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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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, 1998
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
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IMAGYN MEDICAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 98-0122944
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5 CIVIC PLAZA, SUITE 100, NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 668-5858
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding as of October 31, 1998 was
38,687,325.
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<PAGE> 2
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998 and
March 31, 1998............................................................3
Condensed Consolidated Statements of Operations for the Three Months
and Six Months Ended September 30, 1998 and September 30, 1997............4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 1998 and September 30, 1997...........................5
Notes to the Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................14
Item 2. Changes in Securities and Use of Proceeds................................14
Item 6. Exhibits and Reports on Form 8-K.........................................14
</TABLE>
2
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IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 200 $ 702
Receivables, net of allowance for doubtful accounts of $14,027
and $3,359 on September 30, 1998 and March 31, 1998, respectively 19,530 41,828
Inventories, net of allowance for obsolescence of $10,265 and
$4,797 on September 30, 1998 and March 31, 1998, respectively 24,226 31,989
Prepaid expenses 2,862 2,098
Net assets of discontinued operations -- 2,001
--------- ---------
Total current assets 46,818 78,618
Restricted cash 6,875 13,589
Receivables - long term -- 2,513
Property and equipment, net 24,167 29,229
Patents and intangibles, net of accumulated amortization of $5,310
and $4,836 on September 30, 1998 and March 31, 1998, respectively 4,470 8,559
Loans to officers 2,294 2,227
Deposits and other assets 588 694
Deferred debt issuance costs 10,366 9,559
Goodwill, net of accumulated amortization of $5,355 and $4,072 on
September 30, 1998 and March 31, 1998, respectively 56,515 57,798
--------- ---------
$ 152,093 $ 202,786
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 31,832 $ 42,325
Compensation and employee benefits 3,894 4,133
Restructuring liabilities 1,739 3,101
Revolving line of credit 36,652 34,462
Term Loan 14,500 --
Current portion of long-term debt 242 50,253
--------- ---------
Total current liabilities 88,859 134,274
Deferred income -- 1,000
Long-term liabilities:
Long-term debt 54,965 5,265
Senior subordinated notes, net 108,447 108,306
Restructuring liabilities, less current portion 787 1,120
Other liabilities 2,112 2,744
Stockholders' 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 - 100,000,000:
Issued and outstanding shares 38,687,325 and 36,303,125 at
September 30, 1998 and March 31, 1998, respectively 38 36
Warrants 7,683 7,683
Additional paid-in capital 229,492 228,293
Deficit (340,395) (286,041)
Foreign currency translation adjustment 105 106
--------- ---------
Total common stockholders' deficiency (103,077) (49,923)
--------- ---------
$ 152,093 $ 202,786
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 8,189 $ 40,753 $ 20,961 $ 64,929
Cost of sales 12,490 19,166 20,925 29,705
-------- -------- -------- --------
Gross profit (4,301) 21,587 36 35,224
Operating expenses:
Selling, general and administrative 23,205 20,058 38,776 38,956
Research and development 1,408 2,911 2,695 5,675
Restructuring cost -- 5,413 -- 5,413
Direct acquisition cost -- 3,729 -- 4,220
-------- -------- -------- --------
Total operating expenses 24,613 32,111 41,471 54,264
-------- -------- -------- --------
Loss from operations (28,914) (10,524) (41,435) (19,040)
Other income (expense):
Interest income 128 1,174 328 2,146
Interest expense (7,491) (5,321) (14,247) (10,754)
Other 698 (16) 1,000 460
-------- -------- -------- --------
Loss from continuing operations before
provision for income taxes (35,579) (14,687) (54,354) (27,188)
Provision for income taxes -- -- -- 2
-------- -------- -------- --------
Loss from continued operations before
discontinued operations and
extraordinary item (35,579) (14,687) (54,354) (27,190)
Discontinued operations:
Loss from operations of discontinued
business (net of income taxes) -- 88 -- 123
-------- -------- -------- --------
Loss before extraordinary item (35,579) (14,775) (54,354) (27,313)
Extraordinary item (early extinguishment
of debt) -- -- -- (1,823)
-------- -------- -------- --------
