) (17,911,751)
Common stock issued upon conversion of preferred stock (less costs of
$90,730).................................................................. 20,091,613
Common stock issued upon exercise of stock options.......................... 2,953
Cancellation of common stock and amount due from stockholder................ 170,000 --
Amount due from stockholder from sale of common stock....................... (72,900) --
Issuance of bridge financing warrants, subsequently exchanged for common
stock..................................................................... 331,618
Common stock issued for consulting services................................. 1,250
Accretion of convertible redeemable preferred stock......................... (60,000) (60,000)
Unearned compensation related to stock options granted, net of cancellations
of $14,557................................................................ --
Compensation related to stock options vesting............................... 92,230
Net loss for the year ended December 31, 1995............................... (2,645,387) (2,645,387)
------------ ------------ --------------
Balances, December 31, 1995................................................. (195,900) (20,543,071) (97,474)
Common stock issued upon exercise of stock options.......................... 50,461
Common stock issued under the employee stock purchase plan.................. 35,312
Unearned compensation related to stock options granted...................... --
Compensation related to stock options vesting............................... 350,535
Settlement of stockholder loan.............................................. 75,000 (8,435)
Issuance of common stock (less costs of $4,406,730)......................... 43,030,770
Conversion of convertible redeemable preferred stock into common stock...... 9,935,981
Reclassification of amounts to new common stock par value................... --
Net loss for the year ended December 31, 1996............................... (4,407,946) (4,407,946)
------------ ------------ --------------
Balances, December 31, 1996................................................. $ (120,900) $(24,951,017) $ 48,889,204
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-65
<PAGE> 200
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $(5,310,601) $(2,645,387) $ (4,407,946)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization.................................................. 188,610 210,180 237,023
Loss on disposal of furniture, fixtures and equipment.......................... -- 24,014 7,315
Provision for doubtful accounts................................................ 60,000 -- --
Noncash interest income on stockholder loan.................................... -- -- (8,435)
Noncash interest expense on bridge financing warrants.......................... -- 331,618 --
Common stock issued for consulting services.................................... -- 1,250 --
Compensation related to stock options vesting.................................. -- 92,230 350,535
Increase in accounts receivable................................................ (285,860) (439,000) (1,093,826)
Decrease (increase) in inventories............................................. 35,780 (67,410) (943,660)
Increase in other current assets............................................... (47,189) (25,417) (540,701)
Decrease (increase) in other assets............................................ 127,413 58,837 (92,411)
Increase (decrease) in accounts payable........................................ (43,901) 168,710 652,890
Increase (decrease) in accrued salaries and benefits........................... 48,950 (59,135) 302,943
Increase (decrease) in other accrued liabilities............................... 150,301 113,343 (75,218)
----------- ----------- ------------
Net cash used by operating activities...................................... (5,076,497) (2,236,167) (5,611,491)
----------- ----------- ------------
Cash flows from investing activities:
Cash proceeds from sale of furniture, fixtures and equipment..................... -- 875.00 --
Purchase of furniture, fixtures and equipment.................................... (111,830) (163,044) (1,264,561)
Purchase of short-term cash investments.......................................... -- (6,980,454) (12,039,359)
Purchase of long-term cash investments........................................... -- -- (4,358,478)
Loans to stockholders............................................................ (75,000) -- --
(Increase) decrease in restricted cash........................................... (131,000) 131,000
----------- ----------- ------------
Net cash used by investing activities...................................... (186,830) (7,273,623) (17,531,398)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock........................................... -- -- 47,472,612
Proceeds from issuance of bridge financing....................................... -- 2,056,586 --
Proceeds from sale of convertible redeemable preferred stock..................... 12,339 7,879,395 --
Costs of equity issuances........................................................ -- (90,730) (4,406,730)
Proceeds from exercise of stock options.......................................... 3,416 2,953 50,461
----------- ----------- ------------
Net cash provided by financing activities.................................. 15,755 9,848,204 43,116,343
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents....................... (5,247,572) 338,414 19,973,454
Cash and cash equivalents, beginning of year....................................... 7,268,931 2,021,359 2,359,773
----------- ----------- ------------
Cash and cash equivalents, end of year............................................. $ 2,021,359 $ 2,359,773 $ 22,333,227
=========== =========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes................................................................... $ 800 $ 800 $ 2,400
=========== =========== ============
Interest....................................................................... $ 234 $ 60,568 $ --
=========== =========== ============
Supplemental schedule of noncash investing and financing activities:
Sale of 45,903 shares of common stock to an officer in exchange for a promissory
note. Such shares and promissory note were canceled in 1995.................... $ (170,000) $ 170,000
Sale of 328,069 shares of common stock to an officer in exchange for a promissory
note........................................................................... 72,900
Accretion of Series C convertible redeemable preferred stock against the
accumulated deficit............................................................ 80,000 60,000
Exchange of Series A, B and C convertible redeemable preferred stock for common
stock.......................................................................... 20,182,343
Conversion of bridge financing notes to new Series A preferred stock............. 2,056,586
Exchange of bridge financing warrants to common stock............................ 331,618
Common stock issued for consulting services...................................... 1,250
Unearned compensation related to stock options granted........................... 845,870 $ 299,043
Settlement of loan to stockholder and related interest receivable in exchange for
common stock................................................................... 83,435
Conversion of 2,715,546 shares of convertible redeemable preferred stock to
shares of common stock on a one-for-one basis.................................. 9,935,981
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-66
<PAGE> 201
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. THE COMPANY
Imagyn Medical, Inc. (the "Company") was incorporated in 1989. The Company
designs, develops and markets micro-invasive, cost-effective devices for the
diagnosis and treatment of gynecological and reproductive disorders.
Imagyn International, Inc. was organized as a wholly-owned subsidiary of
the Company in 1993. Imagyn International was created to facilitate the
marketing, sales and distribution of the Company's products in international
markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Sales and related cost of goods sold are recognized when goods are shipped
to customers. The majority of the Company's customers are distributors which
sell goods to third-party end-users. The Company is not contractually obligated
to repurchase any inventory from their distributors. The Company records a
warranty accrual at the time of sale for estimated claims.
Research And Development Costs
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, certificates of
deposit, and short-term investments with acquired maturities of three months or
less. The carrying amount of cash and cash equivalents approximates market
value.
Restricted Cash
In 1995, the Company collateralized a letter of credit in the amount of
$117,187 with a certificate of deposit for $131,000. The certificate of deposit
had an interest rate of 4.5% and a maturity date of June 30, 1996, and is
therefore classified as a current asset on the accompanying consolidated balance
sheet at December 31, 1995.
Short-Term And Long-Term Cash Investments
The short-term and long-term cash investments are managed by outside
brokerage firms and consist primarily of commercial paper, certificates of
deposit, and short-term bond instruments and are held to maturity. Short-term
cash investments have acquired maturities of one year or less, while long-term
cash investments have maturities of greater than one year. The carrying amount
of short-term and long-term cash investments is the cost plus interest earned as
of December 31, 1996, which approximates market value.
F-67
<PAGE> 202
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) basis.
Furniture, Fixtures And Equipment
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the term of the related lease or its
estimated useful life.
Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of furniture, fixtures
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in
operations.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." SFAS No. 123 defines a fair value based method of
accounting for an employee stock option. Fair value of the stock option is
determined considering factors such as the exercise price, the expected life of
the option, the current price of the underlying stock and its volatility,
expected dividends on the stock, and the risk-free interest rate for the
expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. Pro forma disclosures for entities that
elect to continue to measure compensation cost under the intrinsic method
provided by Accounting Principles Board Opinion No. 25 must include the effects
of all awards granted in fiscal years that begin after December 15, 1994.
Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-68
<PAGE> 203
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECAPITALIZATION
On September 8, 1995, the Company completed an equity recapitalization (the
"Recapitalization"). The following events occurred as part of the
Recapitalization: (i) the conversion of all outstanding shares of Series A,
Series B and Series C preferred stock on a 1-for-1 basis into shares of common
stock, (ii) a reverse 1-for-5 split of all then outstanding common stock and
common stock options, (iii) the issuance of 2,153,484 shares of new Series A
preferred stock at $3.66 per share for cash of $7,879,395, (iv) the conversion
of outstanding bridge financing notes of $2,056,586 into 562,062 shares of new
Series A preferred stock, (v) conversion of bridge financing warrants into
281,034 shares of common stock, and (vi) amendments to the stock option plans.
Prior to the completion of the Recapitalization, the Company obtained
$2,056,586 in bridge note financing. Interest at the rate of prime plus 1% and
totaling $59,468, was paid in cash. In addition, the Company granted a warrant
to purchase a share of the new Series A preferred stock for $3.66 per share, for
each two shares of new Series A preferred stock received after conversion of the
bridge financing notes, or total warrants to acquire 281,034 shares of new
Series A preferred stock (the "bridge financing warrants"). These bridge
financing warrants were later exchanged to 281,034 shares of common stock for no
additional consideration in the Recapitalization. The Company recognized a
one-time non-cash charge of $331,618 to interest expense in connection with this
transaction with such amount representing the then fair market value, as
determined by an independent third-party valuation, of such shares.
All share and per share amounts have been adjusted to give retroactive
effect to the reverse stock split for all periods presented.
4. INITIAL PUBLIC OFFERING
In June 1996, the Company completed an initial public offering (the "IPO")
of 3,162,500 shares of its common stock at $15.00 per share for proceeds, net of
offering expenses of $4,406,730, of $43,030,770. In connection with the IPO, all
then outstanding shares of convertible redeemable preferred stock were
automatically converted into 2,715,546 shares of common stock.
