<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
------------------------
AMENDMENT NO. 2 TO APPLICATION OR REPORT FILED PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT: JULY 1, 1996
------------------------
UROHEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION)
<TABLE>
<S> <C>
1-11150 98-0122944
(COMMISSION (IRS EMPLOYER
FILE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 668-5858
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
ACQUISITION OF CERTAIN ASSETS OF O.R. CONCEPTS, INC.
On June 5, 1996, Urohealth Systems, Inc. ("Urohealth" or the "Company")
acquired certain assets of O.R. Concepts, Inc. pursuant to an Asset Purchase
Agreement dated June 5, 1996 among Urohealth, O.R. Concepts, Inc., a Texas
Corporation, and Vital Signs, Inc., a New Jersey Corporation. The acquired
assets are used in the development, manufacture, and marketing of laparoscopic
surgery products and accessories.
The purchase price for the acquired assets was $2,786,000, payable in cash
upon the closing of the transaction. The purchase price was funded using a
portion of the proceeds from the sale of Urohealth's 8.75% Convertible
Subordinated Debentures (the "Debentures").
ACQUISITION OF THE INTERMED GROUP, INC.
On July 1, 1996, Urohealth acquired The Intermed Group, Inc., a Delaware
corporation ("Intermed"), pursuant to the terms of the Agreement and Plan of
Merger dated as of June 1, 1996 between Urohealth, Urohealth, Inc. (California),
and Intermed. Intermed is engaged in the development, manufacture and marketing
of disposable medical products.
Under the terms of the agreement, Intermed was merged into Urohealth, Inc.
(California), and each outstanding share of common stock of Intermed was
converted into the right to receive .1242575 shares of Urohealth Common Stock,
plus cash in the amount of $1.21. Upon consummation of the merger, approximately
149,306 shares of Urohealth Common Stock were issued and cash of $1,462,412 was
paid in exchange for all of the outstanding shares of Intermed common stock. The
cash portion of the purchase price was funded using a portion of the proceeds
from the sale of the Debentures.
ACQUISITION OF RICHARD-ALLAN MEDICAL INDUSTRIES, INC.
Urohealth Systems, Inc. ("Urohealth") entered into an Agreement and Plan of
Merger with Richard-Allan Medical Industries, Inc.("Richard-Allan"), an Illinois
corporation. The merger was completed on August 14, 1996. The Company used $30.0
million of a term and revolving credit facility to finance the cash portion of
the purchase price for Richard-Allan. The purchase price totalling $55.5 million
consists of $27.5 million in cash payable at closing, $27.5 million of Urohealth
common stock valued at $13.19 per share and approximately $500,000 in direct
acquisition costs. In addition, the Company acquired the real estate on which
the Richard-Allan facility is located from a partnership for $4.5 million,
consisting of a cash payment of $1.5 million and a note for the balance of the
purchase price. Richard-Allan manufactures and markets minimally invasive and
general surgery products.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three months ended June 30, 1996
compared to the three months ended June 30, 1995.
Unaudited financial statements of Richard-Allan for the three months
ended June 30, 1995 and 1996.
Financial statements of Richard-Allan for the fiscal periods ended
June 30, 1994, 1995 and March 31, 1996, together with Report of
Independent Accountants
(B) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30,
1996
Unaudited Pro Forma Condensed Combined Statement of Operations for
the three months ended June 30, 1996
Unaudited Pro Forma Condensed Combined Statement of Operations for
the nine months ended March 31, 1996
Notes to Unaudited Pro Forma Condensed Combined Consolidated
Financial Statements
2
<PAGE> 3
(C) EXHIBITS
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
2.1* Asset Purchase Agreement dated June 5, 1996, by and between Urohealth Systems,
Inc., O.R. Concepts, Inc., and Vital Signs, Inc.
2.2* Agreement and Plan of Merger dated as of June 1, 1996 between Urohealth Systems,
Inc., Urohealth, Inc. (California), and The Intermed Group Inc.
2.3* Agreement and Plan of Merger dated as of July 5, 1996 between Urohealth Systems,
Inc., Urohealth, Inc. (California), and Richard-Allan Medical Industries, Inc.
</TABLE>
- ---------------
* Filed previously
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UROHEALTH SYSTEMS, INC.
(Registrant)
By: /s/ CHARLES A. LAVERTY
-----------------------------------
Charles A. Laverty
Chief Executive Officer
Date: September 25, 1996
4
<PAGE> 5
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Net Sales. For the quarter ended June 30, 1996, net sales of $5,766,000
were $576,000 or 11% higher than sales of $5,190,000 for the same period in
1995. This increase was largely due to higher sales of the Company's minimally
invasive surgical products.
Gross Profit. For the quarter ended June 30, 1996, gross profit increased
$438,000 or 20% over the same period in 1995. The gross margin percentage
increased from 43% to 46% for the quarter ended June 30, 1996 largely due to
sales growth in the Company's higher margin product line.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended June 30, 1996 decreased $565,000 or 16% over the
same period in 1995 due to lower legal expenses partially offset by higher
selling expenses associated with the expansion of the Company's sales force.
Research and Development. Research and development costs for the quarter
ended June 30, 1996 increased $60,000 or 20% over the same period in 1995 due to
the Company's increased focus on internally developed technology.
Interest Expense. Interest expense for the quarter ended June 30, 1996
decreased $62,000 or 44% over the same period in 1995, primarily due to
decreased borrowing on the Company's line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Through June 1996 the Company's operations have been funded by borrowing on
term loans and lines of credit. In connection with the acquisition of the
Company by Urohealth Systems, Inc., on August 14, 1996, the existing line of
credit was repaid and cancelled. The Company has working capital of $712,000 at
June 30, 1996, and has had negative cash flows from operations for the last
three years ended June 30, 1996.
BUSINESS RISKS
Except for the historical information contained herein, the matters
discussed in this report are forward looking statements that involve risks and
uncertainties. Potential risks and uncertainties include, without limitation,
historical operating losses, dependence on new products, ability to manage
growth, reliance on patents and proprietary rights, government regulation and
required approvals, potential healthcare reform, competition, and dependence on
management.
