<PAGE> 1
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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 DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER: 1-11150
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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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</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
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 January 31, 1999 was
38,687,324.
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<PAGE> 2
INDEX
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1998
and March 31, 1998.......................................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended December 31, 1998 and
December 31, 1997........................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1998 and December 31, 1997........ 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........................................... 16
Item 2. Changes in Securities and Use of Proceeds................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
</TABLE>
2
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IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 571 $ 702
Receivables, net of allowance for doubtful accounts of
$11,676 and $3,359 on December 31, 1998 and March 31,
1998, respectively..................................... 12,302 41,828
Inventories, net of allowance for obsolescence of $10,357
and $4,797 on December 31, 1998 and March 31, 1998,
respectively........................................... 18,611 31,989
Prepaid expenses.......................................... 2,204 2,098
Net assets of discontinued operations..................... -- 2,001
Note receivable........................................... 1,510 --
--------- --------
Total current assets.............................. 35,198 78,618
Restricted cash............................................. -- 13,589
Receivables -- long term.................................... -- 2,513
Property and equipment, net of accumulated depreciation of
$15,134 and $15,501 on December 31, 1998 and March 31,
1998, respectively........................................ 21,371 29,229
Patents and intangibles, net of accumulated amortization of
$4,799 and $4,836 on December 31, 1998 and March 31, 1998,
respectively.............................................. 4,243 8,559
Loans to officers........................................... 2,327 2,227
Deposits and other assets................................... 188 694
Deferred debt issuance costs................................ 10,003 9,559
Goodwill, net of accumulated amortization of $5,994 and
$4,072 on December 31, 1998 and March 31, 1998,
respectively.............................................. 55,876 57,798
--------- --------
$ 129,206 $202,786
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 26,076 $ 42,325
Compensation and employee benefits........................ 3,732 4,133
Restructuring liabilities................................. 1,682 3,101
Revolving line of credit.................................. 32,193 34,462
Term loan................................................. 14,500 --
Current portion of long-term debt......................... 50,171 50,253
--------- --------
Total current liabilities......................... 128,354 134,274
Deferred income............................................. 1,000 1,000
Long-term liabilities:
Long-term debt............................................ 4,971 5,265
Senior subordinated notes, net............................ 108,515 108,306
Restructuring liabilities, less current portion........... 641 1,120
Other liabilities......................................... 1,800 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 December 31, 1998 and
March 31, 1998, respectively........................... 38 36
Warrants.................................................. 7,683 7,683
Additional paid-in capital................................ 229,492 228,293
Deficit................................................... (353,388) (286,041)
Foreign currency translation adjustment................... 100 106
--------- --------
Total common stockholders' deficiency............. (116,075) (49,923)
--------- --------
$ 129,206 $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 NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 9,941 $ 21,178 $ 30,905 $ 86,107
Cost of sales................................... 7,874 12,727 28,890 42,567
-------- -------- -------- --------
Gross profit.................................... 2,067 8,451 2,015 43,540
Operating expenses:
Selling, general and administrative........... 11,643 22,375 50,415 61,610
Research and development...................... 1,134 3,189 3,829 8,864
Restructuring cost............................ -- -- -- 5,413
Direct acquisition cost....................... -- -- -- 4,220
-------- -------- -------- --------
Total operating expenses........................ 12,777 25,564 54,244 80,107
-------- -------- -------- --------
Loss from operations............................ (10,710) (17,113) (52,229) (36,567)
Other income (expense):
Interest income............................... 41 311 369 2,457
Interest expense.............................. (7,962) (5,689) (22,209) (16,443)
Other......................................... 1,008 -- 2,008 460
-------- -------- -------- --------
Loss from continuing operations before provision
for income taxes.............................. (17,623) (22,491) (72,061) (50,093)
Provision for income taxes...................... 9 -- 9 2
-------- -------- -------- --------
Net loss before discontinued operations and
extraordinary items........................... (17,632) (22,491) (72,070) (50,095)
Discontinued operations:
Loss from operations of discontinued business
(net of income taxes)...................... -- 480 -- 603
-------- -------- -------- --------
Net loss before extraordinary items............. (17,632) (22,971) (72,070) (50,698)
Extraordinary items............................. 4,723 (2,037) 4,723 (3,860)
-------- -------- -------- --------
Net loss........................................ $(12,909) $(25,008) $(67,347) $(54,558)
======== ======== ======== ========
Basic and diluted loss per share from
continuing operations before extraordinary
items...................................... $ (0.45) $ (0.63) $ (1.92) $ (1.41)
======== ======== ======== ========
Basic and diluted loss per share from
discontinued operations.................... $ -- $ (0.01) $ -- $ (0.02)
======== ======== ======== ========
Basic and diluted income (loss) per share from
extraordinary items........................ $ 0.12 $ (0.06) $ 0.12 $ (0.11)
======== ======== ======== ========
Basic and diluted loss per share.............. $ (0.33) $ (0.70) $ (1.80) $ (1.54)
======== ======== ======== ========
Weighted average number of common shares used to
compute net loss per share.................... 38,687 35,862 37,445 35,416
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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IMAGYN MEDICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations before discontinued
operations and extraordinary items...................... $(72,070) $(50,095)
Non cash items included in net loss:
Depreciation and amortization........................... 6,413 7,809
Amortization of deferred debt issuance costs............ 1,937 1,234
