<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________ .
COMMISSION FILE NUMBER: 1-11150
------------------------
IMAGYN MEDICAL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 98-0122944
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5 CIVIC PLAZA, SUITE 100, NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 668-5858
UROHEALTH SYSTEMS, INC.
(FORMER NAME)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The number of shares of Common Stock outstanding as of October 31, 1997 was
35,861,326.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1997 and March 31,
1997....................................................................... 3
Condensed Consolidated Statements of Operations for the Three Months and Six
Months Ended September 30, 1997 and September 30, 1996..................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1997 and September 30, 1996.................................. 5
Notes to the Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 13
Item 2. Changes in Securities........................................................ 13
Item 4. Submission of matters to a vote of Security Holders.......................... 13
Item 6. Exhibits and Reports on Form 8-K............................................. 14
</TABLE>
2
<PAGE> 3
IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents.............................................................. $ 10,497 $ 22,574
Short term investments............................................................ 23,114 18,375
Receivables, net of allowance for doubtful accounts of $1,200 and $1,684 on
September 30, 1997 and March 31, 1997, respectively.............................. 39,454 18,103
Income tax receivable............................................................. -- 377
Advances to officers.............................................................. -- 114
Inventories....................................................................... 41,501 24,063
Distributor inventories........................................................... -- 6,307
Prepaid expenses.................................................................. 3,945 3,049
--------- --------
Total current assets.................................................................. 118,511 92,962
Long-term cash investments............................................................ 3,823 5,611
Restricted cash....................................................................... 19,861 48
Receivables -- long term.............................................................. 2,528 2,722
Property and equipment, net........................................................... 31,865 27,533
Patents and intangibles, net of accumulated amortization of $3,782 and $2,646 on
September 30, 1997 and March 31, 1997, respectively................................. 5,970 6,285
Loans to officers..................................................................... 2,073 550
Deposits and other assets............................................................. 1,737 2,288
Deferred debt issuance costs.......................................................... 9,408 5,986
Goodwill.............................................................................. 60,568 43,417
--------- --------
$ 256,344 $187,402
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 46,279 $ 22,800
Compensation and employee benefits................................................ 3,290 3,381
Restructuring liabilities......................................................... 7,032 6,192
Short-term debt................................................................... 18,568 14,518
Current portion of long-term debt................................................. 3,365 3,328
--------- --------
Total current liabilities................................................. 78,534 50,219
Deferred Income....................................................................... 1,000 1,000
Long-term liabilities:
Long-term debt.................................................................... 55,357 98,292
Senior subordinated notes, net.................................................... 108,402 --
Restructuring liabilities, less current portion................................... 1,739 822
Other liabilities................................................................. 3,538 4,149
Minority interest in consolidated subsidiary.......................................... -- 237
Common Stockholders' Equity:
Common stock -- $0.001 par value
Authorized shares -- 100,000,000
Issued and outstanding shares -- 35,592,357 and 34,981,208 at September 30,
1997 and March 31, 1997, respectively....................................... 36 35
Warrants.......................................................................... 7,080 5,359
Additional paid-in capital........................................................ 227,257 225,132
Note receivable from shareholder.................................................. -- (121)
Unearned compensation............................................................. -- (615)
Foreign currency translation adjustment........................................... 44 (14)
Deficit........................................................................... (226,643) (197,093)
--------- --------
Total common stockholders' equity......................................... 7,774 32,683
--------- --------
$ 256,344 $187,402
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.................................... $ 43,131 $ 24,330 $ 69,476 $ 44,154
Cost of sales................................ 21,383 9,812 34,019 17,521
--------- --------- --------- ---------
Gross profit................................. 21,748 14,518 35,457 26,633
Operating expenses:
Selling, general and administrative..... 20,307 14,079 39,726 25,827
Research and development................ 2,911 1,645 5,675 3,126