5
<PAGE> 6
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1996
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 20 $ 18
Accounts receivable, less allowance for doubtful accounts of $8..... 3,116 3,472
Refundable income taxes............................................. 376 510
Inventories......................................................... 1,251 1,141
Prepaid expenses.................................................... -- 115
------ ------
Total current assets........................................ 4,763 5,256
Property and equipment, net........................................... 4,408 4,452
Other assets.......................................................... 64 80
------ ------
$9,235 $9,788
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits............................... $ 340 $ 525
Accounts payable.................................................... 2,315 2,140
Compensation and commissions........................................ 578 879
Other current liabilities........................................... 376 780
Current maturities of long-term debt................................ 160 220
------ ------
Total current liabilities................................... 3,769 4,544
Long-term debt, less current maturities............................... 2,347 2,648
Commitments and Contingencies
Stockholders' equity:
Preferred stock $5 par value:
authorized -- 150,000 shares; issued -- 7,534 shares............. 38 38
Common stock $1 par value:
authorized -- 50,000 shares; issued -- 4,645 shares.............. 5 5
Retained earnings................................................... 3,118 2,597
Treasury stock, at cost:
7,534 shares preferred stock and 113 shares common stock......... (63) (63)
Foreign currency translation adjustments............................ 21 19
------ ------
Total stockholders' equity.................................. 3,119 2,596
------ ------
$9,235 $9,788
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1995 1996
--------- --------
<S> <C> <C>
Net sales........................................................... $ 5,190 $5,766
Cost of sales....................................................... 2,984 3,122
------- ------
- -
Gross profit........................................................ 2,206 2,644
Operating expenses:
Selling, general and administrative............................... 3,425 2,860
Research and development.......................................... 300 360
Interest expense, net............................................. 142 80
------- ------
- -
3,867 3,300
------- ------
- -
Loss from continuing operations before income taxes................. (1,661) (656)
Income taxes (credits).............................................. (2,914) (134)
------- ------
- -
Income (loss) from continuing operations............................ 1,253 (522)
Discontinued operations:
Income from operations, less applicable income taxes of $172...... 323 --
Gain on sale, less applicable income taxes of $4,845.............. 9,405 --
------- ------
- -
9,728 --
------- ------
- -
Net income (loss)................................................... $10,981 $ (522)
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1995 1996
-------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ 10,981 $(522)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization....................................... 155 276
Gain on sale of discontinued operations............................. (14,250) --
Loss on disposition of property..................................... 5 --
Changes in operating assets and liabilities:
Receivables....................................................... 1,844 (357)
Income taxes...................................................... 2,107 (134)
Inventories....................................................... 315 112
Other operating assets............................................ (253) (132)
Accounts payable.................................................. (1,993) 9
Other operating liabilities....................................... 373 704
-------- -----
Net cash used in operating activities.................................... (716) (44)
INVESTING ACTIVITIES
Capital expenditures..................................................... (265) (319)
Proceeds from sale of discontinued operations, net of expenses........... 14,746 --
-------- -----
Net cash provided by (used in) investing activities...................... 14,481 (319)
FINANCING ACTIVITIES
Principal payments under capital lease obligations....................... (33) (19)
Principal payments under long-term debt.................................. (3,751) (11)
Net borrowings (repayment) under revolving line-of-credit agreement...... (4,000) 391
Repurchase of common stock............................................... (3,000) --
-------- -----
Net cash provided by (used in) financing activities...................... (10,784) 361
-------- -----
Increase (decrease) in cash and cash equivalents......................... 2,981 (2)
Cash and cash equivalents at beginning of period......................... 22 20
-------- -----
Cash and cash equivalents at end of period............................... $ 3,003 $ 18
======== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE> 9
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
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 Richard-Allan Medical Industries, Inc. (the "Company")
and its subsidiary. 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.
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 June 30,
1996 and March 31, 1996, its condensed consolidated results of operations for
the three month periods ended June 30, 1996 and June 30, 1995, and its condensed
consolidated cash flows for the three month periods ended June 30, 1996 and June
30, 1995. The results of operations for the three month period ended June 30,
1996 are not necessarily indicative of those to be expected for the entire year.
2. DISCONTINUED OPERATION
In May 1995, the Company sold the assets and operations of its laboratory
products division. The proceeds from the sale, net of expenses, were
approximately $14.7 million. The condensed consolidated statement of operations
for the three months ended June 30, 1995 excludes sales and expenses of the
laboratory products division from continuing operations.
3. INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on last-in, first-out (LIFO) method.
<TABLE>
<CAPTION>
JUNE 30,
1996
MARCH 31, -----------
1996
---------- (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Finished Goods................................................ $ 647 $ 612
Raw Materials................................................. 604 529
------ ------
$1,251 $ 1,141
====== ======
</TABLE>
4. LITIGATION
The Company is subject to lawsuits and claims in the ordinary course of
business. Management believes that the ultimate resolution of such lawsuits and
claims should not have a material adverse effect on the Company's condensed
consolidated financial position or results of operations.
5. SUBSEQUENT EVENT
On July 5, 1996, the Company entered into a definitive agreement to be
acquired by Urohealth Systems, Inc. (Urohealth). The sale was completed August
14, 1996, at which time the operations of the Company were merged with the
operations of Urohealth Systems, Inc.
9
<PAGE> 10
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Richard-Allan Medical Industries, Inc.
