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Friday, December 5, 1997

Imagyn Medical Technologies, Inc.
(Nasdaq: IMTI)
Phone: 714-668-5858
Price (12/4/97): $2 31/32


HOW DID IT FIND TROUBLE?

Imagine a medical device company that's been acquiring other firms so rapidly that its one-time charges just about match its sales. It's tempting to say trouble arrived when investors just got tired of trying to make sense of the company's public filings.

Yet the real trouble actually came when the company's auditors first saw problems with those filings. In late June, the stock dropped from $9 to $4 1/2 on news that the firm's FY97 10-K would be delayed. Auditors said Imagyn needed to adjust its reported sales and assets, including deferring some revenue for introductory shipments of its EndoView video endoscopy system and some initial stocking orders made later in the year.

So FY97 results were worse than expected, with $16.6 million in reported revenue deferred (though $15.2 million of that should be recorded this year).

For the first quarter of the current year, surgical division sales were also weaker than expected. And the second quarter saw a $6.8 million decline in urology sales; new impotence drugs have left sales of the firm's vacuum erection devices flaccid, about like the company's stock price.

BUSINESS DESCRIPTION

Imagyn designs, manufactures, and markets medical products. Back in April, Urohealth (formerly Nasdaq: UROH) announced it would acquire the far smaller Imagyn Medical. When the deal was completed Sept. 29, Urohealth changed its name to Imagyn Medical Technologies.

An aggressive acquisition binge over the last two-and-a-half years has filled out the firm's offerings. Imagyn now sells products to treat incontinence, prostate disease, and impotence. Thanks to the Imagyn Medical line of gynecological products, the company has expanded its offering of reusable medical instruments for use in minimally invasive surgery of the abdomen and chest.

The company now has product supply agreements with four of the six largest group purchasing organizations, including HealthSouth, Voluntary Hospitals of America, and Tenet.

This past summer, the company was hit with a spate of shareholder lawsuits alleging fraud. Plus, its own patent infringement lawsuit against U.S. Surgical (NYSE: USS) was recently answered with seven counterclaims.

FINANCIAL FACTS

Income Statement*
12-month sales: $139 million
12-month income: ($36.2 million)
12-month EPS: ($1.02)
Profit margins: N/A
Market Cap: $106.5 million
(*Based on annualized six-month numbers. Excludes an extraordinary loss from extinguishment of debt and $9.6 in restructuring & acquisition costs.)

Balance Sheet
Cash & Securities: $33.6 million
Current Assets: $118.5 million
Current Liabilities: $78.5 million
Long-term Debt: $163.8 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 0.77*
(*Based on annualized 6-month sales)

HOW COULD YOU HAVE SEEN IT COMING?

Investors should look for companies that are conservative in the way they recognize revenue. Getting a product into a sales channel is simply not the same as selling that product to actual end users. Companies in a financial bind are often less conservative in this regard.

Also, the excitement over new impotence drugs such as those made by Vivus (Nasdaq: VVUS) and Zonagen (Nasdaq: ZONA) might have suggested trouble ahead for Imagyn's urology sales.

An unprofitable company with a huge amount of debt is always a good candidate for trouble.

WHERE TO FROM HERE?

When the second quarter results came out October 28, Chairman and CEO Charles Laverty focused on the company's sales growth. He also highlighted a number of upcoming new product launches.

But a wary investor might have noted that the net loss for the first six months of FY98 was $0.51 per share, well above last year's $0.16 loss. And that's after excluding a rack of one-time charges. Moreover, the shift from urology products to surgery and gynecology products has (as expected) sunk gross margins from 59.6% in the last year's second quarter to 50.4% in the last period.

If this isn't bad enough, the company is sitting on about $110 million in 12.5% notes. Even with the sales gain in the latest quarter, net interest expense was 9.6% of already unprofitable sales.

Plus, Imagyn was not in compliance with its debt covenants as of September 30. The firm was given a waiver through November 30, but with most of its borrowing eligibility in use and no signs of its ability to get back into compliance, the company will need another waiver or will face further trouble.

First Call shows that analysts have been tripping over themselves to lower earnings estimates the past three months. The $0.19 a share loss once expected for the year ending in March now stands at a loss of $0.96 a share. The $0.27 a share profit once projected for FY98 has turned into an estimated loss of $0.26 per share.

Imagyn may have collected some useful medical technology in its shopping spree, but it has nothing but disheartening results to show for it.

-- Louis Corrigan
(TMFSeymor@aol.com)


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