Increase in provision for doubtful accounts............. 11,561 1,005
Increase in inventory reserve........................... 5,562 --
Loss on sales of assets................................. 1,182 205
Compensation relating to stock option vesting........... -- 615
Deferred income recognized.............................. (1,000) --
Other................................................... (85) (913)
Changes in operating assets and liabilities:
Receivables............................................. 16,740 (25,460)
Inventories............................................. 3,532 (12,415)
Deposits and other assets............................... 446 946
Accounts payable and accrued liabilities................ (12,224) 11,099
Restructuring liabilities............................... (1,898) 388
Other liabilities....................................... (944) (1,030)
-------- --------
Net cash used in continuing operating activities.......... (40,848) (66,612)
Net cash used in extraordinary items...................... -- (526)
Net cash provided (used) in discontinued operations....... 794 (1,223)
-------- --------
Net cash used in operating activities..................... (40,054) (68,361)
Cash flows from investing activities:
Purchases of property and equipment, net.................. (666) (9,780)
Proceeds from sale of property and equipment.............. 1,527 --
Proceeds from sale of product line........................ 13,511 --
Proceeds from licensing technology........................ 1,000 --
Purchases of patents and technology....................... -- (15,833)
Proceeds from sale of short and long term investments..... -- 50,547
Purchases of short and long term investments.............. -- (26,561)
Loans and advances to officers............................ -- (1,305)
Restricted cash........................................... 13,589 (13,388)
-------- --------
Net cash provided (used) in investing activities.......... 28,961 (16,320)
Cash flows from financing activities:
Deferred financing fees paid.............................. (1,124) (7,641)
Proceeds from exercise of stock options, shares issued
under employee stock purchase plan stock purchase plan
and shares issued for financing......................... 77 508
Proceeds from long-term debt, net......................... -- 132,301
Proceeds from short-term debt, net........................ -- 33,300
Borrowings on revolving line of credit, net............... (2,269) --
Repayment of capital leases and notes payable, net........ (140) --
Repayment of long term debt............................... (82) (50,634)
Repayment of short term debt.............................. -- (42,550)
Proceeds from term loan................................... 14,500 --
Repurchase of preferred stock............................. -- (142)
-------- --------
Net cash provided by financing activities................. $ 10,962 $ 65,142
-------- --------
Net decrease in cash...................................... $ (131) $(19,539)
======== ========
Cash, beginning of period................................... $ 702 $ 22,574
======== ========
Cash, end of period......................................... $ 571 $ 3,035
======== ========
Cash paid for interest.................................... $ 22,380 $ 12,836
======== ========
Cash paid for taxes....................................... $ 17 $ --
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
During the nine months ended December 31, 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.
In connection with the sale of the impotence product line, the Company
received consideration of $1,500,000 in the form of an interest bearing
promissory note.
See accompanying notes to condensed consolidated financial statements.
5
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IMAGYN MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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. and its subsidiaries
("Imagyn" or the "Company"). 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 a business combinations in fiscal 1998
accounted for using the pooling of interests method. The financial statements
have also been restated to give retroactive effect to 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 December
31, 1998, its condensed consolidated results of operations for the three and
nine month periods ended December 31, 1998 and December 31, 1997, and its
condensed consolidated cash flows for the nine month periods ended December 31,
1998 and December 31, 1997. Adjustments consist of normal recurring accruals
except for the extraordinary items, consisting of the loss on early
extinguishment of debt in fiscal 1998, and the gain on the sale of the impotence
product line in fiscal 1999 in the accompanying unaudited condensed consolidated
statements of operations. The results of operations for the three and nine month
periods ended December 31, 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.
All 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 amortizes
over the fiscal year certain administrative costs to more appropriately reflect
the benefits realized during the course of the fiscal year.
Disposition of Product Line
Until November 20, 1998, the Company offered a number of products designed
for the treatment of urological disorders, including a vacuum erection system, a
penile prosthesis and certain diagnostic equipment (collectively impotence
product line). On November 20, 1998, the Company sold its impotence product line
to Timm Research Company ("Timm") for $15.3 million, consisting of $11.5 million
cash paid at closing (subject to adjustment upon the reconciliation of the final
working capital amounts), $1.5 million paid by delivery of a one-year promissory
note bearing interest at 6% per annum and the assumption by Timm of $2.3 million
of liabilities. In addition, the Company is entitled to receive an additional
$9.0 million under a five-year earn-out formula that is based on Timm achieving
minimum levels of sales of vacuum erection devices. No amounts have been
recognized to date related to the earn-out formula. The Company recorded an
extraordinary gain of $4.7 million, on sale of the impotence product line during
the three months ended December 31, 1998.
Research and Development Activities
The Company acquired various research and development projects in fiscal
1997. These projects included blood oximetry, cardiac output, breast biopsy,
vaginal pH measurement, optical aspirating currette and a line of pivoting
endoscopic surgical instruments, (Pivotal(TM)). The Company received FDA
approval in July 1998
6
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IMAGYN MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
for its breast biopsy system which is marketed as SiteSelect(TM). The first
significant commercial U.S. sales occurred in December 1998. Phem-Alert, the
Company's vaginal pH measurement product, was commercially sold for the
professional market in September 1997. The Company is preparing to submit for
FDA approval the over-the-counter use of this product. In April 1998 the Company
received FDA approval for its optical aspirating currette and currently expects
to begin commercial sales in 1999. In November 1997 the Company received FDA
approval for its Pivotal(TM) line of pivoting endoscopic surgical instruments.