In conjunction with the IPO, the Board of Directors and stockholders
approved a 1-for-1.4814 reverse stock split of all outstanding common stock,
preferred stock and common stock options. All share and per share amounts have
been adjusted to give retroactive effect to the reverse stock split for all
periods presented.
5. RELATED PARTY TRANSACTIONS
During 1994, the Company sold 45,903 shares of common stock to an officer
of the Company in exchange for a $170,000 recourse promissory note. These shares
were returned to the Company and the promissory note was canceled in August 1995
as part of the Company's Recapitalization. On October 31, 1995, the Company sold
328,069 shares of common stock to the same officer in exchange for a $72,900
recourse promissory note. The promissory note bears interest at 6.31% per annum
with all principal and interest due on October 30, 2000. The promissory note is
collateralized by the related shares of common stock. The Company has an option
to repurchase the shares at $0.222 per share. The repurchase option, which
matches the vesting terms of the shares, expired with respect to 35% of the
shares on September 7, 1996 and, for the remaining shares, on a monthly pro rata
basis through September 7, 1998.
The Company has a License Agreement with two of its stockholders relating
to patents, patent applications and other know-how on certain medical equipment
technology. Royalties pursuant to the License Agreement are payable for a period
of ten years following the date of the first commercial sale or the expiration
date of the last applicable patent, whichever occurs later. For the years ended
December 31, 1994, 1995 and 1996, total royalty expense under this agreement was
$18,703, $28,315 and $21,039, respectively.
F-69
<PAGE> 204
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1993, the Company loaned two stockholders $75,000 and $48,000,
respectively. The loans bear interest at 4.92% and 5%, respectively, and have
five-year terms. The loans are collateralized by shares of the Company's common
stock. In March 1996, the $75,000 loan and related $8,435 interest receivable
were settled in full with the exchange of 7,585 shares of the Company's common
stock valued at its then fair market value.
During 1992, the Company entered into a License, Manufacturing and
Distribution Agreement (the "Agreement") with Terumo Corporation ("Terumo"), a
stockholder, granting Terumo the right to manufacture and distribute the
Company's products in Japan. Under the terms of the Agreement, Terumo was
required to pay the Company $1.1 million, nonrefundable, for the right to
distribute the Company's products in Japan and $1 million as a license fee for
the right to manufacture certain of the Company's products for sale in Japan.
The Agreement also requires Terumo to pay royalties to the Company upon sales of
products manufactured by Terumo under the terms of the Agreement. The Company is
required to provide manufacturing know-how, training and documentation to Terumo
for the purpose of establishing manufacturing capability relating to such
products within two years after Japanese government approval of the product,
which was obtained in August 1995. In the event the Company does not meet its
obligation for the transfer of manufacturing know-how, the license fee is
subject to refund with interest at 10%. Based on the Company's continuing
obligations under the license portion of the Agreement, the Company has deferred
income recognition of the $1 million license fee.
6. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Cash............................................... $ 189,664 $ 4,749,972
Cash equivalents................................... 2,170,109 17,583,255
---------- -----------
$2,359,773 $22,333,227
========= ==========
</TABLE>
The cash equivalents are managed by an outside brokerage firm and consist
primarily of money market funds, commercial paper and short-term bond
instruments with initial maturities of 90 days or less.
7. INVENTORIES
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Raw material........................................ $ 372,730 $ 1,141,427
Work-in-process..................................... 248,097 352,903
Finished goods...................................... 443,040 513,197
----------- -----------
$ 1,063,867 $ 2,007,527
========= =========
</TABLE>
F-70
<PAGE> 205
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Equipment........................................... $ 859,603 $1,511,667
Furniture and fixtures.............................. 133,451 674,469
Leasehold improvements.............................. 77,929 132,239
---------- ----------
1,070,983 2,318,375
Accumulated depreciation and amortization........... (681,196) (905,765)
---------- ----------
$ 389,787 $1,412,610
========= =========
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Warranty expenses.................................... $ 204,348 $ 440,210
Distributor termination expenses..................... 325,000 68,307
Foreign branch assessments........................... 30,000 35,000
Other................................................ 101,541 42,154
--------- ---------
$ 660,889 $ 585,671
======== ========
</TABLE>
10. INCOME TAXES
The following table presents the current and deferred income tax provisions
for federal and state income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ------
<S> <C> <C> <C>
Current:
Federal........................................... $ -- $ -- $ --
State............................................. 800 800 1,600
---- ---- ------
800 800 1,600
Deferred:
Federal........................................... -- -- --
State............................................. -- -- --
---- ---- ------
$800 $800 $1,600
==== ==== ======
</TABLE>
F-71
<PAGE> 206
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences which give rise to the deferred
tax provision (benefit) for the years ended December 31, consist of:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Property and equipment.............. $ -- $ (26,920) $ (20,524)
Accrued liabilities................. (40,132) 21,978 (107,217)
Capitalized costs................... (169,225) 301,985 21,588
Accounts receivable allowance....... (25,980) -- --
Inventory reserve................... (248,326) (119,075) 213,963
Stock options....................... -- (39,936) 39,936
Income tax credit carryforwards..... (154,133) (100,002) 64,767
Net operating loss carryforwards.... (1,419,836) (1,202,514) (1,609,854)
Other............................... (1,185) 858 --
----------- ----------- -----------
(2,058,817) (1,163,626) (1,397,341)
Valuation allowance................. 2,058,817 1,163,626 1,397,341
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory regular federal income tax rate........... (34.0)% (34.0)% (34.0)%
Change in valuation allowance....................... 35.2 36.1 32.0
Other............................................... (1.2) (2.1) 2.0
----- ----- -----
Effective tax rate.................................. 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The components of the deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred revenue.................................. $ 433,000 $ 433,000
Capitalized costs................................. 1,799,936 1,778,348
Property and equipment............................ 92,513 113,037
Accrued liabilities............................... 119,883 227,100
Accounts receivable allowance..................... 25,980 25,980
Inventory reserve................................. 367,401 153,438
Stock options..................................... 39,936 --
Income tax credit carryforwards................... 804,927 740,160
Net operating loss carryforwards.................. 4,756,867 6,366,721
----------- -----------
8,440,443 9,837,784
Valuation allowance............................... (8,440,443) (9,837,784)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal and state purposes of approximately $16,531,000 and $8,023,000,
respectively. The net operating loss carryforwards begin expiring in 2005 and
1997, respectively. The Company also has research and experimentation credit
F-72
<PAGE> 207
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
carryforwards for federal and state purposes of approximately $387,000 and
$276,000, respectively. The research and experimentation credits begin to expire
in 2005 for federal purposes and carry forward indefinitely for state purposes.
The Company has federal foreign tax credits of $25,000 which expire in 1998. The
utilization of net operating loss and tax credit carryforwards will be subject
to a substantial annual limitation due to the ownership change limitations under
the provisions of Internal Revenue Code Section 382 and similar state
provisions. The annual limitation is likely to result in the expiration of most
of the Company's net operating loss and tax credit carryforwards before full
utilization.
11. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In June 1996, concurrent with the IPO (Note 4), all 2,715,546 shares of
Series A convertible redeemable preferred stock were converted into common stock
on a one-for-one basis.
12. 1990 INCENTIVE STOCK OPTION PLAN
The Company had a 1990 Incentive Stock Option Plan (the "1990 Option Plan")
under which options were granted, at the then estimated fair market value of the
Company's common stock as determined by the Board of Directors. The 1990 Option
Plan was terminated during the Recapitalization and outstanding options, except
for the options to acquire 40,833 shares of common stock which were exercised in
1996, were canceled. Certain of the canceled options were replaced with new
options under the 1995 Stock Plan (the "1995 Stock Plan").
A summary of the option activity under the 1990 Option Plan is as follows:
<TABLE>
<CAPTION>
SHAREHOLDER OPTION PRICE
OPTIONS PER SHARE
----------- ------------
<S> <C> <C>
Outstanding at January 1, 1994...................... 112,530 $0.37-$3.70
Granted............................................. 53,316 $3.70
Exercised........................................... (4,062) $0.37-$3.70
Canceled............................................ (19,484) $0.37-$3.70
-----------
--------
Outstanding at December 31, 1994.................... 142,300 $0.37-$3.70
Granted............................................. 29,635 $0.74
Exercised........................................... (1,914) $0.37-$0.44
Canceled............................................ (129,188) $0.37-$3.70
-----------
--------
Outstanding at December 31, 1995.................... 40,833 $1.11
Exercised........................................... (40,833) $1.11
-----------
--------
Outstanding at December 31, 1996.................... -- --
======== ===========
</TABLE>
13. 1995 STOCK PLAN
The Company has a 1995 Stock Plan under which options may be granted to
purchase up to 1,675,000 shares of common stock. The 1995 Stock Plan provides
for the options issued to be either incentive stock options or nonstatutory
stock options as defined under Section 422A of the Internal Revenue Code. The
exercise price of the shares under option shall equal or exceed 85% and 100% of
the fair market value of the shares at the date of option grant for nonstatutory
and incentive stock options, respectively. The 1995 Stock Plan expires in the
year 2005 unless terminated earlier. The options generally vest over a 3 to 4
year period.
F-73
<PAGE> 208
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 1995 STOCK PLAN (CONTINUED)
The term of any stock option may not exceed 10 years from the date of grant
except for an incentive stock option granted to an optionee who owns stock
representing more than 10% of the voting power of all classes of stock of the
Company, in which case the term of the option shall be five years.