We have audited the accompanying consolidated balance sheets of
Richard-Allan Medical Industries, Inc. and Subsidiary as of March 31, 1996 and
June 30, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the nine months ended March 31, 1996 and
the years ended June 30, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Richard-Allan
Medical Industries, Inc. and Subsidiary at March 31, 1996 and June 30, 1995 and
the consolidated results of their operations and their cash flows for the nine
months ended March 31, 1996 and the years ended June 30, 1995 and 1994 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kalamazoo, Michigan
August 8, 1996, except Note K as to
which the date is August 14, 1996
10
<PAGE> 11
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS (NOTE F)
Current assets:
Cash and cash equivalents............................................. $ 3,003 $ 20
Accounts receivable, less allowance for doubtful accounts of $8....... 2,993 3,116
Refundable income taxes............................................... -- 376
Inventories (Note D).................................................. 1,722 1,251
Prepaid expenses...................................................... 131 --
Current assets of discontinued operations (Note B).................... 168 --
------- ------
Total current assets.......................................... 8,017 4,763
Property and equipment:
Land.................................................................. 86 86
Building.............................................................. 67 41
Machinery and equipment............................................... 5,870 6,492
Furniture and fixtures................................................ 1,112 1,208
Property under capital lease (Note E)................................. 509 509
Leasehold improvements................................................ 329 311
Computer software..................................................... 319 336
------- ------
8,292 8,983
Less accumulated depreciation and amortization........................ 4,034 4,575
------- ------
4,258 4,408
Other assets............................................................ 27 64
------- ------
$12,302 $9,235
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued against future deposits................................. $ -- $ 340
Accounts payable...................................................... 3,182 2,315
Compensation and commissions.......................................... 578 578
Income taxes payable.................................................. 2,100 --
Other current liabilities............................................. 549 376
Current maturities of long-term debt.................................. 136 160
------- ------
Total current liabilities..................................... 6,545 3,769
Long-term debt, less current maturities (Note F)........................ 2,157 2,347
Commitments and Contingencies (Note J)
Stockholders' equity (Note F):
Preferred stock $5 par value:
authorized -- 150,000 shares; issued -- 7,534 shares
(1995 -- 9,634).................................................... 48 38
Common stock $1 par value:
authorized -- 50,000 shares; issued -- 4,645 shares
(1995 -- 4,660).................................................... 5 5
Retained earnings..................................................... 3,604 3,118
Treasury stock, at cost:
7,534 shares preferred stock and 113 shares common stock
(1995 -- 9,634 and 128, respectively).............................. (80) (63)
Foreign currency translation adjustments.............................. 23 21
------- ------
Total stockholders' equity.................................... 3,600 3,119
------- ------
$12,302 $9,235
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 12
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
---------------------- MARCH 31,
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
Net sales................................................ $16,852 $19,598 $15,705
Cost of sales............................................ 9,566 11,515 8,195
------- ------- -------
Gross profit............................................. 7,286 8,083 7,510
Operating expenses (income):
Selling, general and administrative (Note J):.......... 8,953 12,756 7,450
Research and development............................... 2,421 1,694 765
Distribution fees...................................... (28) -- --
Loss on disposition of property........................ 112 340 --
Interest income........................................ (16) (38) (42)
Interest expense....................................... 602 794 183
Other.................................................. 51 41 9
------- ------- -------
12,095 15,587 8,365
------- ------- -------
Loss from continuing operations before income taxes...... (4,809) (7,504) (855)
Income taxes (credits) (Note I).......................... (742) (3,266) (376)
------- ------- -------
Loss from continuing operations.......................... (4,067) (4,238) (479)
Discontinued operations (Note B):
Income from operations, less applicable income taxes of
$524 and $734 in 1995 and 1994, respectively........ 1,427 1,008 --
Gain on sale, less applicable income taxes of $4,845... -- 9,405 --
------- ------- -------
1,427 10,413 --
------- ------- -------
Net income (loss)........................................ $(2,640) $ 6,175 $ (479)
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
PREFERRED STOCK COMMON STOCK COMMON RETAINED CURRENCY TOTAL
--------------- --------------- PAID-IN STOCK EARNINGS TREASURY TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIPTIONS (DEFICIT) STOCK ADJUSTMENTS EQUITY
------ ------ ------ ------ -------- ------------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
June 30,
1993.......... 14 $ 68 5 $ 5 $ -- $ -- $ 1,083 $(114) $ (15) $ 1,027
Net loss........ -- -- -- -- -- -- (2,640) -- -- (2,640)
Issuance of
common
stock......... -- -- 1 1 999 -- -- -- -- 1,000
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Common stock
subscription
by officer
(Note C)...... -- -- -- -- -- 660 -- -- -- 660
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- 30 30
--- ---- --- ---- ------- ----- ------- ----- ----- -------
Balance as of
June 30,
1994.......... 12 58 6 6 999 660 (1,564) (97) 15 77
Net income...... -- -- -- -- -- -- 6,175 -- -- 6,175
Issuance of
common
stock......... -- -- -- -- 1,000 (660) -- -- -- 340
Purchase of
common
stock......... -- -- (1) (1) (1,999) -- (1,000) -- -- (3,000)
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- 8 8
--- ---- --- ---- ------- ----- ------- ----- ----- -------
Balance as of
June 30,
1995.......... 10 48 5 5 -- -- 3,604 (80) 23 3,600
Net loss........ (479) (479)
Retirement of
pledged
treasury
stock......... (2) (10) -- -- -- -- (7) 17 -- --
Foreign currency
translation
adjustments... -- -- -- -- -- -- -- -- (2) (2)
--- ---- --- ---- ------- ----- ------- ----- ----- -------
Balance as of
March 31,
1996.......... 8 $ 38 5 $ 5 $ -- $ -- $ 3,118 $ (63) $ 21 $ 3,119
=== ==== === ==== ======= ===== ======= ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
-------------------- MARCH 31,
1994 1995 1996
------- -------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $(2,640) $ 6,175 $ (479)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization......................... 492 810 597
Gain on sale of discontinued operations............... -- (14,250) --
Loss on disposition of property....................... 112 340 --
Changes in operating assets and liabilities:
Receivables......................................... (281) 579 46
Income taxes........................................ 2,107 (2,476)
Inventories......................................... (285) (430) 470
Other operating assets.............................. -- (19) 94
Accounts payable.................................... (227) 1,160 (867)
Other operating liabilities......................... 680 (594) 166
------- -------- -------
Net cash used in operating activities...................... (2,149) (4,122) (2,449)
INVESTING ACTIVITIES
Capital expenditures....................................... (1,638) (1,045) (747)
Proceeds from sale of discontinued operations, net of
expenses................................................. -- 14,745 --
------- -------- -------
Net cash provided by (used in) investing activities........ (1,638) 13,700 (747)
FINANCING ACTIVITIES
Principal payments under capital lease obligations......... (62) (75) (56)
Principal payments under long-term debt.................... (118) (4,025) (16)
Net borrowings (repayment) under revolving line-of-credit
agreement................................................ 1,132 (3,632) 278
Proceeds from issuance of long-term debt................... 2,360 3,102 7
Proceeds from issuance of common stock..................... 1,000 1,000 --
Repurchase of common stock................................. (513) (3,000) --
------- -------- -------
Net cash provided by (used in) financing activities........ 3,799 (6,630) 213
Effect of exchange rate changes on cash and cash
equivalents.............................................. 52 (28) --
------- -------- -------
Increase (decrease) in cash and cash equivalents........... 64 2,920 (2,983)
Cash and cash equivalents at beginning of period........... 19 83 3,003
------- -------- -------
Cash and cash equivalents at end of period................. $ 83 $ 3,003 $ 20
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A -- BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Richard-Allan Medical Industries, Inc. and Subsidiary (the Company)
manufactures and markets surgical operating room supplies. The Company markets
these products both domestically and abroad through the use of a direct sales
force and foreign distributors. A division that manufactures and markets
diagnostic reagents used primarily in hospital laboratories was sold in 1995
(see Note B).