Net loss $(35,579) $(14,775) $(54,354) $(29,136)
======== ======== ======== ========
Net loss per share:
Loss before extraordinary item
attributable to common stockholders $(35,579) $(14,775) $(54,354) $(27,313)
Extraordinary item -- -- -- (1,823)
-------- -------- -------- --------
Net loss attributable to common
stockholders $(35,579) $(14,775) $(54,354) $(29,136)
======== ======== ======== ========
Basic and diluted loss per share before
discontinued operations and
extraordinary item $ (0.95) $ (0.42) $ (1.48) $ (0.77)
======== ======== ======== ========
Basic and diluted loss per share
before extraordinary item $ (0.95) $ (0.42) $ (1.48) $ (0.78)
======== ======== ======== ========
Basic and diluted loss per share $ (0.95) $ (0.42) $ (1.48) $ (0.83)
======== ======== ======== ========
Weighted average number of common shares
used to compute loss per share 37,322 35,330 36,820 35,194
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations before discontinued
operations and extraordinary item $(54,354) $(27,190)
Non cash items included in net loss:
Depreciation and amortization 4,496 4,661
Amortization of deferred debt issuance costs 1,252 819
Increase in provision for doubtful accounts 11,346 95
Increase in inventory reserve 5,468 --
Loss on sales of assets 357 149
Compensation relating to stock option vesting -- 615
Other (432) (335)
Changes in operating assets and liabilities:
Receivables 13,468 (21,183)
Inventories 2,295 (10,406)
Deposits and other assets (658) 31
Accounts payable and accrued expenses (5,671) 11,068
Restructuring liabilities (1,695) 1,757
Other liabilities (902) (550)
-------- --------
Net cash used in continuing operating activities (25,030) (40,469)
Net cash provided (used) in discontinued operations 794 (758)
-------- --------
Net cash used in operating activities (24,236) (41,227)
Cash flows from investing activities:
Purchases of property and equipment, net (251) (5,334)
Proceeds from sale of property and equipment 1,427 --
Purchase of patents and technology -- (4,921)
Proceeds from sale of short and long term investments -- 32,371
Purchase of short and long term investments -- (35,321)
Loans and advances to officers -- (1,215)
Restricted cash 6,714 (19,514)
-------- --------
Net cash provided (used) in investing activities 7,890 (33,934)
Cash flows from financing activities:
Deferred financing fees paid (795) (5,941)
Proceeds from exercise of stock options, shares issued under
employee stock purchase plan and shares issued for financing 78 305
Proceeds from long-term debt, net (11) 64,781
Proceeds from short-term debt, net -- 4,050
Borrowings on revolving line of credit, net 2,190 --
Repayment of capital leases and notes payable, net (118) --
Proceeds from term loan 14,500 --
Repurchase of preferred stock -- (111)
-------- --------
Net cash provided by financing activities 15,844 63,084
Net decrease in cash (502) (12,077)
-------- --------
Cash, beginning of period $ 702 $ 22,574
-------- --------
Cash, end of period $ 200 $ 10,497
======== ========
Cash paid for interest $ 13,527 $ 3,508
======== ========
Cash paid for taxes $ 16 $ 2
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
During the quarter ended September 30, 1998, the Company issued common
stock valued at $1,125,000 to an affiliate of the term lenders for services
rendered in connection with obtaining financing.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
IMAGYN MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 Imagyn Medical Technologies, Inc. ("Imagyn" or 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. The financial statements have also been
restated to reflect the impact from discontinued operations.
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, 1998, its condensed consolidated results of operations for the three and six
month periods ended September 30, 1998 and September 30, 1997, and its condensed
consolidated cash flows for the six month periods ended September 30, 1998 and
September 30, 1997. 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, 1998 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, 1998, 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.
2. NET LOSS PER SHARE
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.
3. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal
1999. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, however it has no impact on the
Company's net loss or stockholders' deficiency.
For the three and six months ended September 30, 1998 and 1997 the Company
did not generate any material components of comprehensive income. Reported net
loss equaled comprehensive net loss for the three and six months ended September
30, 1998 and 1997.
