Urohealth Systems Will Sell 5 Million Shares

Urohealth Systems Inc., the Newport Beach company that has relied heavily on its stock to carry out an aggressive acquisition program, is pausing to refuel.

The company, whose chief executive, Charles A. Laverty, has spearheaded its accumulation of seven medical device concerns in the last year, on Thursday filed a plan to sell 5 million shares of common stock. Half of the shares sold would be offered by two large shareholders. Expected proceeds of roughly $30 million would be used to reduce debt and for other general purposes.

The prospect that the offering might dilute shareholder equity apparently didn’t bother stockholders. Urohealth shares closed Thursday at $12.625 a share on the American Stock Exchange, off only 62 1/2 cents for the day.

Russell Diehl, managing partner of Diehl & Co., a Newport Beach-based investment firm, attributed the stock market’s mild reaction to the planned stock sale to investors’ faith that the company’s strategy to amass a full lineup of products for treating urological ills will still pan out.

For now, Diehl says, the stock’s value rests on optimism, rather than results. “This is still in the entrepreneurial stage. This is still a bet,” he said.

For the nine months ended March 31, Urohealth posted a loss of $18 million, or $1.50 a share, on revenue of $39.6 million. Noting the losses, Diehl said, “the valuation that the market has on this stock is not because of earnings, but potential earnings. The company has a story, and the market thinks it’s a great story and that they’ll be successful.”

The company, which, according to its financial filing, has limited options for financing its operations, plans to use about $20 million of proceeds to wipe debt off its highly leveraged balance sheet.

Selling shareholders include Julian and James Osbon, former owners of a company Urohealth bought last year. Assuming the sale proceeds, their stake would be halved to $10.4%, according to James Johnson, the company’s chief financial officer.

In addition, FoxMeyer Health Corp., a major investor, would see its stake drop to 9.6% from 15%, he said.

Urohealth’s stock-sale announcement came a day after it reported taking a hefty $29.5-million charge stemming from acquisitions in its second fiscal quarter ending Sept. 30. Most of the charge resulted from writedowns for incomplete research and development costs from its purchase last month of Richard-Allen Medical Industries Inc.

Diehl attributed the recent $29.5-million charge to management’s attempt to clear the decks before earnings begin.