Basis of Financial Statement Presentation
The Company has elected to change its fiscal year end to March 31. Fiscal
1996 is a nine month transition period ended March 31, 1996. During the nine
month period ended March 31, 1995, the Company's unaudited results of operations
included: net sales of $14.4 million; gross profit of $5.9 million; income tax
credits of $352,000; and a net loss of $4.8 million.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Richard-Allan Medical Industries (U.K.) Ltd.
(subsidiary). All material intercompany balances and transactions are
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
cash and cash equivalents reported in the balance sheets equal their fair value.
Accounts Receivable and Concentration of Credit Risk
The Company sells to a large number of domestic and foreign customers. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. An allowance for doubtful accounts is maintained at a
level that management believes is sufficient to cover potential credit losses.
Foreign Currency Translation
The financial statements of the subsidiary have been translated into U.S.
dollars in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 52, Foreign Currency Translation. All balance sheet accounts have
been translated using the exchange rates in effect at the balance sheet dates,
and operations statement accounts have been translated using the average
exchange rates for the respective periods. The gains and losses resulting from
the changes in exchange rates from period to period have been reported as a
separate component of stockholders' equity. The effect on the statements of
operations of transaction gains and losses is insignificant for all periods
presented.
15
<PAGE> 16
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method for U.S. inventories which approximate
93% and 92% of total inventories at March 31, 1996 and June 30, 1995,
respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
Income Taxes
Deferred income taxes are provided on the difference in earnings determined
for tax and financial reporting purposes. Deferred income taxes have been
calculated under the liability method in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
Income taxes have not been provided on the undistributed earnings of
Richard-Allan Medical Industries (U.K.) Ltd. as it is the Company's intention to
indefinitely reinvest such earnings in the subsidiary's operations and not to
transfer them in the form of a taxable transaction.
Research and Development Expenses
Research and development expenses are charged against income as incurred.
Revenue Recognition
Revenue from sales of manufactured products is recognized upon shipment to
customers (see Note H).
Advertising Expense
Advertising and promotion costs are expensed as incurred.
Reclassification
Certain amounts for 1995 and 1994 have been reclassified to conform with
the 1996 presentation.
NOTE B -- DISCONTINUED OPERATIONS
In May 1995, the Company sold substantially all of the assets and
operations of its laboratory products division. The proceeds from the sale, net
of expenses, were approximately $14.7 million. The 1995 consolidated statement
of operations excludes sales and expenses of the laboratory products division
from continuing operations, and fiscal 1994 results have been restated to
conform with this presentation. Net sales of the laboratory products division
totaled $7,829,000 from July 1994 through May 1995, and $9,014,000 for the year
ended June 30, 1994. The remaining assets of the laboratory products division
have been segregated in the consolidated balance sheet as of June 30, 1995.
16
<PAGE> 17
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- STOCK SUBSCRIPTION
During fiscal 1994 a stockholder made a commitment to purchase common stock
in an amount sufficient to maintain compliance with debt covenants. The amount
of the stock purchase was determined after June 30, 1994 based on financial
statement amounts, and the stock purchase occurred on August 30, 1994. The
purchase has been recorded as a 1994 increase in stockholders' equity, and is a
noncash financing activity for purposes of the 1994 consolidated statement of
cash flows.
NOTE D -- INVENTORIES
Inventories from continuing operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Raw materials and work in process................................ $ 695 $ 604
Finished goods................................................... 1,027 647
------ ------
$1,722 $1,251
====== ======
</TABLE>
If the first-in, first-out method of valuation had been used for all
inventories by the Company, inventories would have been approximately $237,000
higher than reported at both March 31, 1996 and June 30, 1995.
NOTE E -- LEASES
The Company leases certain land, manufacturing and office facilities and
equipment under noncancelable leases. As of March 31, 1996, future net minimum
lease payments under the capital leases and future minimum rental payments
required under operating leases that have initial or remaining noncancelable
terms in excess of one year were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
TWELVE MONTHS ENDED MARCH 31, CAPITAL LEASES LEASES
----------------------------- -------------- ---------
<S> <C> <C>
1997......................................................... $47 $ 7
1998......................................................... -- 3
---
--
---
Total minimum lease payments................................. 47 $10
===
Less amount representing interest............................ 2
---
Present value of net minimum lease payments.................. $45
===
</TABLE>
The Company pays property taxes, insurance and maintenance expenses for the
building and land, which are leased from Newhauser Associates, a related party.
Future minimum lease payments are subject to annual adjustments based on cost of
living indices. Additional lease payments resulting from such adjustments
totaled approximately $91,000 in 1994, $93,000 in 1995 and $71,000 for the nine
months ended March 31, 1996.