A summary of the option activity under the 1995 Stock Plan is as follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTIONS PER SHARE
------------ -------------
<S> <C> <C>
Granted.......................................... 888,765 $0.222
Exercised........................................ (328,069) $0.222
Canceled......................................... (15,797) $0.222
-------- -------------
Outstanding at December 31, 1995................. 544,899 $0.222
Granted.......................................... 337,910 $0.222-$10.25
Exercised........................................ (23,227) $0.222
Canceled......................................... (15,812) $0.222
-------- -------------
Outstanding at December 31, 1996................. 843,770 $0.222-$10.25
======== =============
Exercisable at December 31, 1996................. 241,972 $0.222-$10.25
======== =============
</TABLE>
The difference between the exercise price and the fair market value, as
determined by an independent third-party valuation, of the options at the date
of grant of $845,870, net of cancellations of $14,557, at December 31, 1995, is
accounted for as unearned compensation and is being amortized to expense over
the related service period. During 1996, an additional $299,043 of unearned
compensation was recognized. During the years ended December 31, 1995 and 1996,
amortized compensation expense was $92,230 and $350,535, respectively.
14. OTHER OPTION PLANS
1996 Director Option Plan
The Company has adopted the 1996 Director Option Plan under which options
may be granted to purchase up to 200,000 shares of common stock. The 1996
Director Option Plan provides for 15,000 options to be granted to outside
directors on the date on which they become a member of the board of directors.
An additional 5,000 options are to be automatically granted to each outside
director on the first business day of each year of service provided such outside
director has served as an outside director for at least the previous six months.
The exercise price of the shares under option shall equal 100% of the fair
market value of the shares at the date of option grant. Options granted under
the 1996 Director Option Plan expire ten years from the date of grant unless
terminated earlier. The options vest over a 4-year period.
A summary of the option activity under the 1996 Director Option Plan is as
follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTIONS PER SHARE
------------ --------------
<S> <C> <C>
Granted.......................................... 75,000 $ 10.75-$15.00
------------ --------------
Outstanding at December 31, 1996................. 75,000 $ 10.75-$15.00
========== ============
Exercisable at December 31, 1996................. 10,000 $ 10.75-$15.00
========== ============
</TABLE>
F-74
<PAGE> 209
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OTHER OPTION PLANS (CONTINUED)
1996 Employee Stock Purchase Plan
The Company has adopted the 1996 Employee Stock Purchase Plan ("ESPP")
under which employees may purchase up to 200,000 shares of common stock.
Employees eligible to participate in the ESPP must work an average of at least
20 hours per week and at least five months per calendar year. The ESPP provides
for employees to purchase stock at a 15% discount from the lower of the fair
market value at the enrollment date of the exercise date (June 30 and December
31 of each calendar year). Amounts to purchase stock are withheld through
employee-directed payroll deductions, not to exceed 10% of gross compensation,
up to $12,500 per each six-month purchase period not to exceed $21,250 per
calendar year. The ESPP expires in the year 2006 unless terminated earlier.
Unless an employee withdraws from the ESPP, shares are automatically purchased
on the stated exercise date.
Shares are purchased in whole shares only. Any excess withholdings are
carried forward to the next period. On December 31, 1996, 5,113 shares were
purchased under the ESPP at a price of $6.91 per share. The Company recognized
$6,231 of compensation expense related to the ESPP for the year ended December
31, 1996.
Pro Forma Effect Of Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost been determined on the fair value at the grant dates for
awards under those plans consistent with the method promulgated by SFAS No. 123,
the Company's net loss and loss per share would have been increased to the pro
forma amounts below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net loss
As reported..................................... $(2,645,387) $(4,407,946)
Pro forma....................................... $(2,649,366) $(4,551,258)
Loss per share
As reported..................................... $ (0.59) $ (0.61)
Pro forma....................................... $ (0.59) $ (0.63)
</TABLE>
For options granted from January 1, 1995 to April 30, 1996, the fair value
of each option grant was estimated on the date of the grant using the minimum
value method as the Company was a nonpublic entity when such options were
granted. This value is the current stock price less the present value of the
exercise price for a stock that does not pay dividends. For options granted from
May 1, 1996 to December 31, 1996, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model. The
assumptions used under both models are as follows: the risk-free interest rate
was the U.S. Zero Coupon Bond rate for the corresponding grant date and ranged
from 5.48% to 6.0% in 1995 and from 5.33% to 6.56% in 1996; the exercise price
is equal to the fair market value of the underlying common stock at the grant
date, the expected life of the option is the term to expiration, generally 3 to
4 years; and the common stock will pay no dividends. Under the Black-Scholes
model only, the volatility is 92.36%.
15. PREFERRED SHARES RIGHTS AGREEMENT
On November 7, 1996, the Board of Directors adopted a Preferred Shares
Rights Agreement and declared a dividend of one Preferred Share Purchase Right
(a "Right") for each outstanding share of common stock. Each Right enables its
holder to buy one one-thousandth of one share of the Company's Series A
Participating preferred stock, a designated series of preferred stock for which
each one-thousandth of
F-75
<PAGE> 210
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. PREFERRED SHARES RIGHTS AGREEMENT (CONTINUED)
a share has economic attributes and voting rights equivalent to one share of the
Company's common stock, at an exercise price of $50.
The Rights become exercisable and transferable apart from the common stock
only in certain limited circumstances involving acquisitions of or tender offers
for 15% or more of the Company's common stock. For a limited period of time
after the announcement of any such acquisition or offer, the Rights are
redeemable at the Company's option at a price of $.01 per Right. After becoming
exercisable, in certain more limited circumstances, each Right entitles its
holder to purchase for $50 an amount of common stock of the Company, or in
certain circumstances, securities of the acquiror, having a then current market
value equal to $100. The Rights expire on November 7, 2006.
16. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and manufacturing facilities in the United States
having noncancellable lease terms ranging from 30 to 36 months. In addition, the
Company leases office equipment with lease terms ranging from 21 to 48 months.
As of December 31, 1996, future minimum noncancellable annual lease commitments
for the years ended December 31 are as follows:
<TABLE>
<S> <C>
1997.............................................. $311,549
1998.............................................. 309,220
1999.............................................. 18,292
--------
$639,061
========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $210,900, $202,400 and $256,200, respectively.
401(k) Plan
The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") which is a
defined contribution plan for all Company employees who have reached age 21 and
have completed at least 1,000 hours of service. The 401(k) Plan is
self-contributory. The company may, at its discretion, contribute to the Plan in
an amount not to exceed 12% of the employee's contribution. There were no
Company contributions in 1994, 1995 or 1996.
Management Incentive Bonus Programs
During 1995, the Company approved a Management Incentive Bonus Program (the
"Bonus Plan") for directors and officers. The Bonus Plan provides for bonuses of
up to 20% of base compensation, provided certain specific performance criteria
are met. Bonuses of $246,000 were earned and payable at December 31, 1996 under
the Bonus Plan. No amounts were due or paid in 1995 under the Bonus Plan. A
similar bonus plan was in effect in 1994, and $24,549 was earned under that
plan.
During 1995, the Company established a European Sales Incentive Program
which provides, for eligible employees based in Europe, for additional
compensation provided specific performance criteria are met. During the years
ended December 31, 1995 and 1996, $7,748 and $7,500, respectively, were earned
and paid under this European Program.
F-76
<PAGE> 211
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Distribution Agreement
In 1995, the Company entered into an agreement whereby another company was
appointed as the Company's distributor for certain products in certain
territories. The agreement required nonrefundable payments in the amount of
$3,500,000 which were received by the Company during the year ended December 31,
1995 and are included in operations on the accompanying consolidated statement
of operations as other operating income. The agreement does not have a fixed
term.
17. NET LOSS PER COMMON SHARE
Net loss per common share is based on reported net loss with such reported
net loss increased for accretion of the Series C preferred stock. The resulting
amount is presented below as loss applicable to common stock.
Such loss applicable to common stock in each period presented is divided by
the weighted average number of outstanding common shares which, along with
shares issuable under other equity securities, have been computed in accordance
with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") Topic
4-D. The SAB requires that common stock issued by the Company in the twelve
months immediately preceding a proposed public offering plus the number of
common equivalent shares which become issuable during the same period pursuant
to the issuance of warrants or grant of stock options (using the modified
treasury stock method), and issuance of convertible preferred stock, at prices
less than the per share initial public offering price be included in the
calculation of common stock and common stock equivalent shares as if they were
outstanding for all periods presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
PER PER PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ------ ------- ------ ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Reported net loss...................... $(5,311) $(1.24) $(2,645) $(0.58) $(4,408) $(0.61)
Adjustment for accretion of Series C
preferred stock...................... (80) (0.02) (60) (0.01) -- --
------- ------ ------- ------ ------- ------
Net loss applicable to common stock and
net loss per common share and common
equivalent share..................... $(5,391) $(1.26) $(2,705) $(0.59) $(4,408) $(0.61)
======= ====== ======= ====== ======= ======
Weighted average number of:
Common shares........................ 596 922 3,875
Common equivalent shares............. 3,667 3,651 3,321
------- ------- -------
Weighted average common shares and
common equivalent shares
outstanding.......................... 4,263 4,573 7,196
======= ======= =======
</TABLE>
Primary and fully-diluted loss per share amounts do not differ.
18. CREDIT RISK
The Company maintains cash deposits at a bank and outside brokerage firms.
As of December 31, 1995 and 1996, the Company had cash on deposit $270,316 and
$45,716,855, respectively, in excess of the federally-insured limits.