Restructuring charges................... 5,413 4,000 5,413 4,000
Direct acquisition costs................ 3,729 -- 4,220 --
Write-off of purchased research and
development........................... -- 25,500 -- 25,500
--------- --------- --------- ---------
Total operating expenses........... 32,360 45,224 55,034 58,453
Loss from operations......................... (10,612) (30,706) (19,577) (31,820)
Other income (expense):
Minority interest consisting of accrued
dividends on preferred stock of
subsidiary............................ -- (18) (4) (36)
Interest income......................... 1,174 770 2,146 1,048
Interest expense........................ (5,321) (1,856) (10,754) (2,900)
Other................................... (16) -- 464 --
--------- --------- --------- ---------
Loss before taxes and extraordinary item..... (14,775) (31,810) (27,725) (33,708)
Provision (benefit) for income taxes......... -- (372) 2 (370)
--------- --------- --------- ---------
Loss before extraordinary item............... (14,775) (31,438) (27,727) (33,338)
Extraordinary item (early extinguishment of
debt)...................................... -- (1,823) (2,973)
--------- --------- --------- ---------
Net loss..................................... $ (14,775) $ (31,438) $ (29,550) $ (36,311)
========= ========= ========= =========
Net loss per share:
Loss before extraordinary item.......... $ (14,775) $ (31,438) $ (27,727) $ (33,338)
Dividends and accretion on redeemable
convertible preferred stock........... -- -- -- 398
--------- --------- --------- ---------
Loss attributable to common stockholders
before extraordinary item............. (14,775) (31,438) (27,727) $ (33,736)
Extraordinary item...................... -- -- (1,823) (2,973)
--------- --------- --------- ---------
Net loss attributable to common
stockholders.......................... $ (14,775) $ (31,438) $ (29,550) $ (36,709)
========= ========= ========= =========
Loss per share before extraordinary
item.................................. $ (0.42) $ (1.04) $ (0.79) $ (1.26)
========= ========= ========= =========
Net loss per share...................... $ (0.42) $ (1.04) $ (0.84) $ (1.37)
========= ========= ========= =========
Weighted average number of common shares
used to compute loss per share........ 35,330 30,140 35,194 26,811
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (29,550) $ (36,311)
Non cash items included in net loss:
Extraordinary expense..................................... 1,823 2,433
Depreciation and amortization............................. 4,714 2,055
Amortization of deferred debt issuance costs.............. 819 442
Accretion and accrued interest on convertible notes....... -- 42
Loss on retirement of assets.............................. 149 --
Accrued dividend on preferred stock in subsidiary......... 4 36
Write off of incomplete research and development.......... -- 25,500
Provision for doubtful accounts........................... 95 (267)
Compensation relating to stock option vesting............. 615 175
Other..................................................... (339) 17
Changes in operating assets and liabilities.................... (19,557) (20,004)
--------- ---------
Net cash used in operating activities................ (41,227) (25,882)
Cash flows from investing activities:
Purchase of property and equipment............................. (5,334) (9,668)
Purchase of patents............................................ (250) (502)
Purchase of X-Cardia technology................................ (4,671) --
Proceeds from sale of short and long term investments.......... 32,371 5,952
Restricted cash................................................ (19,514) (65)
Purchase of short and long term investments.................... (35,321) (25,513)
Loans and advances to officers................................. (1,215) --
Businesses purchased net of cash............................... -- (33,787)
--------- ---------
Net cash used in investing activities................ (33,934) (63,583)
Cash flows from financing activities:
Deferred financing fees paid................................... (5,941) (6,116)
Proceeds from issuance of common stock......................... 305 44,170
Proceeds from long-term debt................................... 110,000 72,934
Proceeds from short term debt.................................. 13,300 15,000
Repayment of long-term debt.................................... (45,219) (10,510)
Repayment of short-term debt................................... (9,250) (7,323)
Repurchase of preferred stock.................................. (111) --
--------- ---------
Net cash provided by financing activities............ 63,084 108,155
--------- ---------
Net (decrease) increase in cash..................................... (12,077) 18,690
Cash, beginning of period........................................... 22,574 6,622
--------- ---------
Cash, end of period................................................. $ 10,497 $ 25,312
========= =========
Cash paid for interest......................................... $ 3,734 $ 2,202
========= =========
Cash paid for taxes............................................ $ -- $ 7
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
IMAGYN MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
On September 29, 1997, a wholly-owned subsidiary of Urohealth Systems, Inc.
merged into Imagyn Medical, Inc. and Imagyn Medical, Inc. (Imagyn) became a
wholly-owned subsidiary of Urohealth. Imagyn shareholders received 1.4 shares of
Urohealth common stock for each share of Imagyn common stock. The transaction
was accounted for as a pooling of interests, and the financial statements
presented here reflect the pooled numbers of Urohealth and Imagyn. Also
effective September 29, 1997, Urohealth changed its name to Imagyn Medical
Technologies, Inc.