6
<PAGE> 7
4. INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on the first-in, first-out basis (in thousands).
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Raw materials and supplies $11,854 $14,559
Work in process 3,917 4,649
Finished goods 8,455 12,781
------- -------
$24,226 $31,989
======= =======
</TABLE>
5. DEBT
On August 24, 1998, the Company and its senior lenders amended and restated
the Company's senior credit facility. In connection with the amendment, the
Company entered into a $57.5 million amended credit agreement that is comprised
of a $43.0 million revolving facility and a $14.5 million term facility. The
amended facility made available to the Company $14.5 million of additional term
financing.
The amended credit facility expires on December 30, 1998 and may be extended
with mutual agreement for two additional one-year periods on each December 30th,
provided that no event of default occurred during the preceding year (the
"Expiration Date"). In no event will the term of the amended credit facility
extend beyond December 30, 2000. The borrowings under the amended credit
facility are secured by substantially all of the assets of the Company and its
subsidiaries. The Company is required to meet certain covenants under the
amended credit agreement, consisting primarily of minimum EBITDA, maximum
account turnover, limitations on capital expenditures, additional indebtedness,
liens, investments, and asset sales. The Company was in compliance with the
covenants under the amended and restated credit agreement at September 30, 1998.
The $43.0 million revolving portion of the amended credit facility bears
interest at prime plus 1.50% or LIBOR plus 3.25%. The Company pays a fee of 0.5%
on the unused portion of the revolving credit facility. The borrowing
availability under the revolving portion of the amended credit facility is
calculated using a borrowing base. The borrowing base is equal to 80% of
eligible accounts receivable plus $39.0 million (the "Additional Amount"). The
Additional Amount will be reduced in an amount equal to the net cash proceeds
received by the Company in connection with certain asset sales. The Company is
required to pay the revolving lender an amount equal to 1/2% of the Additional
Amount, for each month in which the borrowings under the revolving portion of
the credit facility exceed 80% of eligible accounts receivable. The Company is
not permitted to prepay the principal amount of any term loans until the
revolving loans have been repaid in full.
The $14.5 million term portion of the amended credit facility was fully
funded in August 1998, and bears interest at a rate of 15% per annum. In
connection with funding the term portion of the amended credit facility, the
Company paid a 2% commitment fee and a 2% arrangement fee to the term lenders.
In addition, the Company pays a quarterly maintenance fee of $50,000 to the term
lenders. Under the term portion of the amended credit facility, interest is
payable monthly and the principal balance is payable on the Expiration Date.
In connection with obtaining the term financing under the amended credit
agreement, the Company issued to affiliates of the term lenders 2,250,000 shares
of Common Stock of the Company (50% of the shares are held in escrow and will be
returned to the Company for cancellation upon the revolving lenders exercising
their rights to purchase all of the outstanding term loans, as long as the
closing of the purchase of the term loans occur on or prior to 120 days from the
effective date of the amended credit agreement) with a fair market value of the
common stock of $1.125 million. The difference between the cash paid for the
common stock and the fair market value is recorded as deferred debt issuance
cost at September 30, 1998 and will be amortized over the term of the loan. The
Company has also agreed to file a registration statement to register the resale
of the shares, and to use its best efforts to have the registration statement
declared effective within 120 days of the original funding date. In the event
that the registration statement is not declared effective within 120 days of the
original funding date, the Company has agreed to pay to the term lenders a
one-time extension fee equal to 2% of the term loans, and to pay an additional
2.5% interest on outstanding term loans retroactive to the original funding
date.
7
<PAGE> 8
As of September 30, 1998 the Company had outstanding borrowings of $36.7
million under the revolver and $14.5 million from the term portion of the
facility.
The Company paid on October 30, 1998, (after the September 30, 1998 due date
but within the permitted grace period) the interest payment of approximately
$1.1 million to the holders of the Company's convertible subordinated
debentures.
6. DISCONTINUED OPERATIONS
During the quarter the Company completed the sale to Pacific Feather Company
of certain manufacturing assets from its Allstate adult reusable diaper
division, which had been previously classified as a discontinued operation. The
Company received net proceeds of approximately $0.8 million from the asset sale.