The Company's customers are primarily physicians and hospitals in the
United States and certain foreign countries, and domestic and international
distributors. The two largest customers accounted for approximately
F-77
<PAGE> 212
IMAGYN MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CREDIT RISK (CONTINUED)
56% of accounts receivable at December 31, 1995 and the three largest customers
totaled approximately 43% of sales for the year ended December 31, 1995. One
customer accounted for approximately 90% of accounts receivable at December 31,
1996 and approximately 91% of sales for the year ended December 31, 1996.
The Company reviews a customer's credit history before extending credit and
may require an international customer to provide an irrevocable letter of credit
drawn on a bank previously approved by the Company. The Company establishes
allowances for doubtful accounts based upon factors surrounding the credit risk
of specific customers. The accounting loss, should a customer be unable to meet
its obligation to the Company, would be equal to the recorded account
receivable.
19. SEGMENT INFORMATION
The Company's products are sold in the following geographic regions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
United States.......................... $ 2,475 $ 639,796 $8,678,490
Japan.................................. 27,342 553,565 289,980
Europe................................. 664,293 684,986 182,477
Australia.............................. 149,048 228,104 159,560
Other.................................. 161,584 136,204 60,315
---------- ---------- ----------
$1,004,742 $2,242,655 $9,370,822
========== ========== ==========
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
In January 1997, the Company granted 25,000 options to outside directors
under the 1996 Director Option Plan at $8.125 per share.
In February 1997, the Company granted 157,500 options to purchase common
stock to employees at $8.125 per share.
F-78
<PAGE> 213
IMAGYN MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 22,333,227 $ 12,423,732
Short-term cash investments................................... 19,019,813 21,223,053
Accounts receivable, net 2,002,965 1,622,761
Inventories................................................... 2,007,527 4,135,481
Other current assets.......................................... 713,461 621,652
------------ ------------
Total current assets.................................. 46,076,993 40,026,679
Long-term cash investments...................................... 4,358,478 5,630,671
Furniture, fixtures and equipment, net.......................... 1,412,610 1,463,303
Other assets.................................................... 107,653 24,318
------------ ------------
Total assets.......................................... $ 51,955,734 $ 47,144,971
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.............................................
Accounts payable.............................................. $ 1,094,758 $ 1,346,492
Accrued salaries and benefits................................. 386,101 353,184
Accrued liabilities........................................... 585,671 490,829
------------ ------------
Total current liabilities............................. 2,066,530 2,190,505
Deferred income................................................. 1,000,000 1,000,000
------------ ------------
Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding............... -- --
Common stock, $0.001 par value, 50,000,000 shares authorized,
7,934,995 and 8,059,007 issued and outstanding in 1996 and
at June 30, 1997, respectively............................. 7,935 8,059
Additional paid-in capital...................................... 74,655,334 74,702,256
Unearned compensation........................................... (702,148) (528,555)
Amounts due from stockholders................................... (120,900) (120,900)
Accumulated deficit............................................. (24,951,017) (30,106,394)
------------ ------------
Total stockholders' equity............................ 48,889,204 43,954,466
------------ ------------
Total liabilities and stockholders' equity............ $ 51,955,734 $ 47,144,971
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-79
<PAGE> 214
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1996 1997 1996 1997
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................................... $2,505,202 $ 1,107,875 $ 3,972,620 $ 1,925,423
Cost of sales................................. 1,589,031 934,165 2,811,292 1,442,831
---------- ----------- ----------- -----------
Gross profit............................. 916,171 173,710 1,161,328 482,592
---------- ----------- ----------- -----------
Sales and marketing expenses.................. 628,765 1,877,024 1,374,835 3,003,733
Research and development expenses............. 681,113 1,099,524 1,421,060 2,118,634
General and administrative expenses........... 433,910 1,169,947 879,934 1,737,220
---------- ----------- ----------- -----------
1,743,788 4,146,495 3,675,829 6,859,587
---------- ----------- ----------- -----------
Loss from operations..................... (827,617) (3,972,785) (2,514,501) (6,376,995)
Other income (expense), net:
Interest income............................. 219,416 583,272 339,827 1,195,245
Other income................................ 0 29,960 0 29,960
---------- ----------- ----------- -----------
Other income (expense), net.............. 219,416 613,232 339,827 1,225,205
---------- ----------- ----------- -----------
Loss before provision for income taxes... (608,201) (3,359,553) (2,174,674) (5,151,790)
Provision for income taxes.................... 1,600 1,987 4,052 3,587
---------- ----------- ----------- -----------
Net loss................................. $ (609,801) $(3,361,540) $(2,178,726) $(5,155,377)
---------- ----------- ----------- -----------
Net loss per common share and common share
equivalent.................................. $ (0.10) $ (0.38) $ (0.38) $ (0.59)
========= ========== ========== ==========
Weighted average common shares and common
share equivalents outstanding............... 6,225,000 8,808,000 5,804,000 8,782,000
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-80
<PAGE> 215
IMAGYN MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1996 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $(2,178,726) $ (5,155,377)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization............................. 102,857 206,125
Compensation related to stock options vesting............. 175,543 173,593
Decrease (increase) in accounts receivable................ (672,429) 380,204
Increase in inventories................................... (738,599) (2,127,954)
Decrease (increase) in other current assets............... (277,843) 91,809
Decrease (increase) in other assets....................... (209,767) 82,135
Increase (decrease) in accounts payable................... 527,557 251,734
Decrease in accrued salaries and benefits................. 19,380 (32,917)
Decrease in other accrued liabilities..................... 18,305 (94,842)
----------- -----------
Net cash used by operating activities................ (3,233,722) (6,225,490)
----------- -----------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment............. (329,645) (255,618)
Purchase of short-term investments........................ (2,702,207) (16,575,248)
Sale of short-term investments............................ 5,417,383 13,099,815
Increase in restricted cash............................... (186,325) 0
----------- -----------
Net cash provided (used) by investing activities..... 2,199,206 (3,731,051)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock........................ 47,437,500 0
Costs of equity issuances................................. (4,017,348) 0
Proceeds from exercise of stock options................... 45,368 26,392
Proceeds from shares issued under employee stock purchase
plan.................................................... 0 20,654
----------- -----------
Net cash provided by financing activities............ 43,465,520 47,046
----------- -----------
Net increase (decrease) in cash and cash equivalents........... 42,431,004 (9,909,495)
Cash and cash equivalents, beginning........................... 2,359,773 22,333,227
----------- -----------
Cash and cash equivalents, ending.............................. $44,790,777 $ 12,423,732
=========== ===========
Supplemental schedule of noncash investing and financing
activities:
Exchange of convertible redeemable preferred stock for
common stock............................................ $ 9,935,981
Unearned compensation related to stock options granted.... 299,043
Settlement of amounts due from stockholder................ 83,435
Costs of equity issuances not yet paid.................... 331,002
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-81
<PAGE> 216
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Imagyn Medical, Inc. (the "Company") was incorporated in 1989. The Company
designs, develops and markets micro-invasive, cost effective devices for the
diagnosis and treatment of gynecological and reproductive disorders.
Imagyn International, Inc. was organized as a wholly-owned subsidiary of
the Company in 1993. Imagyn International, Inc. was created to facilitate the
marketing, sales and distribution of the Company's products in international
markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Sales and related cost of goods sold are recognized when goods are shipped
to customers. The Company's customers include distributors which sell goods to
third-party end-users. The Company is not contractually obligated to repurchase
any inventory from its distributors. The Company records a warranty accrual at
the time of sale for estimated claims.
Research and Development Costs
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, certificates of
deposit, and short-term investments with acquired maturities of three months or
less. The carrying amount of cash and cash equivalents approximates market
value.
Short-Term and Long-Term Cash Investments.
The short-term and long-term cash investments are managed by outside
brokerage firms and consist of primarily of commercial paper, certificates of
deposit, and short-term bond instruments. Short-term cash investments have
acquired maturities of one year or less, while long-term cash investments have
maturities of greater than one year. The carrying amount of short-term and
long-term cash investments are the cost plus interest earned as of June 30,
1997, which approximates market value.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO). Inventories consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
1996
------------ (UNAUDITED)
<S> <C> <C>
Raw materials...................................... $1,141,427 $ 1,908,812
Work-in-process.................................... 352,903 1,036,795
Finished goods..................................... 513,197 1,189,874
--------- ---------
$2,007,527 $ 4,135,481
========= =========
</TABLE>
F-82
<PAGE> 217
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the term of the related lease or its
estimated useful life.
Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of furniture, fixtures
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in
operations.
3. NET LOSS PER SHARE:
Net loss per common share is based on reported net loss. Such net loss in
each period presented is divided by the weighted average number of outstanding
common shares which, along with shares issuable under other equity securities,
have been computed in accordance with Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") Topic 4-D. The SAB requires that common stock issued
by the Company in the twelve months immediately preceding a proposed public
offering plus the number of common equivalent shares which become issuable
during the same period pursuant to the issuance of warrants or grant of stock
options (using the treasury stock method), and the issuance of convertible
preferred stock, at prices less than the per share initial public offering price
be included in the calculation of common stock and common stock equivalent
shares as if they were outstanding for all periods presented.
4. INTERIM FINANCIAL STATEMENTS
The financial statements at June 30, 1997 and for the three and six month
periods ended June 30, 1996 and 1997 are unaudited but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results of the June 30, 1997
period are not necessarily indicative of the results for the entire year.
5. STATEMENTS OF FINANCIAL STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 requires companies to adopt its provisions for fiscal years beginning
after December 15, 1997 and requires restatement of all prior period earnings
per share ("EPS") data presented. Earlier application is not permitted. SFAS No.
128 specifies the computation, presentation and disclosure requirements for EPS.