Commercial sales are anticipated during the fourth quarter of fiscal 1999. The
Company in an effort to improve its cash flow has temporarily reduced
development efforts with respect to its blood oximetry and cardiac output
projects. As of December 31, 1998 the Company estimates the additional time
required to achieve a commercially viable product for blood oximetry is fifteen
months, cardiac output is eighteen months, optical aspirating currette is six
months and Pivotal(TM) instruments is nine months. The Company estimates project
expenditures for the balance of fiscal 1999 to be approximately $1.0 million.
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 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 reported net loss or stockholders' deficiency.
For the three and nine months ended December 31, 1998 and 1997 the Company
did not generate any material components of comprehensive income. Reported net
loss approximated comprehensive net loss for the three and nine months ended
December 31, 1998 and 1997.
4. INVENTORIES, (NET)
Inventories, which are carried at the lower of cost determined on the
first-in, first-out basis or market, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
<S> <C> <C>
Raw materials and supplies............................. $10,326 $14,559
Work in process........................................ 4,086 4,649
Finished goods......................................... 4,199 12,781
------- -------
$18,611 $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.
7
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IMAGYN MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
The Company did not make an interest payment of approximately $1.1 million
due on December 31, 1998 to the holders of the Company's convertible
subordinated debentures, therefore the entire principal balance has been
classified as a current liability in the accompanying condensed consolidated
financial statements. The Company obtained extensions on the interest payment
until March 31, 1999 from holders representing approximately 97% of the
principal amount of the debentures. The Company paid the remaining holders their
required interest payment prior to the expiration of the 30-day grace period
permitted under the debenture.
Under the term portion of the Company's senior credit facility, the Company
agreed to register under the Securities Act of 1933, as amended, certain shares
issued in connection with that financing. The Company was required to register
the shares issued to affiliates of the term lenders prior to December 22, 1998.
The Company failed to register the shares within the relevant time period and as
a result the Company was required to pay the term lenders a one-time extension
fee of 2% of the term loan amount, (approximately $0.3 million) and an
additional 2.5% in interest on amounts outstanding under the term loan
(retroactive to the date the term loan was originally funded). These amounts are
payable by the Company at maturity of the term loans or their earlier repayment
in full. The shares issued to the term lenders in connection with the $14.5
million term loan, resulted in an adjustment to the previous conversion price of
$10.90 for the holders of the Company's convertible subordinate debentures. The
company's convertible debentures are convertible into common stock at a specific
price per share that is subject to anti-dilution adjustments based on stock
splits, stock dividends, reverse splits, sales of securities below the then
current conversion price and similar types of transactions. The new conversion
price is $10.27 per share and the holders of the debentures would be entitled to
receive 4,868,549 shares of common stock if such holders elected to convert all
of the debentures into common stock.
On January 11, 1999, the Company and its senior lenders amended the
Company's credit facility to extend the maturity date to June 30, 1999. The net
proceeds from the sale of the impotence product line, surgical needles, skin
markers, kittners and Dr. FOG products were used to pay down amounts outstanding
under the Company's senior credit facility, and a portion of the revolving and
term loans were then permanently reduced. As of February 5, 1999, amounts
outstanding under the senior credit facility had been reduced to $43.5 from
$46.7 million at December 31, 1998, and the Company, under its revolving credit
facility, had remaining availability of approximately $2.0 million. The Company
was in compliance with the covenants under the credit facility at December 31,
1998.
6. DISCONTINUED OPERATIONS
During the quarter ended September 30, 1998, the Company completed the sale
to Pacific Feather Company of certain manufacturing assets from its Allstate
medical operations which served the incontinence market with a line of reusable
adult diapers and pads, which have been classified as a discontinued operation.
The Company received net proceeds of approximately $0.8 million from the sale.
The Company had approximately $1.4 million in sales for the nine months ended
December 31, 1998 and approximately $6.6 million for the nine months ended
December 31, 1997. Such sales have been excluded from the statement of
operations for all periods presented.
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.
8
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IMAGYN MEDICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
The estimated cost associated with each of the above restructuring plans
and the cash and non-cash charges incurred through December 31, 1998 are
summarized in the table below.
<TABLE>
<CAPTION>
BEGINNING REVISION TO BALANCE AT
RESTRUCTURING ACCRUAL NON-CASH CASH DECEMBER 31,
ACCRUAL ESTIMATES CHARGES CHARGES 1998
------------- ----------- -------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs................. $15,697 $(2,168) $ -- $12,990 $ 539
Facility reduction costs.................. 7,172 601 1,672 4,291 1,810
------- ------- ------ ------- ------
$22,869 $(1,567) $1,672 $17,281 $2,349
======= ======= ====== ======= ======
</TABLE>
The outstanding balance as of December 31, 1998 primarily consist of
severance payments to terminated employees and facility lease termination costs
for closed facilities. The Company periodically reviews the restructuring
reserves and adjusts them if appropriate. No adjustments were required during
the nine months ended December 31, 1998. Management believes that restructuring
liabilities as of December 31, 1998 are adequate to complete the actions
contemplated by the restructuring plans.
8. INCOME TAXES
The Company did not record an income tax benefit for the quarter ended
December 31, 1998 due to uncertainties as to the ultimate realization of the
Company's deferred tax assets, however the Company did record income tax expense
relating to minimum state franchise taxes.