7. RESTRUCTURING CHARGES
In conjunction with the mergers of Dacomed Corporation, Osbon Medical
Systems, Ltd., Advanced Surgical, Inc., Microsurge, Inc. and Imagyn Medical,
Inc. and the purchases of Richard-Allan Medical, Inc., The Intermed Group, Inc.
and O.R. Concepts, the Company implemented restructuring plans to consolidate
redundant administrative and manufacturing facilities and reduce personnel.
The estimated cost associated with each of the above restructuring plans and
the cash and non-cash charges incurred through September 30, 1998 are summarized
in the table below.
<TABLE>
<CAPTION>
BEGINNING BALANCE AT
RESTRUCTURING NON-CASH CASH SEPTEMBER 30
ACCRUAL CHARGES CHARGES 1998
------------- -------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Personnel reduction costs...... $15,697 $ 1,718 $12,812 $ 1,167
Facility reduction costs....... 7,172 1,521 4,292 1,359
------- ------- ------- -------
$22,869 $ 3,239 $17,104 $ 2,526
======= ======= ======= =======
</TABLE>
The Company periodically reviews the restructuring reserves and adjusts them
if appropriate. No adjustments were required during the six months ended
September 30, 1998. Management believes that restructuring liabilities as of
September 30, 1998 are adequate to complete the actions contemplated by the
restructuring plans.
8. INCOME TAXES
The Company did not record an income tax provision or benefit for the
quarter ended September 30, 1998 due to uncertainties as to the ultimate
realization of the Company's deferred tax assets.
9. CONTINGENCIES
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 condensed consolidated financial statements.
10. SUBSEQUENT EVENTS
On October 9, 1998 the Company announced that it had entered into a
definitive agreement with Timm Research Company to sell its impotence product
line for $25.8 million. The purchase price consists of $13.0 million in cash
(subject to certain adjustments), a one year $1.5 million note, the assumption
of $2.3 million of liabilities and a $9.0 million earnout provision. The
transaction has received clearance under the Hart-Scott-Rodino Act and is
expected to close in November 1998. Proceeds from this transaction will
primarily be used to pay down bank debt in accordance with the terms of the
amended credit agreement.
8
<PAGE> 9
On November 3, 1998 the Company announced that it had licensed its MicroSpan
(TM) microhysteroscopy product line to Ethicon, Inc. for $4.0 million. The
payments consist of a license fee, a portion of which is contingent upon certain
development and commercial milestones, and prepaid royalties on future product
sales by Ethicon. The Company received $2.0 million of the payments in November
1998. The license agreement provides Ethicon exclusive worldwide rights to
market and sell the products for 10 years after which Ethicon will own the
products. The Company has agreed to supply Ethicon the products on an exclusive
basis for two years. Proceeds from the licensing agreement will be used for
general working capital requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
NET SALES. For the three months ended September 30, 1998, net sales of $8.2
million were $32.6 million or 79.9% lower than sales of $40.8 million for the
corresponding period in 1997. The decrease was attributable to a significant
decline in sales of the Company's urology and surgical product lines. Urology
sales for the three months ended September 30, 1998 were $3.1 million, a decline
of $6.3 million or 66.4% and were negatively impacted by the introduction of new
oral drug-based treatments for impotence. Surgical division sales for the three
months ended September 30, 1998 were $3.9 million or a decline of $25.6 million
or 86.8% from the prior year. Surgical sales in the prior year were favorably
impacted by $12.9 million of initial surgical and $1.8 million of gynecology
product orders sold to distributors. Surgical sales in the current quarter were
impacted by the Company's decision to continue reduced production in an effort
to improve its cash flow. This decision resulted in lower sales of its surgical
products to distributors. However, the Company believes that in the short-term
distributors possess adequate inventory to continue shipping products to end-use
customers. Sales to international customers represent 22.4% of total sales for
the three months ended September 30, 1998, versus 13.2% for the corresponding
period in 1997. Sales to European and Middle Eastern regions represent 91% of
total International sales during the three months ended September 30, 1998
versus 61% in the prior year. The Company currently anticipates lower quarterly
revenues going forward in comparison to prior year quarters through the
remainder of fiscal 1999.