The implementation of SFAS No. 128 is not expected to have a material effect on
the EPS data presented by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. The implementation of SFAS No. 130 is not expected to have a
material effect on the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented, established standards for the way that a public
enterprise reports information about key revenue-producing segments in the
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about products
and
F-83
<PAGE> 218
IMAGYN MEDICAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STATEMENTS OF FINANCIAL STANDARDS NOT YET ADOPTED (CONTINUED)
services, geographic areas and major customers. The implementation of SFAS No.
131 is not expected to have a material effect on the Company's current reporting
and disclosures.
6. SUBSEQUENT EVENT:
On April 19, 1997, the Company and Urohealth Systems, Inc. ("Urohealth")
entered into an Agreement and Plan of Merger pursuant to which a wholly-owned
subsidiary of Urohealth would be merged with and into the Company, with the
Company surviving the merger and becoming a wholly-owned subsidiary of
Urohealth. Pursuant to the Agreement and Plan of Merger, the Company's
stockholders will receive 1.0358 shares of Urohealth common stock for each share
of Company common stock. On July 17, 1997, the Company and Urohealth amended the
Agreement and Plan of Merger to provide the Company's stockholders with 1.40
shares of Urohealth common stock for each share of Company common stock. The
merger is anticipated to be tax-free to Company stockholders and to be accounted
for as a pooling of interests. The consummation of the merger is subject to the
approval of the stockholders of each company and certain other conditions. The
consolidated financial statements as of June 30, 1997 do not reflect any
adjustments that may be necessary as a result of the completion of the proposed
merger.
F-84
<PAGE> 219
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 19, 1997, Urohealth entered into an agreement to merge a
wholly-owned subsidiary of Urohealth with Imagyn Medical, Inc. (the "Merger") in
a transaction intended to be accounted for as a pooling of interests.
The following unaudited pro forma condensed consolidated balance sheet at
June 30, 1997 reflects the historical consolidated balance sheets of Urohealth
and Imagyn, adjusted to give effect to the Merger, as if such Merger had
occurred at June 30, 1997.
The following unaudited pro forma condensed consolidated statements of
operations are presented to reflect the Merger using the pooling of interest
method as if such Merger had occurred on July 1, 1994 for the year ended June
30, 1995; on July 1, 1995 for the nine month period ended March 31, 1996; on
April 1, 1996 for the year ended March 31, 1997; and April 1, 1997 for the three
months ended June 30, 1997. Imagyn prepares its financial statements on the
basis of a December 31 fiscal year end. The unaudited pro forma condensed
consolidated statements of operations combine: the results of operations of
Urohealth for the three months ended June 30, 1997 with the results of
operations of Imagyn for the same period; the results of operations of Urohealth
for the year ended March 31, 1997 with the results of operations of Imagyn for
the year ended December 31, 1996; the results of operations of Urohealth and
Imagyn for the nine months ended March 31, 1996; and the results of operations
of Urohealth for the year ended June 30, 1995 with the results of operations of
Imagyn for the year ended December 31, 1995. Accordingly, net sales of Imagyn of
approximately $1,509,000 and net loss of Imagyn of $58,000 were included in the
unaudited pro forma condensed consolidated statements of operations for both the
fiscal periods ended June 30, 1995 and March 31, 1996.
The unaudited pro forma condensed consolidated statement of operations for
the year ended March 31, 1997 also reflects the Urohealth acquisitions of
X-Cardia, a purchase effective February 28, 1997, and Richard-Allan, a purchase
effective August 14, 1996, as if these purchase transactions had taken place on
April 1, 1996.
The unaudited pro forma condensed consolidated balance sheet and statements
of operations and accompanying notes should be read in conjunction with the
respective historical audited consolidated financial statements of Urohealth and
Imagyn contained herein.
The unaudited pro forma condensed consolidated financial information is
based on the consolidated financial statements of Urohealth and Imagyn giving
effect to the transactions under the assumptions and adjustments outlined in the
accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The pro forma adjustments are based upon available information and upon
certain assumptions that Urohealth management believes are reasonable given the
circumstances. The unaudited pro forma condensed consolidated balance sheet and
statements of operations are provided for comparative purposes only and are not
necessarily indicative of the results that would have been obtained had the
acquisitions occurred on the dates indicated or that may be achieved in the
future.
F-85
<PAGE> 220
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH IMAGYN ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................... $ 5,750 $ 12,424 $ -- $ 18,174
Short-term cash investments.............. -- 21,223 -- 21,223
Receivables, net......................... 22,044 1,623 23,667
Income tax receivable.................... 377 -- 377
Advances to officers..................... 9 -- 9
Inventories.............................. 29,728 4,135 -- 33,863
Distributor inventories.................. 6,307 -- -- 6,307
Prepaid expenses......................... 3,849 621 -- 4,470
-------- --------- ------- ---------
Total current assets....................... 68,064 40,026 -- 108,090
Restricted cash, noncurrent................ 19,327 -- -- 19,327
Receivables -- long-term................... 2,383 -- -- 2,383
Long-term cash investments................. -- 5,631 -- 5,631
Property and equipment, net................ 27,421 1,463 -- 28,884
Patents and intangibles, net............... 6,099 -- -- 6,099
Loans to officers.......................... 2,041 -- -- 2,041
Deposits and other assets.................. 1,753 24 -- 1,777
Deferred debt issuance costs............... 9,734 -- -- 9,734
Goodwill................................... 42,867 -- -- 42,867
-------- --------- ------- ---------
$179,689 $ 47,144 $ -- $ 226,833
======== ========= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable and accrued
liabilities........................... $ 20,679 $ 1,837 $ 3,500(a) $ 26,016
Compensation and employee benefits....... 2,911 353 -- 3,264
Restructuring liabilities................ 5,482 -- -- 5,482
Short-term debt.......................... 5,268 -- -- 5,268
Current portion of long-term debt........ 3,216 -- -- 3,216
-------- --------- ------- ---------
Total current liabilities............. 37,556 2,190 3,500 43,246
Long-term liabilities:
Long-term debt........................... 53,269 -- -- 53,269
Senior subordinated notes, net of
discount.............................. 108,340 -- -- 108,340
Restructuring liabilities, less current
portion............................... 678 -- -- 678
Other liabilities........................ 3,822 1,000 -- 4,822
Common Stockholders' Equity:
Common stock............................. 24 8 3(b) 35
Warrants................................. 7,080 -- -- 7,080
Additional paid-in capital............... 150,638 74,702 (3)(b) 225,337
Foreign currency translation
adjustment............................ 44 -- -- 44
Deficit.................................. (181,762) (30,106) (3,500)(a) (215,368)
Note receivable from shareholders........ -- (121) -- (121)
Unearned compensation.................... -- (529) -- (529)
-------- --------- ------- ---------
Total common stockholders'
(deficiency) equity................. (23,976) 43,954 (3,500) 16,478
-------- --------- ------- ---------
$179,689 $ 47,144 $ -- $ 226,833
======== ========= ======= =========
</TABLE>
See accompanying notes.
F-86
<PAGE> 221
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
UROHEALTH IMAGYN ADJUSTMENTS TOTAL
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales.................................... $ 25,237 $ 1,108 $ $ 26,345
Cost of sales................................ 11,702 934 12,636
-------- ------- ------- ---------
Gross profit................................. 13,535 174 -- 13,709
Operating expenses:
Selling, general and administrative........ 16,863 3,047 19,910
Research and development................... 1,665 1,099 2,764
Merger and acquisitions costs.............. -- -- --
Write-off incomplete research and
development............................. -- -- --
Restructuring charges...................... -- -- --
-------- ------- ------- ---------
Total operating expenses..................... 18,528 4,146 -- 22,674
-------- ------- ------- ---------
Profit (loss) from operations................ (4,993) (3,972) -- (8,965)
Other income (expense):
Minority interest consisting of accrued
dividends on preferred stock of
subsidiary.............................. (4) -- (4)
Interest income............................ 389 583 972
Interest expense........................... (5,433) -- (5,433)
Other...................................... 450 30 480
-------- ------- ------- ---------
Loss before tax and extraordinary item....... (9,591) (3,359) -- (12,950)
Provision (benefit) for income tax........... -- 2 --(c) 2
-------- ------- ------- ---------
Loss before extraordinary item............... $ (9,591) $(3,361) $ -- $ (12,952)
======== ======= ======= =========
Loss per share:
(Loss) before extraordinary item........... $ (9,591) $(3,361) $ (12,952)
Dividends and accretion.................... -- -- --
-------- ------- ---------
(Loss) before extraordinary item
attributable to common shareholders..... $ (9,591) $(3,361) $ (12,952)
======== ======= =========
(Loss) per share before extraordinary item
attributable to common shareholders..... $ (0.40) $ (0.38) $ (0.36)
======== ======= =========
Weighted average number of shares.......... 23,822 8,808 36,153
======== ======= =========
</TABLE>
See accompanying notes
F-87
<PAGE> 222
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RICHARD- PRO FORMA PRO FORMA PRO FORMA PRO FORMA
UROHEALTH X-CARDIA(1) ALLAN ADJUSTMENTS UROHEALTH IMAGYN ADJUSTMENTS TOTAL
--------- ----------- -------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 90,695 $ -- $ 8,427 $ -- $ 99,122 $ 9,371 $ -- $108,493
Cost of sales........................ 41,083 -- 4,320 -- 45,403 6,579 -- 51,982
-------- ------ ------- ------- -------- ------- ----- --------
Gross profit......................... 49,612 -- 4,107 -- 53,719 2,792 -- 56,511
Operating expenses:
Selling, general and
administrative................... 57,691 255 4,950 431(d) 63,327 6,316 -- 69,643
Research and development........... 4,997 354 594 -- 5,945 2,708 -- 8,653
Merger and acquisitions costs...... 3,600 -- -- -- 3,600 -- -- 3,600
Write-off incomplete research and
development...................... 47,232 -- -- -- 47,232 -- -- 47,232
Restructuring charges.............. 12,000 -- -- -- 12,000 -- -- 12,000
-------- ------ ------- ------- -------- ------- ----- --------
Total operating expenses............. 125,520 609 5,544 431 132,104 9,024 -- 141,128
-------- ------ ------- ------- -------- ------- ----- --------
Loss from operations................. (75,908) (609) (1,437) (431) (78,385) (6,232) -- (84,617)
Other income (expense):
Minority interest consisting of
accrued dividends on preferred
stock of subsidiary.............. (25) -- -- -- (25) -- -- (25)
Interest income.................... 339 11 -- -- 350 1,826 -- 2,176
Interest expense................... (8,143) (17) (136) (1,116)(e) (9,412) -- -- (9,412)
-------- ------ ------- ------- -------- ------- ----- --------
Loss before tax and extraordinary
item............................... (83,737) (615) (1,573) (1,547) (87,472) (4,406) -- (91,878)
Provision (benefit) for income tax... (227) -- (134) -- (361) 2 --(c) (359)
-------- ------ ------- ------- -------- ------- ----- --------
Loss before extraordinary item....... $(83,510) $(615) $(1,439) $(1,547) $(87,111) $(4,408) $ -- $(91,519)
======== ====== ======= ======= ======== ======= ===== ========
Loss per share:
Loss before extraordinary item..... $(83,510) $(87,111) $(4,408) $(91,519)
Dividends and accretion on
redeemable convertible preferred
stock............................ (398) (398) -- (398)
-------- -------- ------- --------
Loss before extraordinary item
attributable to common
stockholders..................... $(83,908) $(87,509) $(4,408) $(91,917)
======== ======== ======= ========
Loss per share before extraordinary
item............................. $ (4.31) $ (4.09) $ (0.61) $ (2.92)
======== ======== ======= ========
Weighted average number of shares
used to compute net loss per
share............................ 19,453 21,417 7,196 31,491
======== ======== ======= ========
</TABLE>
- ---------------
(1) X-Cardia results of operations reflect activity from the company's inception
February 13, 1996 through December 31, 1996. Activity from February 13, 1996
through March 31, 1996 is immaterial.