9. CONTINGENCIES
Dacomed, which the Company merged with in July 1995, is a defendant in
approximately five lawsuits seeking damages in product liability and related
theories. Dacomed has also been notified of certain other product liability
claims that may become the subject of lawsuits in the future. Dacomed is being
defended in such lawsuits by law firms selected by Dacomed's product liability
insurer(s). In addition, the Company is involved from time to time in various
claims and legal actions in the ordinary course of business. The Company does
not anticipate that adverse outcomes in currently pending litigation would have
a material adverse effect on its business, results of operations, financial
condition, or cash flows. 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 EVENT
On February 5, 1999, the Company sold its surgical needles, skin markers,
kittners and Dr. FOG product lines to Surgical Supply LLC for $6.65 million in
cash paid at closing and a $1.0 million interest bearing promissory note from
the buyer, payable in nine equal quarterly payments over 30 months. Net proceeds
from the sale were used to pay down borrowings under the senior credit facility
and a portion of the revolving and term loans were then permanently reduced to
$45.5 million.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1997.
Net sales. For the three months ended December 31, 1998, net sales of $9.9
million were $11.2 million or 53.1% lower than net sales of $21.1 million for
the corresponding period in 1997. The decrease was primarily attributable to a
significant decline in sales of the Company's urology and surgical product
lines. Urology sales for the three months ended December 31, 1998 were $0.7
million, a decline of $6.5 million or 90.0%. Urology sales through November 1998
were negatively impacted by the introduction of new oral drug-based treatments
for impotence. On November 20, 1998, the Company sold its impotence product line
which accounts for virtually all of the Company's urology sales. Surgical
division sales for the three months ended December 31, 1998 were $7.2 million or
a decline of $4.9 million or 40.5% from the prior year. Surgical sales in the
current quarter were impacted by the Company's decision in the prior two
quarters to reduce production in an effort to conserve cash flow. While
production began increasing in the current quarter, the average level of
production during the quarter was below historical standards resulting in lower
sales of surgical products to distributors. Sales to international customers
represent 23.2% of total sales for the three months ended December 31, 1998,
versus 18.4% for the corresponding period in 1997. International sales consist
primarily of sales to European and Middle Eastern regions which represents 77.0%
of total International sales during the three months ended December 31, 1998
versus 57.0% 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 December 31, 1998, gross profit
decreased $6.4 million to $2.1 million versus $8.5 million in the prior year
period. This decrease was primarily attributable to the decrease in sales over
the period and a decline in gross profit margin. Gross profit margin declined to
20.8% from 39.9% in the prior year period primarily a result of manufacturing
volume variances of $1.5 million.
Selling, general and administrative. Selling, general and administrative
expenses were $11.6 million versus $22.4 million in the prior year period. The
decrease was primarily attributable to the consolidation and cost cutting
initiatives undertaken by the Company during January and May, 1998. In addition,
the sale of the impotence product line in late November 1998 resulted in lower
selling, general and administrative expenses of approximately $0.5 million.
Research and development. Research and development costs for the three
months ended December 31, 1998 decreased $2.1 million or 65.6% over the
corresponding period in 1997. The decrease in research and development expenses
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 December 31, 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 December 31, 1998, $4.9
million of this restructuring charge has been paid.
Interest. Interest expense for the three months ended December 31, 1998
increased $2.3 million over the corresponding period in 1997. The increase was
primarily due to higher debt levels associated with the Company's credit
facility. The decrease in interest income of $0.3 million was attributable to
lower cash and investment balances held by the Company during the three months
ended December 31, 1998.
Other, net. During the three months ended December 31, 1998, other income
included $1.0 million for licensing fees for the microhysteroscope product line
to Ethicon Inc.
Extraordinary items. In connection with the sale of the impotence product
line in November 1998, the Company recorded an extraordinary gain on product
line sale of $4.7 million. During the three months ended December 31, 1997 the
Company recorded an extraordinary loss of $2.0 million consisting of the
write-off of deferred financing costs, related to the early retirement of its
previous credit facility.
10
<PAGE> 11
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1997.
Net sales. For the nine months ended December 31, 1998, net sales of $30.9
million were $55.2 million or 64.1% lower than net sales of $86.1 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 nine months ended December 31, 1998 were $7.9 million, a decline
of $18.6 million or 70.2%. Urology sales through November 1998 were negatively
impacted by the introduction of new oral drug-based treatments for impotence. On
November 20, 1998, the Company sold the impotence product line which accounted
for virtually all of the Company's urology sales. Surgical division sales in the
nine months ended December 31, 1998 were $18.2 million, a decline of $36.4
million or 66.7% 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
nine months were impacted by the Company's decision to reduce production over
the first six months of the fiscal year in an effort to improve its cash flow.
This decision resulted in lower sales of its surgical products to distributors.
Sales to international customers represent 24.3% of total sales for the nine
months ended December 31, 1998, versus 14.6% for the corresponding period in
1997. European and Middle Eastern region sales represent 81.0% of total
International sales during the nine months ended December 31, 1998 versus 62%
for the corresponding period of the prior year.
Gross profit. For the nine months ended December 31, 1998, gross profit
decreased $41.5 million to $2.0 million versus gross profit of $43.5 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 $5.7 million.
Excluding the impact of reserve adjustments, gross profit margin declined to
24.9% from 50.6% in the prior year period. The decrease in gross profit margin
was mainly due to manufacturing volume variances of $5.0 million.