GROSS PROFIT. For the three months ended September 30, 1998, gross profit
decreased $25.9 million to a $4.3 million loss versus gross profit of $21.6
million in the prior year period. This decrease was primarily attributable to
the decrease in sales over the period, an increase in certain inventory reserves
attributed to the Company's video endoscopy systems and a decline in gross
profit margin. The slower than projected market acceptance of the Company's
portable hand-held video endoscopy systems coupled with the rapid change in
video technology have caused the Company to increase its inventory reserves
estimate by $4.7 million. Excluding the impact of reserve adjustments, gross
profit margin declined to 12.2% from 53.0% in the prior year period. The
decrease in gross profit margin was mainly due to manufacturing volume variances
of $1.7 million.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $23.2 million versus $20.1 million in the prior year period. SG&A
expenses for the quarter included $10.8 million of bad debt reserves associated
with certain surgical and urology accounts receivable. Excluding the increase in
bad debt reserves, SG&A was $12.4 million or a 38.0% reduction from the prior
period. The decrease was attributable to the consolidation of manufacturing
facilities and cost cutting initiatives undertaken by the Company during January
and May 1998.
RESEARCH AND DEVELOPMENT. Research and development costs for the three months
ended September 30, 1998 decreased $1.5 million or 51.7% over the corresponding
period in 1997. The decrease in research and development expenditures resulted
from the substantial completion of the development of the Company's SiteSelect,
EV2 and AeroView products and the slowdown in the development of other
technologies while the Company worked to improve cash flow.
RESTRUCTURING. For the three months ended September 30, 1997, the Company
recorded a restructuring charge attributable to the merger with Imagyn Medical,
Inc. of $5.4 million consisting of $3.6 million in personnel reduction costs and
$1.8 million in facility reduction costs. Through September 30, 1998, $3.8
million of this restructuring charge has been paid.
9
<PAGE> 10
DIRECT ACQUISITION COSTS. In the prior year in conjunction with the merger
with Imagyn Medical, Inc., the Company had direct acquisition costs of
approximately $3.7 million consisting primarily of investment banking, legal,
accounting, printing, solicitation and filing fees.
NET INTEREST EXPENSE. Net interest expense for the three months ended
September 30, 1998 increased $3.2 million over the corresponding period in 1997.
The increase was primarily due to higher debt levels associated with the
Company's credit facility. This increase was also affected by lower interest
income of $1.0 million attributable to lower cash and investment balances held
by the Company during the three months ended September 30, 1998.
OTHER, NET. During the three months ended September 30, 1998 other income
included $1.0 million of previously deferred income and the net effect of
disposing of property, plant and equipment. The $1.0 million of deferred income
relates to the transfer of manufacturing know-how for the Company's Ovation
systems.
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 1997.
NET SALES. For the six months ended September 30, 1998, net sales of $21.0
million were $43.9 million or 67.6% lower than sales of $64.9 million for the
corresponding period in 1997. The decrease was attributable to a significant
decline in sales of the Company's urology and surgical product lines. Urology
sales for the six months ended September 30, 1998 were $7.2 million, a decline
of $12.0 million or 62.5% and were negatively impacted by the introduction of
new oral drug-based treatments for impotence. Surgical division sales in the six
months ended September 30, 1998 were $11.0 million, a decline of $31.5 million
or 74.2% from the prior year. Surgical sales in the prior year were favorably
impacted by $12.9 million of initial surgical and $1.8 million of gynecology
product orders sold to distributors. Surgical sales in the current six months
were impacted by the Company's decision to continue reduced production in an
effort to improve its cash flow. This decision resulted in lower sales of its
surgical products to distributors, however the Company believes that in the
short-term distributors possess adequate inventory to continue shipping products
to end-use customers. Sales to international customers represent 24.7% of total
sales for the six months ended September 30, 1998, versus 13.4% for the
corresponding period in 1997. European and Middle Eastern region sales
represent 83% of total International sales during the six months ended
September 30, 1998 versus 63% for the corresponding period of the prior year.