See accompanying notes
F-88
<PAGE> 223
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH IMAGYN ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales........................................ $ 42,953 $ 2,976 $ -- $ 45,929
Cost of sales.................................... 14,964 2,485 -- 17,449
-------- ------- ----- ---------
Gross profit..................................... 27,989 491 -- 28,480
Operating expenses:
Selling, general and administrative............ 37,056 3,995 -- 41,051
Research and development....................... 2,777 1,712 -- 4,489
Merger and acquisition costs................... 4,232 -- -- 4,232
Restructuring charges.......................... 5,456 -- -- 5,456
-------- ------- ----- ---------
Total operating expenses......................... 49,521 5,707 -- 55,228
Other operating income........................... -- 3,500 -- 3,500
-------- ------- ----- ---------
Loss from operations............................. (21,532) (1,716) -- (23,248)
Other income (expense):
Minority interest consisting of accrued dividends
on preferred stock of subsidiary............... (55) -- -- (55)
Interest income................................ 101 265 -- 366
Interest expense............................... (1,059) (174) -- (1,233)
Other.......................................... (48) -- -- (48)
-------- ------- ----- ---------
Loss before tax.................................. (22,593) (1,625) -- (24,218)
Provision for income tax......................... 431 2 -- 433
-------- ------- ----- ---------
Net loss......................................... $(23,024) $(1,627) $ -- $ (24,651)
======== ======= ===== =========
Loss per share:
Net loss....................................... $(23,024) $(1,627) $ (24,651)
Dividends and accretion on redeemable
convertible preferred stock................. (579) (20) (599)
-------- ------- ---------
Net loss attributable to common stockholders... $(23,603) $(1,647) $ (25,250)
======== ======= =========
Net loss per share............................. $ (1.58) $ (0.31) $ (1.12)
======== ======= =========
Weighted average number of shares used to
compute net loss per share.................. 14,980 5,334 22,448
======== ======= =========
</TABLE>
See accompanying notes
F-89
<PAGE> 224
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH IMAGYN ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 49,250 $ 2,243 $ -- $ 51,493
Cost of sales...................................... 18,529 1,811 -- 20,340
--------- ------- ---- ---------
Gross profit....................................... 30,721 432 -- 31,153
Operating expenses:
Selling, general and administrative.............. 41,057 4,548 -- 45,605
Research and development......................... 5,406 1,811 -- 7,217
Merger and acquisition costs..................... 851 -- -- 851
Settlement of litigation......................... 300 -- -- 300
Write-off incomplete research and development.... 5,312 -- -- 5,312
Restructuring charges............................ 1,200 -- -- 1,200
--------- ------- ---- ---------
Total operating expenses........................... 54,126 6,359 -- 60,485
Other operating income............................. -- 3,500 -- 3,500
--------- ------- ---- ---------
Loss from operations............................... (23,405) (2,427) -- (25,832)
Other income (expense):
Minority interest consisting of accrued dividends
on preferred stock of subsidiary.............. (78) -- -- (78)
Interest income.................................. 394 174 -- 568
Interest expense................................. (367) (391) -- (758)
Other............................................ 5 -- -- 5
--------- ------- ---- ---------
Loss before tax.................................... (23,451) (2,644) -- (26,095)
Provision for income tax........................... 1,386 1 -- 1,387
--------- ------- ---- ---------
Net loss........................................... $(24,837) $(2,645) $ -- $ (27,482)
========= ======= ==== =========
Loss per share:
Net loss......................................... $(24,837) $(2,645) $ (27,482)
Dividends and accretion on redeemable convertible
preferred stock............................... (45) (60) (105)
--------- ------- ---------
Net loss attributable to common stockholders..... $(24,882) $(2,705) $ (27,587)
========= ======= =========
Net loss per share............................... $ (1.70) $ (0.59) $ (1.31)
========= ======= =========
Weighted average number of shares used to compute
net loss per share............................ 14,672 4,573 21,074
========= ======= =========
</TABLE>
See accompanying notes
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UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Pro Forma Adjustments
Acquisition of Imagyn
On April 19, 1997, the Company entered into an Agreement and Plan of Merger
pursuant to which Urohealth would acquire Imagyn Medical, Inc. ("Imagyn") in a
stock-for-stock merger (the "Imagyn Merger"). The Imagyn Merger is expected to
be accounted for as a pooling-of-interests and each share of Imagyn common stock
will be exchanged for 1.40 shares of Urohealth Common Stock. The consummation of
the Imagyn Merger is subject to approval of the Imagyn and Urohealth
stockholders, and other customary closing conditions. No assurances can be given
that the Imagyn Merger will be successfully consummated.
(a) Under the pooling of interests accounting method, direct transaction
costs are deferred and expensed upon completion of the merger. Such costs are
estimated to be $3.5 million and include investment banking, legal, accounting,
printing, solicitation, filing fees and similar expenses. The accrual of these
expenses has been reflected in the unaudited pro forma condensed combined
balance sheet as of June 30, 1997, but not in the unaudited pro forma condensed
combined statements of operations. Direct transaction costs reflected in the
unaudited pro forma condensed combined statements of operations relate to
previous mergers.
(b) Common stock and additional paid-in capital have been adjusted to
reflect the issuance of Urohealth Common Stock in exchange for the issued and
outstanding shares of Imagyn Common Stock.
(c) No income tax provision or benefit has been recorded in the pro forma
adjustments, since the combined historical operations of the companies would not
result in the recognition of additional income tax provision or benefit.
Acquisition of X-Cardia
On February 28, 1997, the Company acquired X-Cardia Corporation through a
merger of X-Cardia into a wholly owned subsidiary of the Company. This
transaction was accounted for as a purchase. The results of operations of
X-Cardia are included in the results of operations of Urohealth from the date of
acquisition. The unaudited pro forma condensed consolidated statement of
operations for the year ended March 31, 1997 reflects the results of operations
for X-Cardia as if the acquisition had occurred as of April 1, 1996.
Acquisition of Richard-Allan
On August 14, 1996, the Company acquired Richard-Allan Medical Industries,
Inc. in a transaction accounted for as a purchase. The results of operations of
Richard-Allan are included in the results of operations of Urohealth from the
date of acquisition. The unaudited pro forma condensed consolidated statement of
operations for the year ended March 31, 1997 reflects the results of operations
for Richard-Allan as if the acquisition had occurred as of April 1, 1996.
(d) Goodwill, net of write-off of purchased research and development
related to Richard-Allan, is $32.3 million. Goodwill is amortized over 25 years.
(e) Interest on funds used and additional debt assumed to effect the
acquisition of Richard-Allan including the new bank credit facility ($30.0
million) assumed note payable ($3.0 million), and internal funds (approximately
$1.0 million) at an estimated composite interest rate of 8.75%.
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APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 17, 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.
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
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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 1.40 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.
(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
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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 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 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.
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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 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
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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.
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 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-ScottRodino 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
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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 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
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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 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 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
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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 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
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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 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.
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 documenta-
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tion 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, 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
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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 (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 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
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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 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.
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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:
(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 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;
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(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 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 semimonthly) 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
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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, 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.
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
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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 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.
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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 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 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.
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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 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, Keith
Tholin and Gary Woker 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) Prior to the Effective Time, Imagyn and Gary Woker shall have
terminated 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
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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.