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 Imagyn Medical Technologies, 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 September
30, 1997, its condensed consolidated results of operations for the three and six
month periods ended September 30, 1997 and September 30, 1996, and its condensed
consolidated cash flows for the six month periods ended September 30, 1997 and
September 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 and six month periods ended September 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 costs that benefit one or more interim periods to more appropriately
reflect the benefits realized during the course of the fiscal year.
6
<PAGE> 7
Financial information presented reflects the September 29, 1997 merger with
Imagyn Medical, Inc., which has been accounted for as a pooling of interest. The
results of operations reported by the Company (Urohealth) and those by Imagyn
included in the accompanying interim consolidated financial statement are
summarized below.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
Urohealth................... $ 39,751 $ 21,581 $ 64,988 $ 38,899
Imagyn...................... 3,380 2,749 4,488 5,255
-------- -------- -------- --------
$ 43,131 $ 24,330 $ 69,476 $ 44,154
======== ======== ======== ========
Net loss:
Urohealth................... $ (7,767) $(30,554) $ (19,181) $ (35,701)
Imagyn...................... (7,008) (884) (10,369) (610)
-------- -------- -------- --------
$(14,775) $(31,438) $ (29,550) $ (36,311)
======== ======== ======== ========
</TABLE>
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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on March 31, 1998.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of this Standard is expected to have
no effect on the Company's computation of primary earnings per share for the
three and six months ended September 30, 1997 or the corresponding periods in
1996.
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>
SEPTEMBER 30, MARCH 31,
1997 1997
------------- -------------
<S> <C> <C>
Raw materials and supplies................................. $18,414 $10,147
Work in progress........................................... 5,653 3,606
Finished goods............................................. 17,434 10,310
------- -------
$41,501 $24,063
======= =======
Distributor inventories.................................... $ -- $ 6,307
======= =======
</TABLE>
4. DEBT
The Company was not in compliance with certain financial covenants under
its Senior Credit Facility for the quarter ended September 30, 1997, but was
granted a waiver through November 30, 1997 by its senior lender that permits
borrowings equal to the lesser of $15.0 million or 80% of eligible accounts
receivable under the facility. As of September 30, 1997, the Company had
borrowing eligibility of $15.0 million and outstanding borrowings of $13.3
million.
7
<PAGE> 8
5. RESTRUCTURING
The Company's restructuring plan to consolidate redundant facilities and
reduce personnel resulting from the mergers with Dacomed Corporation, Osbon
Medical Systems, Ltd. (Osbon) and Advanced Surgical, Inc. was initiated in
December 1995. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through September
30, 1997 are summarized in the table below. The remaining restructuring accrual
at September 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 SEPTEMBER 30,
ACCRUAL CHARGES CHARGES RECLASSIFICATIONS 1997
------------- -------- ------- ----------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs...... $ 2,620 $ -- $1,867 $(730) $ 23
Facility reduction costs....... 2,836 1,199 1,863 730 504
------ ------ ------ ----- ----
$ 5,456 $1,199 $3,730 $ -- $ 527
====== ====== ====== ===== ====
</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. The estimated cost associated with each
component of this restructuring plan and the cash and non-cash charges incurred
through September 30, 1997 are summarized in the table below.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH SEPTEMBER 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction cost.................... $ 2,412 $ -- $1,365 $ 1,047
Facility reduction costs.................... 1,588 -- 299 1,289
------ ---- ------ ------
$ 4,000 $ -- $1,664 $ 2,336
====== ==== ====== ======
</TABLE>
In March 1997, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from mergers with Osbon and
Microsurge Inc. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through September
30, 1997 are summarized in the table below.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH SEPTEMBER 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs................... $ 7,067 $ -- $4,985 $ 2,082
Facility reduction costs.................... 933 473 96 364
------ ---- ------ ------
$ 8,000 $473 $5,081 $ 2,446
====== ==== ====== ======
</TABLE>
In September 1997, the Company implemented a restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the merger
with Imagyn. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through September
30, 1997 are summarized in the table below.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH SEPTEMBER 30,
ACCRUAL CHARGES CHARGES 1997
------------- -------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs................... $ 3,598 $ -- $1,951 $ 1,647
Facility reduction costs.................... 1,815 -- -- 1,815
------ ---- ------ ------
$ 5,413 $ -- $1,951 $ 3,462
====== ==== ====== ======
</TABLE>
8
<PAGE> 9
Although subject to future adjustment, management of the Company believes
that restructuring reserves as of September 30, 1997 are adequate to complete
the various restructuring plans.