The Company currently anticipates lower revenues going forward in comparison to
prior year periods, through the remainder of fiscal 1999.
GROSS PROFIT. For the six months ended September 30, 1998, gross profit
decreased $35.1 million to $.04 million versus gross profit of $35.2 million in
the prior year period. This decrease was primarily attributable to the decrease
in sales over the period, an increase in certain inventory reserves attributed
to the Company's video endoscopy systems and a decline in gross profit margin.
The slower than projected market acceptance of the portable hand-held video
endoscopy systems coupled with the rapid change in video technology have caused
the Company to increase its inventory reserves estimate by $4.7 million.
Excluding the impact of reserve adjustments, gross profit margin declined to
25.4% from 54.2% in the prior year period. The decrease in gross profit margin
was mainly due to manufacturing volume variances of $3.4 million.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $38.8 million versus $39.0 million in the prior year period. SG&A
expenses for six months included $10.8 million of bad debt reserves associated
with certain surgical and urology accounts receivable. Excluding the increase in
bad debt reserves, SG&A was $28.0 million or a 28.1% reduction from the prior
period. The decrease was attributable to the consolidation of manufacturing
facilities and cost cutting initiatives undertaken by the Company during January
and May 1998.
RESEARCH AND DEVELOPMENT. Research and development costs for the six months
ended September 30, 1998 decreased $3.0 million or 52.6% over the corresponding
period in 1997. The decrease in research and development expenditures resulted
from the substantial completion of the development of the Company's SiteSelect,
EV2 and AeroView products and the slowdown in the development of other
technologies while the Company worked to improve cash flow.
RESTRUCTURING. For the six 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, 1998, $3.8 million of this
restructuring charge has been paid.
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<PAGE> 11
DIRECT ACQUISITION COSTS. For the six months ended September 30, 1997 the
Company had direct acquisition costs of approximately $4.2 million consisting
primarily of investment banking, legal, accounting, printing, solicitation and
filing fees paid to complete the Imagyn merger.
NET INTEREST EXPENSE. Net interest expense for the six months ended
September 30, 1998 increased $5.3 million over the corresponding period in 1997.
The increase was primarily due to interest expense associated with higher debt
levels related to the Company's credit facility and lower interest income of
$1.8 million attributable to lower cash and investment balances held by the
Company during the six months ended September 30, 1998.
OTHER, NET. During the six months ended September 30, 1998 other income
included $1.0 million of previously deferred income and the net effect of
disposing of property, plant and equipment. The $1.0 million of deferred income
relates to transfer of manufacturing know-how for the Ovation systems.
EXTRAORDINARY EXPENSE. During the six months ended September 30, 1997 the
Company used approximately $55.0 million of the net proceeds from the offering
of the 12 1/2% of Senior Subordinated 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had negative working capital of $42.0
million. The Company's consolidated cash and cash equivalents of $0.2 million at
September 30, 1998 decreased by $0.5 million during the six months ended
September 30, 1998. Uses of cash totaled $25.4 million during the six months
ended September 30, 1998 and related primarily to cash used in operating
activities of $24.2 million, and cash paid for deferred financing fees of $0.8
million. The Company's negative cash flow from operations of $24.2 million for
the six months ended September 30, 1998 was related primarily to operating
losses, offset in part by decreases in accounts receivable and inventory. For
the six months ended September 30, 1998, sources of cash included approximately
$16.6 million from net incremental debt funding, $1.4 million from the sale of
property and equipment and $6.7 million from restricted cash which was used to
pay the interest costs on the Company's Senior Subordinated Notes. The Company
had an interest payment of approximately $1.1 million due on September 30, 1998
to the holders of the Company's Convertible Subordinated Debentures. The Company
made the quarterly interest payment on October 30, 1998, within the permitted
30 day grace period. The Company amended and restated its senior credit facility
in August 1998. (See notes to condensed consolidated financial statements)
Approximately $1.7 million of the Company's $2.5 million of remaining
restructuring liabilities are projected to be paid over the next 12 months. The
Company anticipates capital expenditures, primarily relating to tooling,
fixtures and information systems, to be approximately $1.0 million over the next
six months.