(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, 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.
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(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 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.
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
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restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or any other action shall have become final and
non-appealable.
(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 Five Million U.S.
Dollars ($5,000,000) (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 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 Two Million U.S. Dollars ($2,000,000) 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
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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 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
with a copy to:
Morrison & Foerster LLP
19900 MacArthur Boulevard, Suite 1200
Irvine, California 92612
Attention: Robert M. Mattson, Jr., Esq.
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(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.
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.
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<PAGE> 249
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
IMAGYN MEDICAL, INC.
By: /s/ FRANKLIN D. BROWN
------------------------------------
Name: Franklin D. Brown
Title: President and
Chief Executive Officer
Attest
/s/ J. CASEY MCGLYNN
- --------------------------------------
J. Casey McGlynn
Secretary
A-24
<PAGE> 250
APPENDIX B
[PIPER JAFFRAY LETTERHEAD]
July 16, 1997
The Board of Directors
UROHEALTH Systems, Inc.
Five Civic Plaza, Suite 100
Newport Beach, CA 92660
Attention: Charles A. Laverty
Chairman and Chief Executive Officer
Members of the Board:
In connection with the proposed transaction ("Transaction") in which
UROHEALTH Subsidiary Corporation, a wholly-owned subsidiary of UROHEALTH
Systems, Inc. ("UROHEALTH") shall be merged with and into Imagyn Medical Inc.
("Imagyn") and Imagyn shall thereupon be a wholly-owned subsidiary of UROHEALTH,
you have requested our opinion as to the fairness, from a financial point of
view, to UROHEALTH Systems, Inc. of the proposed aggregate consideration to be
paid by UROHEALTH in the Transaction. Under the terms of the Agreement and Plan
of Merger (the "Agreement") at the effective time of the Transaction, each
issued and outstanding share of Imagyn Common Stock (other than shares held by
UROHEALTH or a UROHEALTH subsidiary and Excluded Shares (as such term is defined
in the Merger Agreement)) will be exchanged into 1.4000 shares of UROHEALTH
Common Stock. The terms and conditions of the Merger, including the cash to be
paid in respect of fractional shares and the terms limiting Excluded Shares, are
more fully set forth in the Agreement. The Transaction is intended to qualify as
a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code") and will be treated as a
pooling-of-interests for accounting purposes.
Piper Jaffray Inc., as a customary part of its investment banking business,
is engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, underwriting and secondary distributions of
securities, private placements and valuations for estate, corporate and other
purposes. We have acted as exclusive financial advisor to UROHEALTH in
connection with the Transaction and will receive a fee for our services which is
contingent upon consummation of the Transaction. In addition, we will receive a
separate fee for providing this opinion. This opinion fee is not contingent upon
the consummation of the Transaction. UROHEALTH has also agreed to indemnify us
against certain liabilities in connection with our services. Piper Jaffray makes
a market in the Common Stock of UROHEALTH and provides research coverage for
UROHEALTH. Piper Jaffray acted as co-manager of the public offering of
UROHEALTH's Common Stock on November 13, 1996. In addition, Piper Jaffray acted
as financial advisor to UROHEALTH in connection with prior acquisition
transactions and has received fees for the rendering of such services. In the
ordinary course of our business, we and our affiliates may actively trade
securities of UROHEALTH for our own account or the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have reviewed (i) an executed copy of the Agreement and Plan of
Merger dated April 19, 1997 and a draft copy of Amendment #1 to the Agreement
and Plan of Merger, (ii) certain proprietary information related to Imagyn,
(iii) certain publicly available financial and other information relative to
Imagyn, (iv) certain internal financial information of Imagyn on a stand-alone
basis prepared for financial planning purposes and furnished by the management
of Imagyn, (v) to the extent publicly available, the stock price premiums paid
and financial terms of certain acquisition transactions involving companies
operating in industries deemed similar to that in which Imagyn operates and
selected public companies deemed comparable to Imagyn, (vi) certain publicly
available information relative to UROHEALTH, (vii) certain internal financial
information of UROHEALTH, Imagyn and the combined company, prepared by UROHEALTH
management for financial planning purposes and furnished by the management of
UROHEALTH, and (viii) certain publicly available financial
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and securities data of UROHEALTH. We had discussions with members of the
management of (a) UROHEALTH concerning the financial condition, current
operating results and business outlook for both UROHEALTH and Imagyn on a
stand-alone basis and the combined company resulting from the Transaction and
UROHEALTH's plans relating to such combined company as well as the amount and
timing of the cost savings and related expenses expected to result from the
Transaction, and (b) Imagyn concerning the financial condition, current
operating results and business outlook for Imagyn and the combined company.
We have relied upon and assumed the accuracy, completeness and fairness of
the financial statements and other information provided to us by UROHEALTH,
Imagyn or otherwise made available to us, and have not assumed responsibility
for the independent verification of such information. Neither UROHEALTH or
Imagyn publicly disclosed internal financial information of the type provided to
Piper Jaffray in connection with Piper Jaffray's review of the Transaction. Such
information was prepared for financial planning purposes and was not prepared
with the expectation of public disclosure. We have relied upon the assurances of
the managements of UROHEALTH and Imagyn that the information provided to us as
set forth above by UROHEALTH and Imagyn has been prepared on a reasonable basis,
and, with respect to financial planning data and other business outlook
information, reflects the best currently available estimates, and that they are
not aware of any information or facts that would make the information provided
to us incomplete or misleading. Without limiting the generality of the
foregoing, we have assumed that neither UROHEALTH nor Imagyn is a party to any
pending transaction, including external financial, recapitalizations,
acquisitions or merger discussions, other than the Transaction or in the
ordinary course of business.
We have assumed that the transactions contemplated by the Agreement will
constitute a "reorganization" within the meaning of Section 368(a) of the Code
and that the transaction will be treated as a pooling-of-interests for
accounting purposes. In addition, in arriving at our opinion, we have assumed
that, in the course of obtaining the necessary regulatory approvals for the
Transaction, no restrictions, including any divestiture requirements will be
imposed that will have a material adverse effect on the contemplated benefits of
the Transaction.
In arriving at our opinion, we have not performed any appraisals or
valuations of any specific assets or liabilities of UROHEALTH or Imagyn, and
have not been furnished with any such appraisals or valuations. We express no
opinion regarding the liquidation value of any entity.
This opinion is necessarily based upon the information available to us and
facts and circumstances as they exist and are subject to evaluation on the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion. We are not expressing any opinion
herein as to the price at which shares of UROHEALTH Common Stock have traded or
may trade at any future time. We have not undertaken to reaffirm or revise this
opinion or otherwise comment upon any events occurring after the date hereof and
do not have any obligation to update, revise or reaffirm this opinion.
This opinion is directed to the Board of Directors of UROHEALTH and is not
intended to be and does not constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the Transaction. We were not
requested to opine as to, and this opinion does not address, the basic business
decision to proceed with or effect the Transaction. This opinion shall not be
published or otherwise used, nor shall any public references to us be made,
without our prior written approval.
Based upon and subject to the foregoing and based upon such other factors
as we consider relevant, it is our opinion that the aggregate consideration
proposed to be paid by UROHEALTH in the Transaction is fair, from a financial
point of view, to UROHEALTH as of the date hereof.
Sincerely,
[SIG]
PIPER JAFFRAY INC.
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<PAGE> 252
APPENDIX C
[DILLON, READ & CO. INC. LETTERHEAD]
July 16, 1997
The Board of Directors
Imagyn Medical, Inc.
27651 La Paz Road
Laguna Niguel, CA 92677
Gentlemen:
We understand that UROHEALTH Systems, Inc., a Delaware corporation
("UROHEALTH") is undertaking a transaction whereby a wholly-owned subsidiary of
UROHEALTH will be merged with and into Imagyn Medical, Inc., a Delaware
corporation ("Imagyn"), pursuant to the terms of an Agreement and Plan of Merger
and the exhibits thereto, as amended on July 16, 1997 (the "Merger Agreement"),
such that Imagyn becomes a wholly-owned subsidiary of UROHEALTH (the
"Transaction"). Pursuant to the Transaction, each outstanding share of Imagyn's
Common Stock, $0.001 par value (the "Imagyn Common Stock"), shall be converted
into 1.4 shares of UROHEALTH Common Stock, $0.001 par value (the "UROHEALTH
Common Stock"), (the "Consideration"). The terms and conditions of the
Transaction are more fully set forth in the Merger Agreement.
You have requested our opinion as to whether the Consideration to be
received by the holders of Imagyn Common Stock (the "Holders") in the
Transaction is fair to such Holders, from a financial point of view.
Dillon, Read & Co. Inc. has acted as financial advisor to the Board of
Directors of Imagyn in connection with the Merger and will receive a fee upon
the consummation thereof. In the ordinary course of business, we have traded
securities of Imagyn for our own account and for the accounts of our customers
and have traded securities of UROHEALTH for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities. Dillon, Read & Co. Inc. acted as lead manager in Imagyn's
initial public offering and received standard and customary fees for such role.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to Imagyn and UROHEALTH, (ii) reviewed certain management estimates and
company financial forecasts prepared by the managements of Imagyn and UROHEALTH,
(iii) reviewed certain financial information and other data provided to us by
Imagyn that is not publicly available relating to the business and prospects of
Imagyn, (iv) reviewed certain financial information and other data provided to
us by UROHEALTH that is not publicly available relating to the business and
prospects of UROHEALTH, (v) conducted discussions with members of the senior
managements of Imagyn and UROHEALTH with respect to the operations, financial
condition, history and prospects of each company, (vi) reviewed publicly
available financial and stock market data with respect to certain other
companies in lines of business we believe to be generally comparable to those of
Imagyn and UROHEALTH, (vii) considered the pro forma effects of the Transaction
on UROHEALTH's financial statements and reviewed certain estimates of synergies
prepared by the management of Imagyn, (viii) reviewed the historical market
prices and trading volumes of the Imagyn Common Stock and the UROHEALTH Common
Stock,
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<PAGE> 253
Imagyn Medical, Inc.