Selling, general and administrative. Selling, general and administrative
expenses were $50.4 million versus $61.6 million in the prior year period. SG&A
expenses for nine months ended December 31, 1998 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 $39.6 million or a 35.7%
reduction from the prior period. The decrease was primarily attributable to the
consolidation and cost cutting initiatives undertaken by the Company during
January and May 1998. In addition, the sale of the impotence product line in
late November 1998 resulted in lower selling, general and administrative
expenses of approximately $0.5 million.
Research and development. Research and development costs for the nine
months ended December 31, 1998 decreased $5.0 million or 56.8% over the
corresponding period in 1997. The decrease in research and development expenses
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 nine months ended December 31, 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 December 31, 1998, $4.9 million of this
restructuring charge has been paid.
Direct acquisition costs. For the nine months ended December 31, 1997, the
Company had direct acquisition costs of approximately $4.2 million consisting
primarily of $2.2 million of investment banking fees; $0.8 million of legal,
accounting, and printing; and $1.2 million of solicitation, filing fees and
other costs paid to complete the Imagyn merger.
Interest. Interest expense for the nine months ended December 31, 1998
increased $5.8 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. Interest income decreased by $2.1 million. This
decrease was attributable to lower cash and investment balances held by the
Company during the nine months ended December 31, 1998.
11
<PAGE> 12
Other, net. During the nine months ended December 31, 1998 other income of
$2.0 million included $1.0 million of deferred income related to the transfer of
manufacturing know-how for the Ovation systems, and a $1.0 million license fee
for the MicroSpan(TM), microhysteroscope product line.
Extraordinary items. In connection with the sale of the impotence product
line in November 1998, the Company recorded an extraordinary gain on product
line sale of $4.7 million. During the nine months ended December 31, 1997, the
Company recorded extraordinary losses of $3.9 million consisting of the
write-off of deferred financing costs, related to the early retirement of two
different bank credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had negative working capital of $93.2
million. The Company's consolidated cash and cash equivalents of $0.6 million at
December 31, 1998, decreased by $0.1 million during the nine months ended
December 31, 1998. Uses of cash totaled $41.9 million during the nine months
ended December 31, 1998 and related primarily to cash used in operating
activities of $40.1 million, and cash paid for deferred financing fees of $1.1
million. The Company's negative cash flow from operations of $40.1 million for
the nine months ended December 31, 1998, was related primarily to operating
losses, offset in part by decreases in accounts receivable, and inventory. For
the nine months ended December 31, 1998, sources of cash included approximately
$12.0 million from net incremental debt funding, $13.5 million for the sale of
the impotence product line, $1.5 million from the sale of property and
equipment, $1.0 million from the licensing of technology and $13.6 million from
restricted cash which was used to pay the interest costs on the Company's Senior
Subordinated Notes.
Approximately $1.7 million of the Company's $2.3 million of remaining
restructuring liabilities are projected to be paid over the next twelve months.
The Company anticipates capital expenditures, primarily relating to tooling,
fixtures and information systems, to be approximately $0.4 million over the next
three months.
The Company in an effort to improve its cash flow has temporarily reduced
development efforts with respect to its blood oximetry and cardiac output
projects. As of December 31, 1998 the Company estimates the additional time
required to achieve a commercially viable product for blood oximetry is fifteen
months, cardiac output is eighteen months and optical aspirating currette is six
months and Pivotal(TM) instruments is nine months. The Company estimates project
expenditures for the balance of fiscal 1999 to be approximately $1.0 million.
The Company did not make an interest payment of approximately $1.1 million
due on December 31, 1998 to the holders of the Company's convertible
subordinated debentures, therefore the entire principal balance has been
classified as a current liability in the condensed consolidated financial
statements. The Company obtained extensions on the interest payment currently
due until March 31, 1999 from holders representing approximately 97% of the
principal amount of the debentures. The Company paid the remaining holders their
required interest payment prior to the expiration of the 30-day grace period
permitted under the indenture. If the Company had failed to make the interest
payment within the grace period or obtain an extension from the holders such
failure would have constituted an event of default under the convertible
subordinated debentures.
Under the term portion of the Company's senior credit facility, the Company
agreed to register under the Securities Act of 1933, as amended, certain shares
issued in connection with that financing. The Company was required to register
the shares issued to affiliates of the term lenders prior to December 22, 1998.
The Company failed to register the shares within the relevant time period and as
a result, the Company was required to pay the term lenders a one-time extension
fee of 2% of the term loan amount, (approximately $0.3 million), and an
additional 2.5% in interest on amounts outstanding under the term loan
(retroactive to the date the term loan was originally funded). These amounts are
payable by the Company at maturity of the term loans or their earlier repayment
in full. The shares issued to the term lenders in connections with the $14.5
million term loan, resulted in an adjustment to the previous conversion price of
$10.90 for the holders of the Company's convertible subordinated debentures. The
Company's convertible debentures are convertible into common stock at a specific
price per share that is subject to anti-dilution adjustments based on stock
splits, stock dividends, reverse splits, sales of securities below the then
current conversion price and similar types of transactions. The new conversion
price is $10.27 per share and the holders of the debentures would be
12
<PAGE> 13
entitled to receive 4,868,549 shares of common stock if such holders elected to
convert all of the debentures into common stock.