Total lease expense was approximately $299,000 and $254,000 in 1994 and
1995, respectively and $107,000 for the nine month period ended March 31, 1996.
17
<PAGE> 18
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to bank under revolving credit agreement........... $1,679 $1,956
Subordinated 12% unsecured note payable to the estate of a former
stockholder for redemption of stock, maturing in annual
installments of $41,963 through July 1997...................... 84 84
12% and 10% unsecured notes payable, maturing at various dates
through July 2000.............................................. 352 359
Non-interest-bearing note (discounted to present value at a rate
of 10%), secured by pledged shares of treasury stock held in
escrow, to a former stockholder for redemption of stock,
maturing in monthly installments varying from $3,000 to $3,500
through October 1, 1999........................................ 79 63
Present value of lease payments under capitalized leases (see
Note E)........................................................ 99 45
------ ------
2,293 2,507
Less current maturities.......................................... 136 160
------ ------
Total long-term debt................................... $2,157 $2,347
====== ======
</TABLE>
Effective May 1, 1996, the Company renegotiated the terms of its bank
financing agreement. Under the terms of the amended agreement, the Company has a
$3.1 million revolving line of credit, with interest payable monthly at the
bank's prime rate (8.25% at March 31, 1996) plus 1.5%. Approximately $1.4
million of additional borrowings were available under the line at March 31,
1996, subject to an asset-based lending formula.
All borrowings under the amended bank financing agreement are required to
be paid in full on September 1, 1996, and the bank has stated its intention to
call the debt on that date. This arrangement provides a grace period until that
date for the Company to achieve compliance with certain financial covenants
included in the agreement. The Company is currently in violation of financial
covenants related to, among others, minimum working capital requirements. The
bank financing agreement also restricts the payment of any dividends, other than
dividends payable in Company-owned stock, on any shares of its capital stock.
The bank borrowings are collateralized by substantially all assets of the
Company, a personal guarantee of and life insurance policy on the principal
stockholder, a $1 million guarantee by a former officer and stockholder of the
Company, and a co-guarantee by Newhauser Associates, a related party. The
Company is a co-guarantor of a $1.4 million bank construction loan held by
Newhauser Associates that also expires on September 1, 1996.
As described in Note K, the Company was acquired and became a division of
Urohealth Systems, Inc. in August, 1996. In connection with this transaction,
all of the Company's debt is being refinanced on a long-term basis. Accordingly,
the Company's debt at March 31, 1996 has been classified as long-term, except
for amounts which were expected to be repaid prior to the refinancing.
Interest paid totaled $792,000 in 1994 and $608,000 in 1995, and $185,000
for the nine months ended March 31, 1996. The carrying amount of the Company's
long-term debt approximates its fair value.
18
<PAGE> 19
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- EMPLOYEE BENEFIT PLAN
The Company has a qualified profit-sharing plan covering employees with
more than one year of service, who may elect to defer up to 15% of their
compensation. The Company contributes 35% of the participant's deferred salary
to the plan, up to 6% of compensation, and makes additional contributions to the
plan at its discretion. The amount of Company contributions to the plan was
approximately $16,500 in 1994, $88,000 in 1995 and $61,000 for the nine months
ended March 31, 1996.
NOTE H -- DISTRIBUTION AGREEMENTS
Certain international sales of the Company are transacted under the terms
of international distribution agreements with foreign companies which the
Company entered into in 1992, 1993 and 1994. The agreements appoint the
distributor to sell and service all existing and future product lines of the
Company in a particular territory. In exchange for these exclusive distribution
rights, which range from six to twenty years, and for initial services provided
by the Company for the distributor at the time the agreements were entered into,
the distributors paid fees to the Company totaling $28,800 in 1994 and agreed to
market no competing products in the territory during the term of the agreement.
Income recognized by the Company from these distribution agreements was not
significant for the periods presented.
NOTE I -- INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Operating expense accruals..................................... $ 200 $ 205
Financial statement over tax depreciation...................... 61 73
Inventory capitalization for tax purposes...................... 51 20
Other.......................................................... 15 3
----- -----
$ 327 $ 301
===== =====
Valuation allowance for deferred tax assets...................... $(327) $(301)
===== =====
</TABLE>
The Company had no deferred income tax liabilities at March 31, 1996 or
June 30, 1995.
19
<PAGE> 20
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the income tax provision (credit) from continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
JUNE 30, ENDED
----------------- MARCH 31,
1994 1995 1996
------ ------ -----------
<S> <C> <C> <C>
Current:
Federal............................................ $(734) $(3,266) $(376)
State.............................................. -- -- --
Foreign............................................ (8) -- --
----- ------- -----
$(742) $(3,266) $(376)
===== ======= =====
Deferred:
Federal............................................ $ -- $ -- $ --
State.............................................. -- -- --
Foreign............................................ -- -- --
----- ------- -----
$ -- $ -- $ --
===== ======= =====
</TABLE>
The Company's income tax provision (credit) from continuing operations
differed from the income tax provision (credit) from continuing operations at
the federal statutory rate of 34%, as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------- MARCH 31,
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
Income tax provision (credit) at the statutory
rate.............................................. $(1,635) $(2,551) $(291)
Adjustments:
Increase (decrease) in valuation allowance........ 901 (855) (26)
Effect of favorable tax determinations............ -- -- (82)
Other............................................. (8) 140 23
------- ------- -----
Tax provision (credit).............................. $ (742) $(3,266) $(376)
======= ======= =====
</TABLE>
In 1995, the Company utilized approximately $938,000 and $228,000 of net
operating loss tax benefit and research and development credit carryforwards,
respectively.
Cash paid for purposes of federal income taxes during the nine month period
ended March 31, 1996, was approximately $2.1 million. No cash was paid for
purposes of federal income taxes during the years ended June 30, 1995 and 1994.