July 16, 1997
Page 2
(ix) compared the financial terms of the Transaction with the financial terms of
certain other transactions which we believe to be generally comparable to the
Transaction, (x) reviewed the Merger Agreement, and (xi) conducted such other
financial studies, analyses, and investigations, and considered such other
information as we deemed necessary or appropriate.
In connection with our review, we have not independently verified any of
the foregoing information and have, with your consent, relied on its being
complete and accurate in all material respects. In addition, we have not made or
received any evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of Imagyn and UROHEALTH. With respect to the financial
forecasts, pro forma effects and estimates of synergies referred to above, we
have assumed, with your consent, that the Imagyn and UROHEALTH company financial
forecasts, pro forma information and estimates of synergies have been prepared
reasonably on a basis reflecting the best currently available estimates and
judgments of the respective managements as to the future financial performance
of their respective companies. Further, our opinion is based on economic,
monetary, and market conditions existing on the date hereof. Dillon, Read & Co.
Inc. was authorized to contact only one alternative potential merger partner; we
understand that Imagyn contacted several other companies in an effort to solicit
additional third party offers.
In rendering our opinion, we have assumed, with your consent, that the
Transaction will receive pooling-of-interests accounting treatment and will
qualify as a tax-free reorganization.
In rendering this opinion, we are not rendering any opinion as to the value
of UROHEALTH or making any recommendation to the Holders with respect to the
advisability of disposing of or retaining UROHEALTH Common Stock received in the
Transaction. In addition, we are not making any recommendation regarding whether
or not it is advisable for Holders to vote in favor of the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the Holders in the Transaction
is fair to such Holders from a financial point of view.
Very truly yours,
/s/ Dillon, Read & Co. Inc.
Dillon, Read & Co. Inc.
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<PAGE> 254
APPENDIX D
ARTICLE III, SECTION 1 OF THE BYLAWS OF THIS CORPORATION IS HEREBY AMENDED
AND RESTATED IN ITS ENTIRETY TO READ AS FOLLOWS:
"Section 1. Number and Term of Office. The number of directors of the
corporation shall not be less than three (3) nor more than fifteen (15) until
changed by amendment of the Certificate of Incorporation or by a Bylaw amending
this Section 1 duly adopted by the Board of Directors. The exact number of
directors shall be fixed from time to time, within the limits specified in the
Certificate of Incorporation or in this Section 1, by the Board of Directors.
Subject to the foregoing provisions for changing the number of directors, the
number of directors of the corporation has been fixed at nine (9).
The directors shall be divided into three classes, designated Class I,
Class II and Class III, as nearly equal in number as the then total number of
directors permits. At the 1997 annual meeting of stockholders, Class I directors
shall be elected for a one-year term, Class II directors for a two-year term and
Class III directors for a three-year term. At each succeeding annual meeting
beginning in 1998, successors to the class of directors whose term expires at
that annual meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term which
shall coincide with the remaining term of that class, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
Notwithstanding the foregoing, whenever the holders of any one or more classes
or series of Preferred Stock issued by the corporation shall have the right to
vote separately by class or series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of these
Bylaws applicable thereto, and such directors so elected shall not be divided
into classes pursuant to this Section 1 unless expressly provided by such terms.
With the exception of the first Board of Directors, which shall be elected
by the incorporators, and except as provided in Section 3 of this Article III,
the directors shall be elected by a plurality vote of shares represented in
person or by proxy, at the stockholders annual meeting each year and entitled to
vote on the election of directors. Elected directors shall hold office until the
next annual meeting for the years in which their terms expire and until their
successors shall be duly elected and qualified. Directors need not be
stockholders. If, for any cause, the Board of Directors shall not have been
elected at an annual meeting, they may be elected as soon as thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws."
SECTION 4(B) OF THE BYLAWS OF THIS CORPORATION IS HEREBY AMENDED AND
RESTATED IN ITS ENTIRETY TO READ AS FOLLOWS:
"(b) At a special meeting of stockholders called for the purpose in the
manner hereinabove provided, the Board of Directors, or any individual director,
may be removed from office only for cause and a new director or directors
elected by a vote of stockholders holding a majority of the outstanding shares
entitled to vote at an election of directors."
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<PAGE> 255
IMAGYN MEDICAL, INC.
27651 LA PAZ ROAD
LAGUNA NIGUEL, CALIFORNIA 92677
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS OF IMAGYN MEDICAL, INC.
TO BE HELD ON SEPTEMBER 29, 1997
The undersigned hereby appoints Franklin D. Brown and J.C. MacRae, each with
full power of substitution, as proxy of the undersigned, to attend the Special
Meeting of Stockholders of IMAGYN MEDICAL, INC. (the "Company") to be held at
the Sutton Place Hotel, 4500 MacArthur Boulevard, Newport Beach, California
92660 at 8:00 a.m. local time on September 29, 1997, and at any and all
adjournments thereof, and to vote all Common Stock of the Company, as designated
on the reverse side of this proxy, with all powers the undersigned would possess
if personally present at the meeting.
This proxy will be voted or withheld from being voted in accordance with the
instructions specified. Where no choice is specified, this proxy will confer
discretionary authority and will be voted FOR approval of the Merger. This proxy
confers authority for the above named persons to vote in his discretion with
respect to amendments or variations to the matters identified in the notice of
the meeting accompanying this proxy and other matters which may properly come
before the meeting. A stockholder has the right to appoint a person, who need
not be a stockholder, to attend and act on his behalf at the meeting, other than
the person designated in this form of proxy, such right may be exercised by
inserting the name of such person in the blank space provided.
(Continued and to be signed on reverse side)
<PAGE> 256
(Continued from other side)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. Adoption and approval of the Agreement and Plan of Merger pursuant to which
the Company would become a wholly owned subsidiary of Urohealth Systems,
Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY IN THE
ENCLOSED ENVELOPE.
NOTE: Please sign exactly as name
appears hereon. When signing as
executor, administrator, attorney,
trustee or guardian please give
your full title as such. If a
corporation, please sign in full
corporation name by president or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person. If a joint tenancy, please
have both tenants sign.
Dated: , 1997
----------------------------
----------------------------------
(Signature)
<PAGE> 257
UROHEALTH SYSTEMS, INC.
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS OF
UROHEALTH SYSTEMS, INC. TO BE HELD ON SEPTEMBER 29, 1997
The undersigned hereby appoints Charles A. Laverty and Kevin M.
Higgins, each with full power of substitution, as proxy of the undersigned, to
attend the Annual Meeting of Stockholders of UROHEALTH SYSTEMS, INC. (the
"Company") to be held at the Hyatt Newporter, 1107 Jamboree Road, Newport
Beach, California 92660 at 8:00 a.m. local time, and at any and all
adjournments thereof, and to vote all Common Stock of the Company, as
designated on the reverse side of this proxy, with all powers the undersigned
would possess if personally present at the meeting.
This proxy will be voted or withheld from being voted in accordance
with the instructions specified. Where no choice is specified, this proxy will
confer discretionary authority and will be voted FOR approval of Proposals 1
through 7. This proxy confers authority for the above named persons to vote in
his discretion with respect to amendments or variations to the matters
identified in the notice of the meeting accompanying this proxy and other
matters which may properly come before the meeting. A stockholder has the right
to appoint a person, who need not be a stockholder, to attend and act on his
behalf at the meeting, other than the person designated in this form of proxy,
such right may be exercised by inserting the name of such person in the blank
space provided.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
-----------
SEE REVERSE
SIDE
-----------
<PAGE> 258
[X] PLEASE MARK YOUR
VOTE AS IN THIS
EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE FOLLOWING PROPOSALS AND NOMINEES:
FOR AGAINST ABSTAIN
1. Approval of classification of the Board [ ] [ ] [ ]
of Directors.
FOR WITHHELD NOMINEES: Class I: Michael Gross
2. Election of [ ] [ ] Richard R. Newhauser
Directors Francis J. Tedesco
Class II: Abbey J. Butler
For, except vote withheld from the Robert N. Elkins, M.D.
the following nominees: Melvyn J. Estrim
Class III: John S. Chamberlin
Lawrence Goelman
Charles A. Laverty
FOR AGAINST ABSTAIN
3. Adoption and approval of the Agreement and [ ] [ ] [ ]
Plan of Merger relating to the merger of
a wholly owned subsidiary with Imagyn
Medical, Inc.
4. Ratification of selection of accountants [ ] [ ] [ ]
5. Approval of an increase in the authorized [ ] [ ] [ ]
shares of Common Stock
6. Approval of a change of the name of the [ ] [ ] [ ]
corporation to Imagyn Medical Technologies,
Inc.
7. Approval of elimination of the ability of [ ] [ ] [ ]
stockholders to take action by written
consent.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE.
SIGNATURE(S)________________________________________ DATE ______________, 1997
NOTE: Please sign exactly as name appears hereon. When signing as executor,
administrator, attorney, trustee or guardian please give your full title
as such. If a corporation, please sign in full corporation name by
president or other authorized officer. If a partnership, please sign in
partnership name by authorized person. If a joint tenancy, please have
both tenants sign.