In addition to its negative cash flow from operations, the Company has
substantial indebtedness and significant debt service obligations. At September
30, 1998 the Company had approximately $214.8 million of outstanding debt. The
Company's ability to satisfy its debt obligations will depend upon its ability
to satisfactorily resolve its current liquidity situation and improve its future
operating performance. The Company's success in dealing with these issues 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 senior credit facility or successor credit
facilities or funding from the proceeds of asset sales. The Company will require
substantial amounts of cash to fund scheduled payments of principal and interest
on its outstanding indebtedness as well as future capital expenditures and any
increased working capital requirements. The Company historically has had
negative cash flow from operations. In order to have positive cash flow from
operations and meet its various financial requirements, including debt service,
the Company must experience substantial growth and improvements in its results
of operations. There can be no assurance that the Company will be able to
achieve this growth and improvement in operations.
As of November 10, 1998 the Company, under its credit facility, had
remaining availability of $1.7 million. Based on current cash flows, recurring
losses from operations, and its difficulties in generating sufficient cash flow
to meet its obligations, the Company believes that additional funding will be
necessary to fund its operations over the next three months. Under the terms of
its Senior Subordinated Notes the Company is restricted from raising
11
<PAGE> 12
additional debt funding. The Company is continuing to explore alternatives to
deal with the near-term liquidity situation, including the sale of non-strategic
assets, the discounting of certain accounts receivable and continued
consolidation and cost cutting initiatives.
The Company has entered into a definitive agreement with Timm Research
Company to sell its impotence product line for $25.8 million. The purchase price
consists of cash, notes, assumption of liabilities and a $9.0 million earnout
provision. Proceeds from this transaction will primarily be used to pay down
bank debt in accordance with the terms of the amended credit agreement. (See
notes to condensed consolidated financial statements.)
The Company is continuing its efforts to sell other non-strategic assets,
and has received a letter of intent for one product line for which due diligence
has begun. Discussions with other interested parties relating to a third product
line are continuing, and the Company expects to complete one or more sales by
the end of fiscal 1999. There can be no assurances, however, that any such sales
will be completed during such period or at all.
Under the terms of the Company's senior credit facility and 12-1/2% Senior
Subordinated Notes, ("Notes") the Company has restrictions on the amount of
additional debt it can currently incur. No assurances can be given that
additional financing will be available to the Company or that, if available,
such financing will be obtainable on terms favorable to the Company. There can
be no assurance that the Company will have positive cash flow from operations in
the future. If the Company is unable to meet its cash requirements out of cash
flow from operations or from available borrowings, there can be no assurance
that it will be able to obtain alternative financing or that it will be
permitted to do so under the terms of the senior credit facility, the Indenture
relating to the Notes or other debt instruments. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to absorb adverse operating results, to fund capital expenditures,
or research and development would be adversely affected. Finally, it is
anticipated that in order to pay the principal balance of the Notes due at
maturity, the Company will have to obtain alternative financing, and there can
be no assurance alternative financing would be available.
YEAR 2000 ISSUES
The "Year 2000" issue is the result of computer programs using two digits
rather than four digits to define the applicable year. Because of this
programming convention, software, hardware or firmware may recognize a date
using "00" as the year 1900 rather than the year 2000. Use of non-compliant
programs could result in system failures, miscalculations or errors causing
disruptions of operations or other business problems, including, among others, a
temporary inability to process transactions and invoices or engage in similar
normal business activities.
The Company has undertaken a review of its systems for Year 2000 compliance
with a view toward replacing non-compliant systems and creating an integrated
Year 2000 compliant system. The Company has determined that its integrated
Management Information System is Year 2000 compliant. This system provides for
the Company's management of operations and managerial and financial reporting
requirements. In addition, the Company has completed its assessment of all
telecommunications systems including voice and data networking. The Company
currently estimates the total costs related to bringing the internal systems
associated with networks, and telecommunication equipment into compliance in the
range of $150,000 to $200,000. It is estimated that approximately $120,000 of
these costs will be capitalized to the extent permitted under generally accepted
accounting principles. The Company believes that all systems will be fully
tested and compliant by the end of the third quarter of calendar year 1999.