20
<PAGE> 21
RICHARD-ALLAN MEDICAL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits and claims in the ordinary course of
business. Management believes that the ultimate resolution of such lawsuits and
claims will not have a material adverse effect on the Company's consolidated
financial position or results of operations. During fiscal 1995 the Company
incurred approximately $2,000,000 in legal fees in successful defense of a
patent infringement suit initiated by a large surgical equipment manufacturer,
which has been included in selling, general and administrative expenses. The
Company is party to a negotiated payment plan for these legal fees. If the
Company maintains payments in accordance with the plan, the law firm has agreed
to reduce the legal fees charged to the Company by $350,000. This expense
reduction will be recognized only after completion of the payment plan and the
forgiveness of fees is realized.
As of March 31, 1996, the Company had entered into various purchase
commitments for tooling equipment of approximately $1 million.
NOTE K -- SUBSEQUENT EVENT
On July 5, 1996, the Company entered into a definitive agreement to be
acquired by Urohealth Systems, Inc. (Urohealth). The sale was consummated on
August 14, 1996, at which time the Company became a division of Urohealth.
Urohealth has made commitments to the Company to provide funding for the
Company's operations for a minimum of twelve months beginning on July 5, 1996.
In addition, Urohealth has entered into a financing arrangement which will be
used to refinance all of the Company's debt with debt having maturities greater
than one year.
21
<PAGE> 22
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
are presented to reflect the acquisition of Richard-Allan, on August 14, 1996,
the acquisition of Intermed, effective on June 1, 1996, and the acquisition of
certain assets of O.R. Concepts effective June 5, 1996 (collectively "the
Acquisitions"). These transactions were accounted for as purchases.
The unaudited pro forma condensed combined financial statements and
accompanying notes should be read in conjunction with the respective historical
audited consolidated financial statements of UROHEALTH contained in its Annual
Report on Form 10-K for the year ended March 31, 1996 and the audited
consolidated financial statements of Richard-Allan included herein.
The pro forma condensed combined balance sheet as of June 30, 1996 has been
prepared as if the Richard-Allan acquisition and the related financing occurred
on that date. Additionally, the unaudited pro forma condensed combined balance
sheet reflects the funding of the Company's private placement of $50.0 million
of Debentures, which was completed in July 1996, as if it had occurred on June
30, 1996. The unaudited pro forma condensed combined statements of operations
have been prepared as if the Acquisitions and the related financing occurred on
July 1, 1995.
The unaudited pro forma combined data are based on the separate
consolidated financial statements of UROHEALTH, Richard-Allan, Intermed and O.R.
Concepts giving effect to the transactions under the assumptions and adjustments
outlined in the accompanying Notes to the Unaudited Pro Forma Condensed Combined
Financial Statements. The pro forma adjustments are based upon available
information and upon certain assumptions that UROHEALTH management believes are
reasonable given the circumstances. The unaudited pro forma condensed combined
results of operations for the three month period ended June 30, 1996 include the
unaudited results of operations of Richard-Allan, Intermed and O.R. Concepts for
such period. The unaudited pro forma condensed combined results of operations
for the nine month fiscal period ended March 31, 1996 include the audited
results of operations of Richard-Allan, and the unaudited results of operations
of Intermed and O.R. Concepts for such period. The unaudited pro forma condensed
combined financial statements are provided for comparative purposes only and are
not necessarily indicative of the results that would have been obtained had the
Acquisitions occurred on the dates indicated or that may be achieved in the
future.
The Company anticipates significant costs to be incurred in connection with
the implementation of a plan of consolidation of the Richard-Allan and Intermed
operations. The expenses associated with the restructuring and consolidation are
estimated to total approximately $4.0 million, and an additional charge will be
taken for incomplete research and development acquired in the Richard-Allan
acquisition, which is preliminarily estimated at $25.5 million. These expenses
have not been reflected in the unaudited pro forma condensed combined statements
of operations. They are anticipated to be recorded as one-time charges in the
quarter ending September 30, 1996.
The Company expects to realize cost savings and efficiencies from the
consolidation of the Richard-Allan and Intermed operations and the acquisition
of the O.R. Concepts product line. The consolidations include the elimination of
certain duplicative corporate and administrative expenses and the manufacture of
previously purchased inventories. No assurance, however, can be given regarding
the aggregate amount or the timing of cost savings to be achieved by the Company
from the consolidation. Such cost savings have not been reflected in the
unaudited pro forma condensed combined statement of operations.
Shares used in the computation of earnings per common share give effect to
the applicable exchange ratios for the Richard-Allan and Intermed acquisitions
for the three months ended June 30, 1996 and the nine months ended March 31,
1996, presented in the unaudited pro forma condensed combined statement of
operations.
22
<PAGE> 23
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SALE OF
RICHARD- SUBORDINATED PRO FORMA TOTAL
UROHEALTH ALLAN DEBENTURES ADJUSTMENTS PRO FORMA
--------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current:
Cash and equivalents................ $ 3,603 $ 18 $15,700(g) $ (2,648)(c) $ 16,673
Accounts receivable, net............ 11,113 3,472 -- -- 14,585
Inventories......................... 10,971 1,141 -- -- 12,112
Prepaids and deposits............... 2,039 115 -- -- 2,154
Deferred debt issuance costs........ 659 -- -- -- 659
Other............................... 24 510 -- -- 534
------- ------ ------- ------- --------
Total current assets......... 28,409 5,256 15,700 (2,648) 46,717
Property and equipment, net......... 9,618 4,452 -- 4,500(b) 18,570
Deferred debt issuance costs........ 5,490 -- -- 1,300(a) 6,790
Patents, net........................ 4,581 -- -- -- 4,581
Deposits and other assets........... 867 80 -- -- 947
Goodwill............................ 7,240 -- -- 52,904(b) 60,144
Investment in Richard-Allan......... -- -- -- 60,000(a) --
(60,000)(b)
------- ------ ------- ------- --------
Total assets................. $56,205 $9,788 $15,700 $ 56,056 $137,749
======= ====== ======= ======= ========
Liabilities
Current:
Accounts payable and accrued
expenses.......................... $10,298 $3,445 $ -- $ 800(a) $ 14,543
Accrued compensation................ 2,141 879 -- -- 3,020
Restructuring accrual............... 645 -- -- -- 645
Revolving line of credit............ -- -- -- 10,000(a) 10,000
Current portion of notes payable and
capital leases.................... 872 220 -- -- 1,092
------- ------ ------- ------- --------
Total current liabilities.... 13,956 4,544 -- 10,800 29,300
Long-term liabilities:
Notes payable....................... 65 2,648 -- 20,000(a) 23,065
3,000(a)
(2,648)(c)
Capital leases...................... 181 -- -- -- 181
Other liabilities................... 284 -- -- -- 284
Restructuring, less current
portion........................... 797 -- -- -- 797
Minority interest................... 1,090 -- -- -- 1,090
Convertible subordinated
debentures........................ 34,300 -- 15,700(g) -- 50,000
Common stockholders' equity:
Preferred stock..................... -- 38 -- (38)(b) --
Common stock........................ 14 5 -- 2(a) 16
(5)(b)
Warrants............................ 7,546 -- -- -- 7,546
Additional paid-in capital.......... 63,952 -- -- 27,498(a) 91,450
Treasury stock...................... -- (63) -- 63(b) --
Retained earnings (deficit)......... (65,892 ) 2,597 -- (2,597)(b) (65,892 )
Foreign currency translation........ (88 ) 19 -- (19)(b) (88 )
------- ------ ------- ------- --------
Total common stockholders' equity... 5,532 2,596 -- 24,904 33,032
------- ------ ------- ------- --------
Total liabilities and stockholders'
equity............................ $56,205 $9,788 $15,700 $ 56,056 $137,749
======= ====== ======= ======= ========
</TABLE>
23
<PAGE> 24
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
O.R.