On January 11, 1999, the Company and its senior lenders amended the
Company's credit facility to extend the maturity date to June 30, 1999. The net
proceeds from the sale of the impotence product line, surgical needles, skin
markers, kittners and Dr. FOG products were used to pay down amounts outstanding
under the Company's senior credit facility and a portion of the revolving and
term loans were then permanently reduced. As of February 5, 1999, amounts
outstanding under the senior credit facility had been reduced to $43.5 from
$46.7 million at December 31, 1998. As of February 5, 1999 the Company, under
its revolving credit facility, had remaining availability of approximately $2.0
million. The Company was in compliance with its covenants at December 31, 1998.
In addition to its negative cash flow from operations, the Company has
substantial indebtedness and significant debt service obligations. At December
31, 1998 the Company had approximately $210.4 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, which will be affected by prevailing economic
conditions and financial, business and other factors, certain of which are
beyond its control, as well as the availability of borrowings under its existing
senior credit facility or successor credit facilities 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.
The documents governing the indebtedness of the Company (including the Note
Indenture and the senior credit facility) contain significant covenants that
limit the Company's and its subsidiaries' ability to engage in various
transactions and, in the case of the senior credit facility, require
satisfaction of specified financial performance criteria. In addition, under
each of the foregoing documents, the occurrence of certain events (including,
without limitation, failure to comply with the foregoing covenants, material
inaccuracies of representations and warranties, certain defaults under or
acceleration of other indebtedness and events of bankruptcy or insolvency)
would, in certain cases after notice and grace periods, constitute an event of
default permitting acceleration of the indebtedness covered by such documents.
The limitations imposed by the documents governing the outstanding indebtedness
of the Company and its subsidiaries are substantial, and failure to comply with
them could have material adverse effect on the Company and its subsidiaries.
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 additional debt
funding. The Company is continuing to explore alternatives to deal with the
near-term liquidity situation, including the sale of additional non-strategic
assets, and continued consolidation and cost cutting initiatives.
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 (the "Note Indenture"), or other
debt instruments. In the absence of such financing, the Company's ability to
respond to changing business and economic conditions, to make future
acquisitions, to absorb adverse operating results or to fund capital
expenditures or research and development may be adversely affected. Finally, it
is anticipated that in order to pay the principal balance of the Notes due at
maturity, the Company will have to obtain alternative financing.
The Company's high degree of leverage could have important consequences
including, without limitation, the following: (i) a substantial portion of the
Company's net cash provided by operations will be committed to
13
<PAGE> 14
the payment of the Company's interest expense and principal repayment
obligations and will not be available to the Company for its operations, capital
expenditures, acquisition or other purposes; (ii) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures or acquisitions may be limited; (iii) the Company will be more
highly leveraged than most of its competitors, which may place it at a
disadvantage and limit the Company's flexibility in reacting to changes in its
business; and (iv) the Company's borrowings under the credit facility bear
interest at variable rates, which could result in higher interest expense if
interest rates rise. In addition, the credit facility restricts the Company's
ability to make payments on its outstanding junior indebtedness without prior
approval of its senior lenders.
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 for fixed assets and 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 this 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.
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, financial condition, and cash flows.
TRANSFER TO OTC
The Company was notified by the Nasdaq Stock Market that the Company no
longer satisfied the continued listing criteria for the Nasdaq SmallCap Market.
The Company's Common Stock began trading in
14
<PAGE> 15
the over-the-counter (OTC) bulletin board market on December 7, 1998. Stocks
that trade in the over-the-counter market tend to be less liquid with lower
trading volumes, than stocks traded in more established trading markets. As a
result, the prices of stocks traded in the over-the-counter market tend to be
more volatile. In addition, the Company's Common Stock may become subject to the
requirements of Section 15(g) of the Securities Exchange Act of 1934, as
amended, which imposes certain requirements on brokers and dealers conducting
transactions in "penny stocks" as defined in the statute. Section 15(g) provides
that no broker or dealer shall effect any transaction in a "penny stock" without
providing to the customer certain written information regarding, among other
things, market risks associated with trading in penny stocks, the dealer market,
including "bid" and "ask" prices for penny stocks, the significance of the
difference between the bid and ask price, and a description of the amount and
types of compensation that the broker or dealer will receive or has received in
connection with a specific transaction.
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, risks 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.
15
<PAGE> 16
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. Fifty percent of the shares were held in escrow
and would be returned to the Company for cancellation upon the revolving lenders
exercising their rights to purchase all the outstanding term loans, prior to 120
days from the effective date of the amended credit agreement. The revolving
lenders did not purchase the outstanding term loans and the escrowed shares were
released to the affiliates of the term lenders. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 24, 1998, the Company held its Annual Meeting of stockholders.
At the Annual Meeting, the stockholders elected the following Class I directors,
Richard Newhauser and Francis J. Tedesco, M.D. to serve a three year term. At
the Annual Meeting the stockholders voted on one proposal. The results of that
voting are set forth below:
<TABLE>
<CAPTION>
VOTES
PROPOSAL FOR AGAINST ABSTAIN
-------- ---------- ------- -------
<S> <C> <C> <C>
Ratification of Deloitte & Touche, LLP as the
Company's independent auditors for year ending
March 31, 1999..................................... 29,269,020 535,282 98,895
</TABLE>
ELECTION OF DIRECTORS:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- ---------- --------------
<S> <C> <C>
Richard Newhauser......................................... 28,330,542 1,572,655
Francis Tedesco, M.D. .................................... 28,221,378 1,681,819
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Second Amendment to Credit Agreement dated January 11, 1999,
among the Borrowers, the Company, as guarantor, and BT
Commercial Corporation, as agent and the lenders.