6. INCOME TAXES
The Company did not record an income tax provision or benefit for the
quarter ended September 30, 1997 since the realization of tax benefits of
operating losses is not assured.
7. CONTINGENCIES
In July and August 1997, nine 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 suits are based on substantially the same facts and have been
brought on behalf of purchasers of the Company's Common Stock during various
periods between July 18, 1996 and July 1, 1997. On October 6, 1997, the Court
ordered the nine cases consolidated and ordered the plaintiffs to file an
amended complaint setting forth all of the claims.
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.
8. SUBSEQUENT EVENTS
The Company filed a patent infringement suit against U.S. Surgical
Corporation on October 16, 1997. In its complaint, the Company alleges that U.S.
Surgical's ABBI breast biopsy device is infringing on two patents relating to
Imagyn's percutaneous incisional breast biopsy device, which will be marketed
under the name SITESELECT(TM). The Company's complaint asks the court for an
injunction barring further ABBI manufacturing and sales in the United States,
damages for U.S. Surgical's willful infringement of the patents, and attorneys'
fees.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Receivables................................................. $(21,252) $ (4,394)
Inventories................................................. (11,041) (11,180)
Income tax receivable....................................... 377 (377)
Prepaid expenses and deposits............................... (346) (3,314)
Accounts payable and accrued liabilities.................... 11,629 (2,729)
Compensation and employee benefits.......................... (92) 113
Restructuring liabilities................................... 1,757 2,278
Other liabilities........................................... (589) (401)
-------- --------
$(19,557) $(20,004)
======== ========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996.
Net sales. For the three months ended September 30, 1997, net sales of
$43.1 million were $18.8 million or 77.3% higher than sales of $24.3 million for
the corresponding period in 1996. Of this increase, $12.9 million was
attributable to initial Surgical stocking orders shipped during fiscal 1997 and
$8.3 million was attributed to an increase in the Company's Surgical and
Gynecology divisions sales resulting from increased sales through the Company's
existing distribution channels. These increases were partially offset by a $3.0
million decline in Urology sales. The Company believes the recently introduced
drug-based treatment for impotence adversely affected the sale of the Company's
Urology division's vacuum erection devices as patients opted to try this new
treatment modality. It is impracticable for the Company to predict the long-term
effects of the new treatment modality, on sales of the Company's Urology
division.
Gross profit. For the three months ended September 30, 1997, gross profit
increased $7.2 million or 49.8% over the same period in 1996. However, the gross
profit percentage decreased from 59.7% for the three months ended September 30,
1996 to 50.4% for the three months ended September 30, 1997. The decrease in
gross profit percentage was primarily due to a shift in sales from higher margin
urology products to lower margin surgical products. Higher margin urology
products accounted for 51% of total sales, for the three months ended September
30, 1996, decreasing to approximately 22% of total sales during the three months
ended September 30, 1997.
Selling, general and administrative. Selling, general and administrative
expenses of $20.3 million for the three months ended September 30, 1997 were
$6.2 million or 44.2% higher than selling, general and administrative expenses
of $14.1 million for the corresponding period in 1996. The increase was due to
the increased selling costs resulting from growing sales and the continued
development of the Company's infrastructure.