CONCEPTS
RICHARD- AND PRO FORMA TOTAL
UROHEALTH ALLAN INTERMED ADJUSTMENTS PRO FORMA
--------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales........................... $16,892 $ 5,766 $ 885 $ -- $23,543
Cost of sales....................... 5,257 3,122 984 -- 9,363
------- ------- ------ ------- -------
Gross profit........................ 11,635 2,644 (99) -- 14,180
Operating expenses:
Selling, general and
administrative................. 9,106 2,860 982 572(e) 13,520
Research and development.......... 343 360 -- -- 703
------- ------- ------ ------- -------
9,449 3,220 982 572 14,223
------- ------- ------ ------- -------
Income (loss) from operations....... 2,186 (576) (1,081) (572) (43)
Other income (expense):
Minority interest................. (18) -- -- -- (18)
Interest income................... 51 -- -- -- 51
Interest expense.................. (961) (80) (2) (743)(d) (1,786)
Other............................. -- -- (11) -- (11)
------- ------- ------ ------- -------
Income (loss) before taxes and
extraordinary item................ 1,258 (656) (1,094) (1,315) (1,807)
Income tax expense (benefit)........ -- (134) -- --(f) (134)
------- ------- ------ ------- -------
Income (loss) before extraordinary
item.............................. $ 1,258 $ (522) $ (1,094) $(1,315) $(1,673)
======= ======= ====== ======= =======
Earnings per share:
Income (loss) before extraordinary
item........................... $ 1,258 $(1,673)
Dividends and accretion on
redeemable convertible
preferred stock................ (103) (103)
------- -------
Income (loss) before extraordinary
item attributable to common
stockholders................... $ 1,155 $(1,776)
======= =======
Income (loss) before extraordinary
item per share attributable to
common stockholders............ $ 0.09 $ (0.11)
======= =======
Weighted average number of
shares(h)......................... 13,442 15,676
======= =======
</TABLE>
24
<PAGE> 25
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
O.R.
CONCEPTS
RICHARD- AND PRO FORMA TOTAL
UROHEALTH ALLAN INTERMED ADJUSTMENTS PRO FORMA
--------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 39,641 $ 15,705 $ 4,354 $ -- $ 59,700
Cost of sales....................... 12,896 8,195 2,509 -- 23,600
------- ------- ------ ------- -------
Gross profit........................ 26,745 7,510 1,845 -- 36,100
Operating expenses:
Selling, general and
administrative................. 32,218 7,450 1,378 1,717(e) 42,763
Research and development.......... 1,324 765 3 -- 2,092
Restructuring charges............. 5,456 -- -- -- 5,456
Direct acquisition costs.......... 4,232 -- -- -- 4,232
------- ------- ------ ------- -------
43,230 8,215 1,381 1,717 54,543
------- ------- ------ ------- -------
Income (loss) from operations....... (16,485 ) (705) 464 (1,717) (18,443)
Other income (expense):
Minority interest................. (55 ) -- -- -- (55)
Interest income................... 23 42 -- -- 65
Interest expense.................. (1,002 ) (183) (14) (2,229)(d) (3,428)
Other............................... (48 ) (9) -- -- (57)
------- ------- ------ ------- -------
Income (loss) before taxes and
extraordinary item................ (17,567 ) (855) 450 (3,946) (21,918)
Income tax expense (benefit)........ 431 (376) -- --(f) 55
------- ------- ------ ------- -------
Income (loss) before extraordinary
item.............................. $(17,998 ) $ (479) $ 450 $(3,946) $ (21,973)
======= ======= ====== ======= =======
Earnings per share:
Income (loss) before extraordinary
item........................... $(17,998 ) $ (21,973)
Dividends and accretion on
redeemable convertible
preferred stock................ (579 ) (579)
------- -------
Income (loss) before extraordinary
item attributable to common
stockholders................... $(18,577 ) $ (22,552)
======= =======
Income (loss) before extraordinary
item per share attributable to
common stockholders............ $ (1.50 ) $ (1.55)
======= =======
Weighted average number of
shares(h)......................... 12,344 14,578
======= =======
</TABLE>
25
<PAGE> 26
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. ACQUISITIONS
Acquisition of Richard-Allan Medical Industries, Inc.
On July 5, 1996, UROHEALTH entered into an agreement to acquire all of the
outstanding capital stock of Richard-Allan in exchange for $27.5 million in cash
and 2,084,691 shares of UROHEALTH Common Stock. In addition, the Company agreed
to acquire the real estate on which the Richard-Allan facility is located from a
partnership for $1.5 million of cash and a $3.0 million note. The acquisition
was accounted for as a purchase and has been recorded based upon available
information and upon certain assumptions that the Company believes are
reasonable in the circumstances. The purchase price has been allocated to the
acquired assets and liabilities based on a preliminary determination of their
respective fair values.