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
Current report on Form 8-K filed December 7, 1998, relating to the
disposition of the impotence product line under an asset purchase
agreement with Timm Research Company.
Current report on Form 8-K/A filed January 13, 1999, to include Pro
Forma financial information relating to the disposition of the impotence
product line.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements 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 15th day of
February, 1999.
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
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.1 Second Amendment to Credit Agreement dated January 11, 1999,
among the Borrowers, the Company, as guarantor, and BT
Commercial Corporation, as agent and the lenders.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement (the "Amendment") is made on
this 11 day of January, 1999 to be effective as of December 30, 1998 by and
among Imagyn Medical Technologies California, Inc., Dacomed Corporation,
Allstate Medical Products, Inc., Osbon Medical Systems, Ltd., Microsurge, Inc.,
Imagyn Medical, Inc. (collectively, the "Borrowers"), Imagyn Medical
Technologies, Inc. (the "Guarantor"), BT Commercial Corporation, as Agent (in
such capacity, the "Agent"), and BT Commercial Corporation (in its capacity as
lender, "BTCC"), Kensington International Limited ("Kensington"), and
Springfield Associates, L.L.C. ("Springfield") (BTCC, Kensington and Springfield
are hereinafter referred to collectively as "Lenders").
W I T N E S S E T H:
WHEREAS, the Agent, the Lenders, the Borrowers and the Guarantor are
parties to that certain Amended and Restated Credit Agreement dated as of August
24, 1998, as amended from time to time (the "Credit Agreement); and
WHEREAS, the parties desire to amend the Credit Agreement, as more fully
set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the adequacy of which is
hereby acknowledged, and subject to the terms and conditions hereof, the parties
hereto agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, all capitalized
terms shall have the meaning given to them in the Credit Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT.
2.1 Section 1.1 of the Credit Agreement is hereby amended by
deleting the defined term "Expiration Date" in its entirety, and inserting the
following in its stead:
"EXPIRATION DATE means June 30, 1999."
2.2 ARTICLE 2 of the Credit Agreement is hereby amended by the
addition of the following new Section 2.1.1:
"2.1.1 Additional Revolving Loans. In the sole discretion of the
Revolving Lenders, Revolving Loans may be made available to the
Borrowers in an aggregate amount not to exceed $2,000,000 in
excess of the Revolving Line of Credit available hereunder from
time to time (the "Additional Revolving Loans"). The Additional
Revolving Loans shall in all respects be treated as Revolving
Loans
<PAGE> 2
hereunder and shall be subject to all of the terms and
conditions with respect to the manner of borrowing and the
payment of interest thereon. In determining any Revolving
Lender's Revolving Commitment hereunder, the amount of any
outstanding Additional Revolving Loans shall be included."
2.3 Section 4.7(b) of the Credit Agreement is hereby deleted in
its entirety and the following is inserted in its stead:
"(b) upon the occurrence of any Asset Disposition permitted
pursuant to the terms of Section 8.8(iv), the net proceeds
thereof shall be distributed to the Lenders in accordance with
the terms of the Intercreditor Agreement, as amended from time to
time. To the extent any of the Revolving Loans then outstanding
constitute LIBOR Rate Loans, Borrowers shall pay to Agent an
amount equal thereto, to be held in a cash collateral account for
the benefit of the Revolving Lenders and under the sole control
and dominion of Agent, and from which Agent shall apply such
funds to the LIBOR Rate Loans at the end of the applicable
Interest Period. Any such repayment under this subsection (b)
shall constitute a permanent reduction or termination of the
Revolving Line of Credit, but shall not constitute a permanent
reduction or termination of the amount available as Additional
Revolving Loans.
2.4 Section 8.9 of the Credit Agreement is hereby amended by
deleting subsection (iii) thereof in its entirety and inserting the following in
its stead:
"(iii) so long as no Default or Event of Default has occurred or
is occasioned thereby, declare and pay dividends to the
Guarantor in an amount necessary to allow the Guarantor to
pay its federal, state and local taxes, and for funds
necessary for general corporate overhead of the
Guarantor."
2.5 Section 11.11(c) of the Credit Agreement is hereby amended by
deleting the word "or" at the end of subsection (i) thereof, deleting the word
"and" at the end of subsection (ii) thereof, and inserting the word "or" in its
stead, and inserting the following new subsection (iii):
"(iii) amend or waive the provisions of Section 8.9 hereof; and"
2
<PAGE> 3
SECTION 3. ACCRUAL OF CERTAIN PAYMENTS.
3.1 Notwithstanding the provisions of Section 4.1(A) of the
Credit Agreement to the contrary, the Term Lenders agreed that the Term Loan
shall continue to accrue interest at a rate of 15% per annum which shall be
payable as provided in the Credit Agreement, and the additional interest which
is required to be paid from and after the occurrence of a Registration Default
shall accrue and be unpaid until the payment in full of the outstanding
principal of the Term Loan.
3.2 Notwithstanding the provisions of Section 4.5(B) of the
Credit Agreement to the contrary, the Term Lenders agree that the Term Extension
Payment shall be due and owing in full with the final payment of the principal
of the Term Loan.