Research and development. Research and development costs for the three
months ended September 30, 1997 increased $1.3 million or 77% over the
corresponding period in 1996. During fiscal 1997, the Company made significant
investments in, and acquisitions of, technology. The increase in R&D
expenditures is related to the development of new products using the acquired
technologies.
Restructuring. For the three months ended September 30, 1997, the Company
recorded a restructuring charge attributable to the merger with Imagyn of $5.4
million consisting of $3.6 million in personnel reduction costs and $1.8 million
in facility reduction costs. Through September 30, 1997, $2.0 million of this
restructuring charge has been paid. (See note 5.)
Net interest expense. Net interest expense for the three months ended
September 30, 1997 increased $3.1 million over the corresponding period in 1996.
The increase was primarily due to interest expense associated with the Company's
12.5% Senior Subordinated Notes. This increase was partially offset by higher
interest income of $0.4 million attributable to higher cash and investment
balances held by the Company during the three months ended September 30, 1997.
Direct acquisition costs. The Company had direct acquisition costs of
approximately $3.7 million related to expenses paid to complete the Imagyn
merger.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996.
Net sales. For the six months ended September 30, 1997, net sales of $69.5
million were $25.3 million or 57.4% higher than sales of $44.2 million for the
corresponding period in 1996. Of this increase, $12.9 million was attributable
to initial Surgical stocking orders shipped during fiscal 1997, and $19.3
million was attributable to an increase in the Company's Surgical division sales
resulting from increased sales through the Company's existing distribution
channels and the inclusion of sales for a full six months from the Surgical
division's (Richard-Allan) operations which was purchased on August 15, 1996.
The Surgical increases were partially offset by a $6.8 million decline in
Urology sales. The Company believes that the introduction of a new drug-based
treatment for impotence adversely affected the sale of the Company's Urology
division's vacuum
10
<PAGE> 11
erection devices as patients opted to try this new treatment modality. It is
impracticable for the Company to predict the long-term effects of the new
treatment modality on sales of the Company's Urology division.
Gross profit. For the six months ended September 30, 1997, gross profit
increased $8.8 million or 33.1% over the same period in 1996. However, the gross
profit percentage decreased from 60.3% for the six months ended September 30,
1996 to 51.0% for the six months ended September 30, 1997. The decrease in gross
profit percentage was primarily due to a shift in sales from higher margin
Urology products to lower margin Surgical products. For the six months ended
September 30, 1996, higher margin Urology products accounted for 59% of total
sales, decreasing to approximately 28% of total sales during the six months
ended September 30, 1997.
Selling, general and administrative. Selling, general and administrative
expenses of $39.7 million for the six months ended September 30, 1997 were $13.9
million or 53.8% higher than selling, general and administrative expenses of
$25.8 million for the corresponding period in 1996. The increase was due to
increased selling costs associated with growing sales and the continued
development of the Company's infrastructure, and the inclusion of six months'
selling general and administrative expenses relating to the Surgical division's
(Richard-Allan) operation which was purchased on August 15, 1996.
Research and development. Research and development costs for the six months
ended September 30, 1997 increased $2.5 million over the corresponding period in
1996. The Company continues to make significant investments in, and acquisitions
of, technology. The increase in R&D expenditures is related to the development
of new products using the acquired technologies.
Net interest expense. Net interest expense for the six months ended
September 30, 1997 increased $6.8 million over the corresponding period in 1996.
The increase was primarily due to interest expense associated with the Company's
12.5% Senior Subordinated Notes (the Notes) in April 1997 as well as a full six
months of interest on the sale of convertible subordinated debentures which was
completed during May 1996. This increase was partially offset by higher interest
income of $1.1 million attributable to higher cash and investment balances held
by the Company during the six months ended September 30, 1997.
Extraordinary expense. The Company used approximately $55.0 million of the
net proceeds from the offering of the Notes to repay amounts outstanding under
its term and revolving credit facility. The Company 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.
Direct acquisition costs. The Company had direct acquisition costs of
approximately $4.2 million related to expenses paid to complete the Imagyn
merger.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $40 million.
The Company's consolidated cash and cash equivalents and short-term investments
decreased by $7 million over the six months ending September 30, 1997. Uses of
cash totaled $70 million during this six month period and related to cash used
in operating activities ($41 million), restricted cash ($19 million) and cash
used to purchase property, plant, equipment and technology ($10 million). For
the six month period $63 million in cash was provided from incremental debt
funding.