The Company is continuing to evaluate the value of acquired incomplete
research and development incident to this acquisition. The evaluation includes,
among other factors, the stage of development of each product, the time and
resources needed to complete each product, expected income and associated risks
(including the inherent difficulties and uncertainties in developing and
manufacturing new products and potential alternative surgical procedures in
future target markets). The Company has estimated a one-time non-cash charge to
earnings of approximately $25.5 million for incomplete research and development
related to the acquired company that does not have alternative future use. No
such charge has been recognized in the pro forma financial information herein.
Acquisition of The Intermed Group, Inc.
On July 1, 1996, UROHEALTH acquired Intermed pursuant to the terms of the
Agreement and Plan of Merger dated as of June 1, 1996. Under the terms of the
agreement, each outstanding share of common stock of Intermed was converted into
the right to receive .1242575 shares of UROHEALTH Common Stock, plus cash in the
amount of $1.21. Upon consummation of the merger, approximately 149,306 shares
of UROHEALTH Common Stock (with a value of $2.05 million) were issued and cash
of $1.46 million was paid in exchange for all of the outstanding shares of
Intermed common stock. Direct acquisition costs incurred related to the
transaction were $400,000. The cash portion of the purchase price was funded
using a portion of the proceeds from the sale of the Debentures. The purchase
price has been allocated to the acquired assets and liabilities based on a
preliminary determination of their respective fair values. It was determined by
the Company that the acquired identifiable tangible and intangible assets had a
value of $1.18 million and assumed liabilities had a value of $1.61 million.
Acquisition of Certain Assets of O.R. Concepts, Inc.
On June 5, 1996, UROHEALTH acquired certain assets of O.R. Concepts
pursuant to an Asset Purchase Agreement dated June 5, 1996 among UROHEALTH, O.R.
Concepts and Vital Signs, Inc., a New Jersey Corporation. The purchase price for
the acquired assets was $2.8 million, payable in cash upon the closing of the
transaction. The purchase price was funded using a portion of the proceeds from
the sale of the Debentures. The purchase price has been allocated to the
acquired assets and liabilities based on a preliminary determination of their
respective fair values. It was determined by the Company that the acquired
identifiable tangible and intangible assets had a value of $273,000 (net of a
$291,000 write-down of certain acquired inventory, reflected as a charge to cost
of sales during the three months ended June 30, 1996) and that the assumed
liabilities had a value of $20,000.
The historical amounts included in the accompanying pro forma condensed
financial statements as of March 31, 1996 and for the nine months then ended
reflect the financial position and results of operations of UROHEALTH prior to
the Acquisitions.
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<PAGE> 27
(a) The total purchase price of the Richard-Allan acquisition,
including direct acquisition costs and the cost of the related
real estate, of $60,000,000 was determined as follows:
<TABLE>
<S> <C>
Issuance of 2,084,691 shares of UROHEALTH Common Stock
at $13.19 per share................................... $ 27,500,000
Cash................................................... 29,000,000
Note payable........................................... 3,000,000
Direct acquisition costs............................... 500,000
------------
$ 60,000,000
==========
</TABLE>
The cash and direct acquisition cost portions of the purchase price
were financed with $30.0 million of borrowings under a new $35.0
million bank credit facility that consists of a $20.0 million term
loan and a $15.0 million revolving line of credit. The remaining
amounts under the new bank credit facility are available for
general corporate purposes. The Company incurred $1.3 million of
costs in connection with establishment of the new bank credit
facility that will be treated as deferred debt issuance costs.
(b) Allocation of the purchase price of $60,000,000 based on the
Company's estimate of the fair market value of assets acquired
and liabilities assumed results in the following:
<TABLE>
<S> <C>
Net assets at historical amounts....................... $ 2,596,000
Land and building...................................... 4,500,000
Costs in excess of net assets acquired................. 52,904,000
------------
$ 60,000,000
==========
</TABLE>
(c) Repayment of Richard-Allan line of credit upon funding of new bank
credit facility.
(d) Interest on funds used and additional debt assumed to effect the
Acquisitions including the new bank credit facility ($30.0
million), assumed note payable ($3.0 million), and internal funds
(approximately $1 million) at an estimated composite interest
rate of 8.75%.
(e) Amortization of costs in excess of book value of assets acquired
in the Intermed ($4,348,000) and Richard-Allan transactions.
Costs in excess of net assets acquired are amortized over 25
years.
(f) No income tax effect has been provided for the pro forma
adjustments since UROHEALTH's historical operations for the
period would not permit any additional income tax benefit to be
recognized.
2. SALE OF SUBORDINATED CONVERTIBLE DEBENTURES
(g) On May 3, 1996, the Company entered into an agreement to sell
$50.0 million of the Debentures in a private placement. The
Company sold the Debentures as follows: $19.4 million on May 13,
1996, $14.9 million on May 17, 1996, and $15.7 million on July 9,
1996, which has been reflected as a pro forma adjustment in the
unaudited pro forma condensed combined balance sheet as of June
30, 1996. These borrowings resulted in aggregate net proceeds of
approximately $45.0 million, net of debt issuance costs. The
Company used $16.5 million of the proceeds to repay amounts
outstanding under a revolving line of credit and a bank note. In
connection with the debt extinguishments the Company incurred
expenses of approximately $3 million during the three month
period ended June 30, 1996 which have been accounted for as
extraordinary charges and therefore excluded from the unaudited
pro forma condensed combined statement of operations for such
period pursuant to SEC regulations. This amount is reflected as a
reduction of retained earnings in the unaudited pro forma
condensed combined balance sheet.
3. PER SHARE CALCULATIONS
(h) The aggregate weighted average common share amounts represent the
weighted average common shares of UROHEALTH plus the number of
shares issued for Richard-Allan and Intermed. Common stock
equivalents have not been included in the calculation as they are
anti-dilutive.
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