The Company is continuing its review with respect to the following
non-system areas (i) the Company's non-information technology systems (such as
buildings, plant, equipment and other infrastructure systems that may contain
embedded microcontroller technology), (ii) the status of major vendors, third
party network service providers and other material service providers (insofar as
they relate to the Company's business), and (iii) the status of major customers
(insofar as they relate to the Company's business). The Company anticipates
completing the review by the first calendar quarter of 1999. The Company's
efforts to assess its non-system areas related to Year 2000 compliance involve
(i) a wide-ranging assessment of the Year 2000 problems that may effect the
Company, (ii) the development of remedies to address the problems discovered in
the assessment phase, and (iii) testing of the remedies.
12
<PAGE> 13
The Company is developing contingency plans to handle worst case Year 2000
scenarios that the Company believes reasonably could occur and, if necessary,
intends to develop a timetable for completing such contingency plans. The
Company expects to have its contingency plans in place by the third calendar
quarter of 1999. The Company believes at this time that the worst case Year 2000
scenarios may involve sole source suppliers who are unable to ship products to
the Company because of their system failures.
Although the Company's efforts to be Year 2000 compliant are intended to
minimize the adverse effects of the Year 2000 issue on the Company's business
and operations, the actual effects of the issue will not be known until 2000.
Difficulties in completing the Company's compliance program or the failure of
its major vendors, third party network service providers, and other material
service providers and customers to adequately address their respective Year 2000
issues in a timely manner could have a material adverse effect on the Company's
business, results of operations, and financial condition.
POTENTIAL TRANSFER TO OTC
The Company has been notified by the Nasdaq Stock Market that the Company no
longer satisfies the continued listing criteria for the Nasdaq SmallCap Market.
If the Company fails to obtain a waiver, the Company will either have to execute
a reverse stock split and may need to take other actions to increase the
Company's tangible net worth or move to the electronic bulletin board market.
There are no assurances that the Company could continue to meet Nasdaq listing
criteria after a reverse stock split.
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, the Company's current liquidity problem, ability to
raise additional financing, ability to sell off non-strategic assets and to
complete sales currently subject to letters of intent or definitive agreements
on a timely basis, if at all, dependence on new products, ability to manage
growth, risk related to the year 2000, reliance on patents and proprietary
rights, government regulation and required approvals, 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 1998 which has been filed with the
Securities and Exchange Commission.
13
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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
condensed 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 AND USE OF PROCEEDS.
In connection with obtaining the term financing under the amended credit
agreement, the Company issued to affiliates of the term lenders 2,250,000 shares
of Common Stock of the Company (50% of the shares are held in escrow and will be
returned to the Company for cancellation upon the revolving lenders exercising
their rights to purchase all the outstanding term loans, as long as the closing
of the purchase of the term loans occur on or prior to 120 days from the
effective date of the amended credit agreement). The Company has also agreed to
file a registration statement to register the resale of the shares, and to use
its best efforts to have the registration statement declared effective. This
issuance was exempt from registration pursuant to Section 4.(2) of the
Securities Act of 1933.
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 September 14, 1998 relating to the
amended and restated senior credit facility, among the Borrowers,
the Company as guarantor, and BT Commercial Corporation, as agent.
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 16th day of November 1998.
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
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 200
<SECURITIES> 0
<RECEIVABLES> 33,557
<ALLOWANCES> 14,027
<INVENTORY> 24,226
<CURRENT-ASSETS> 46,818
<PP&E> 40,886
<DEPRECIATION> 16,719
<TOTAL-ASSETS> 152,093
<CURRENT-LIABILITIES> 88,859
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> (103,115)
<TOTAL-LIABILITY-AND-EQUITY> 152,093
<SALES> 8,189
<TOTAL-REVENUES> 8,189
<CGS> 12,490
<TOTAL-COSTS> 12,490
<OTHER-EXPENSES> 24,613
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,491
<INCOME-PRETAX> (35,579)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,579)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