The Company's negative cash flows from operations of $41 million, primarily
related to operating losses, and increases in accounts receivable and
inventories. Accounts receivable balances were approximately $21.3 million
higher at September 30, 1997 than at March 31, 1997 primarily due to increased
sales during the six months ending September. Management anticipates further
increases in accounts receivable in fiscal 1998, as sales volume increases and
payment terms are possibly extended under a number of distribution agreements.
The Company's inventory balances were $17.4 million higher at September 30, 1997
than at March 31, 1997 due to an increase in inventories to levels to support
increased sales volumes, and the introduction of new products. The Company
expects further increases in inventories to support anticipated sales under
group purchasing organization and distribution agreements.
11
<PAGE> 12
Approximately $7 million of the Company's $8.8 million of remaining
restructuring liabilities are projected to be paid over the next 12 months. The
long-term portion consists of redundant facility lease costs to be paid through
2003 and severance costs to be paid out over the next two years. The Company
currently expects to pay these restructuring liabilities from cash flow from
operations or from financing activities.
The Company anticipates capital expenditures, primarily for increased
manufacturing capacity and information systems, for the next six months will be
approximately $6.7 million.
The Company is a holding company whose material assets consist primarily of
the capital stock of its subsidiaries. Consequently, the Company is dependent
upon dividends paid by its subsidiaries to pay the Company's debt obligations,
including its obligations under the Notes and the Senior Credit Facility. Except
for applicable restrictions under state corporate laws, there are currently no
restrictions on any subsidiaries ability to pay dividends to the Company.
The Company has a $50 million senior credit facility and is required to
meet certain financial covenants. Available amounts are based on eligible
inventory and accounts receivable. The Company was not in compliance with
certain financial covenants under its Senior Credit Facility for the quarter
ended September 30, 1997, but was granted a waiver through November 30, 1997 by
its lender that permits borrowings equal to the lesser of $15.0 million or 80%
of eligible accounts receivable under the facility. As of September 30, 1997,
the Company's borrowing eligibility was approximately $15 million. The Company
had borrowings of $13.3 million during in the September quarter.
The Company believes currently available cash balances, amounts available
under the Senior Credit Facility and funds generated from operations and other
financing alternatives will provide adequate liquidity to finance its operations
for the next twelve months. The Company may require additional funds to support
its working capital requirements or for other purposes and may seek to raise
such additional funds through public or private equity and/or debt financings or
from other sources. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to the Company. In the absence of such financing the Company's ability
to absorb adverse operating results or to fund capital expenditures or research
and development, to respond to changes in business and economic conditions and
to make future acquisitions may be adversely affected. The Company's business
strategy includes efforts to expand business operations through the acquisition
of new products, product lines and businesses. Business acquisitions may
continue to be financed through the issuance of shares of the Company's Common
Stock and other financing activities. However, there can be no assurance that
any such transactions will be consummated. Should the Company not be able to
obtain such financing, the Company will be required to proceed with its planned
expansion at a slower rate.
BUSINESS RISKS
Except for the historical information contained herein, the matters
discussed in this report are forward looking statements that involve risks and
uncertainties. Potential risks and uncertainties include, without limitation,
historical operating losses, dependence on new products, ability to manage
growth, reliance on patents and proprietary rights, government regulation and
required approvals, potential healthcare reform, competition, and dependence on
management. More information on potential factors which could affect the
Company's financial results are included in the Company's Annual Report on Form
10-K, as amended, for fiscal 1997 which has been filed with the Securities and
Exchange Commission.
12
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July and August 1997, nine 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 suits are based on substantially the same facts and have been
brought on behalf of purchasers of the Company's Common Stock during various
periods between July 18, 1996 and July 1, 1997. On October 6, 1997, the Court
ordered the nine cases consolidated and ordered the plaintiffs to file an
amended complaint setting forth all of the claims.
In September 1997, a derivative action was filed in California State Court
on behalf of the Company against certain directors and officers of the Company
alleging violations of certain fiduciary duties and seeking damages from those
individuals for the benefit of the Company. The allegations in the state
derivative action are based on substantially the same facts as those set forth
in the class action suits described above.