SECTION 4. ASSET DISPOSITION PROCEEDS. The Borrowers agree to use their
best efforts to effect Asset Dispositions from and after the date hereof to and
including the Expiration Date which will generate net cash proceeds in an amount
not less than $18,000,000, which cash proceeds shall be applied in accordance
with the provisions of Section 4.7(b) of the Credit Agreement. To the extent
such cash proceeds exceed $18,000,000, the Lenders hereby agree that the
Borrowers shall be entitled to use such excess proceeds up to $1,000,000 in the
aggregate for working capital purposes. Thereafter, any additional net proceeds
of Asset Dispositions in excess of $19,000,000 shall continue to be applied in
accordance with Section 4.7(b) of the Credit Agreement.
SECTION 5. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon satisfaction of the following conditions precedent:
5.1 Agent shall have received copies of this Amendment duly
executed by the Borrowers, the Guarantor, and the Lenders.
5.2 Agent shall have received a duly executed counterpart of the
First Amendment to Intercreditor Agreement in the form attached hereto as
Exhibit A.
5.3 Agent shall have received such other documents, certificates
and assurances as it shall reasonably request.
SECTION 6. REAFFIRMATION OF BORROWERS. The Borrowers hereby represent
and warrant to Agent and Lenders that (i) the representations and warranties set
forth in Section 6 of the Credit Agreement are true and correct on and as of the
date hereof, except to the extent (a) that any such representations or
warranties relate to a specific date, or (b) of changes thereto as a result of
transactions for which Agent and Lenders have granted their consent; (ii) the
Borrowers are on the date hereof in compliance with all of the terms and
provisions set forth in
3
<PAGE> 4
the Credit Agreement as hereby amended; and (iii) upon execution hereof no
Default or Even of Default has occurred and is continuing or has not previously
been waived.
SECTION 7. FULL FORCE AND EFFECT. Except as herein amended, the Credit
Agreement and all other Credit Documents shall remain in full force and effect.
SECTION 8. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the day and year specified above.
BORROWERS:
IMAGYN MEDICAL TECHNOLOGIES
CALIFORNIA, INC.
By: /s/ M.A. Montevideo
--------------------------
Name: M.A. Montevideo
------------------------
Title: Chief Financial Officer
-----------------------
DACOMED CORPORATION
By: /s/ M.A. Montevideo
--------------------------
Name: M.A. Montevideo
------------------------
Title: Chief Financial Officer
-----------------------
ALLSTATE MEDICAL PRODUCTS,
INC.
By: /s/ M.A. Montevideo
--------------------------
Name: M.A. Montevideo
------------------------
Title: Chief Financial Officer
-----------------------
OSBON MEDICAL SYSTEMS, LTD.
By: /s/ M.A. Montevideo
--------------------------
Name: M.A. Montevideo
------------------------
Title: Chief Financial Officer
-----------------------
MICROSURGE, INC.
By: /s/ M.A. Montevideo
--------------------------
Name: M.A. Montevideo
------------------------
Title: Chief Financial Officer
-----------------------
5
<PAGE> 6
GUARANTOR:
By its signature hereon, the
undersigned also hereby
restates and reaffirms its
Guaranty dated as of December
30, 1997 made in favor of
Agent for the benefit of the
Lenders, which the
undersigned delivered in
connection with the Existing
Credit Agreement, agrees that
such Guaranty continues in
full force and effect as the
valid and binding obligation
of the undersigned with
respect to the Obligations of
the Borrowers under the
Amended and Restated Credit
Agreement, as amended hereby,
and further represents and
warrants that the undersigned
has no claims or defenses to
the enforcement of the rights
and remedies of the Agent and
Lenders thereunder.
IMAGYN MEDICAL TECHNOLOGIES,
INC.
By: /s/ M.A. Montevideo
--------------------------
Name: M.A. Montevideo
------------------------
Title: Chief Financial Officer
-----------------------
AGENT:
BT COMMERCIAL CORPORATION, AS
AGENT
By: /s/ Wayne D. Hillock
--------------------------
Name: Wayne D. Hillock
--------------------------
Title: Senior Vice President
--------------------------
6
<PAGE> 7
LENDERS:
BT COMMERCIAL CORPORATION
By: /s/ Wayne D. Hillock
------------------------------
Name: Wayne D. Hillock
--------------------------
Title: Senior Vice President
-----------------------
KENSINGTON INTERNATIONAL
LIMITED
By: Marley International, Inc.
Attorney-in-Fact
By: /s/ Paul Singer
------------------------------
Name: Paul Singer
--------------------------
Title: President
-----------------------
SPRINGFIELD ASSOCIATES, L.L.C.
By: Elliott Associates, L.P.
Managing Member
By: /s/ Paul Singer
------------------------------
Name: Paul Singer
--------------------------
Title: General Partner
-----------------------
7
<PAGE> 8
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR
The undersigned hereby ratifies and reaffirms that certain Continuing
Limited Guaranty dated July 10, 1998 (the "Guaranty") made by the undersigned in
favor of the Agent for the benefit of the Lenders and each of terms and
provisions contained therein, and agrees that the Guaranty continues in full
force and effect following the execution and delivery of the foregoing
Amendment. The undersigned represents and warrants to Agent that the Guaranty
was on the date of the execution and delivery thereof, and continues to be, the
valid and binding obligation of the undersigned enforceable in accordance with
its terms and that the undersigned has not claims or defenses to the enforcement
of the rights and remedies of Agent under the Guaranty.
/s/ Charles Laverty
----------------------------
Charles Laverty
Dated: January 13, 1999
8
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