In addition, the Company is involved from time to time in various claims
and legal actions arising in the ordinary course of business. No provision for
any liability that may result from the ultimate resolution of any of the matters
described or referred to in this Item 1 have been included in the accompanying
consolidated financial statements. In management's opinion, the ultimate
resolution of claims currently pending will not have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES.
In August and September 1997, the Company issued approximately 400,000
shares of Common Stock to the former shareholders of X-Cardia Corporation
relating to achievement of a milestone under the original merger agreement and
the registration of the shares originally issued in the merger. The shares were
issued in a private placement transaction in reliance upon the exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), provided by Section 4(2) of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 29, 1997, the Company held its Annual Meeting of Stockholders.
At the Annual Meeting, the stockholders approved the classification of the Board
of Directors and elected the following directors to the indicated terms in
office: Class I (one-year term): Michael Gross, Richard Newhauser and Francis J.
Tedesco; Class II (two-year term): Abbey J. Butler, Robert N. Elkins and Melvyn
J. Estrin; and Class III (three-year term): John Chamberlin, Lawrence Goelman
and Charles A. Laverty.
13
<PAGE> 14
At the Annual Meeting the stockholders voted on seven proposals. The
results of that voting are set forth below.
<TABLE>
<CAPTION>
VOTES
----------------------------------
PROPOSAL FOR AGAINST ABSTAIN
----------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Approval of bylaw amendment to classify the Board of
Directors.......................................... 14,718,774 713,217 3,224,694
Approval of Agreement and Plan of Merger with Imagyn
Medical, Inc. ..................................... 18,473,372 155,260 28,053
Ratification of Ernst & Young LLP as the Company's
auditors for fiscal 1998........................... 23,901,955 118,816 41,583
Approval of increase in the number of authorized
shares of Common Stock from 50 million to 100
million............................................ 20,616,265 3,362,209 83,880
Approval of the change of the Company's name to
"Imagyn Medical Technologies, Inc."................ 22,946,582 699,642 416,310
Approval of an amendment the Certificate of
Incorporation to require that all stockholder
actions be taken at a special or annual meeting.... 15,632,531 2,362,821 639,684
</TABLE>
ELECTION OF DIRECTORS:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
------------------------------------------------------------ ---------- --------------
<S> <C> <C>
Michael Gross............................................... 23,744,750 317,604
Richard Newhauser........................................... 23,784,985 277,369
Francis J. Tedesco.......................................... 23,784,652 277,702
Abbey J. Butler............................................. 23,784,652 277,702
Robert N. Elkins............................................ 23,784,985 277,369
Melvyn J. Estrin............................................ 23,784,985 277,369
John Chamberlin............................................. 23,784,527 277,827
Lawrence Goelman............................................ 23,784,652 277,702
Charles A. Laverty.......................................... 23,784,985 277,369
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed October 7, 1997 relating to the
consummation of the acquisition of Imagyn Medical, Inc. on September 29,
1997.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized, this 10th day of November 1997.
Imagyn Medical Technologies, Inc.,
a Delaware corporation
By: /s/ CHARLES A. LAVERTY
------------------------------------
Charles A. Laverty
Chief Executive Officer/
Chairman of the Board
By: /s/ MICHAEL A. MONTEVIDEO
------------------------------------
Michael A. Montevideo
Senior Vice President and
Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,497
<SECURITIES> 23,114
<RECEIVABLES> 39,454
<ALLOWANCES> 1,200
<INVENTORY> 41,501
<CURRENT-ASSETS> 118,511
<PP&E> 31,865
<DEPRECIATION> 0
<TOTAL-ASSETS> 256,344
<CURRENT-LIABILITIES> 78,534
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 7,738
<TOTAL-LIABILITY-AND-EQUITY> 256,344
<SALES> 43,131
<TOTAL-REVENUES> 43,131
<CGS> 21,383
<TOTAL-COSTS> 21,383
<OTHER-EXPENSES> 32,360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,321
<INCOME-PRETAX> (14,775)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,775)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0
</TABLE>
