<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
------------------------
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: April 14, 1997
------------------------
UROHEALTH SYSTEMS, INC.
(Exact name of Registrant as specified in its Charter)
------------------------
DELAWARE
(State or other jurisdiction of incorporation)
1-11150 98-0122944
(Commission file number) (IRS Employer
Identification Number)
------------------------
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)
===============================================================================
<PAGE> 2
ITEM 2. ACQUISITIONS OR DISPOSITION OF ASSETS
ACQUISITION OF MICROSURGE, INC.
On March 31, 1997, the Company completed the acquisition of MICROSURGE, Inc. The
agreement provides for the issuance of shares of UROHEALTH Common Stock, the
payment of notes payable and accrued interest of approximately $3.2 million and
the assumption of $5.5 million in convertible MICROSURGE notes. The value of
this transaction is approximately $38.0 million.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS AND EXHIBITS.
Financial statements of MICROSURGE, Inc. as of December 31, 1996
and 1995 and for the three years in the period ended December
31, 1996, together with Report of Independent Accountants.
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1996.
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended December 31, 1996.
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended March 31, 1996.
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended June 30, 1995.
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended June 30, 1994.
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
(C) EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit
Number
2.0* Agreement and Plan of Merger dated March 11, 1997 by and
between UROHEALTH SYSTEMS, INC., UROHEALTH, INC.
(California) and MICROSURGE, Inc.
23.1 Consent of Coopers & Lybrand L.L.P.
- --------------
* previously filed
2
<PAGE> 3
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/ JAMES L. JOHNSON
---------------------------
James L. Johnson
Executive Vice President
and Chief Financial Officer
Date: April 25, 1997
3
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Microsurge, Inc.:
We have audited the accompanying balance sheets of Microsurge, Inc. as of
December 31, 1996 and 1995 and the related statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1996. 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 financial position of Microsurge, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, cash used
in operating activities, deficiency in working capital and debt due currently
which must be refinanced raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are described
in Notes 1, 8 and 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 14, 1997
4
<PAGE> 5
MICROSURGE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 264,889 $ 1,152,666
Marketable securities......................................... 1,540,700 --
Accounts receivable, net of allowance for doubtful accounts of
$80,000 in 1995 and $113,025 at December 31, 1996.......... 711,691 1,030,718
Inventories................................................... 984,755 2,204,417
Other current assets.......................................... 44,358 107,889
------------ ------------
Total current assets.................................. 3,546,393 4,495,690
Property and equipment, net..................................... 936,940 634,115
Restricted cash................................................. 96,000 96,000
Purchased technology............................................ 290,000 1,553,833
Other assets.................................................... 38,835 24,694
------------ ------------
Total assets.......................................... $ 4,908,168 $ 6,804,332
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses......................... $ 1,238,974 $ 2,205,236
Notes payable................................................. 150,000 2,800,000
Current portion of capital lease obligation................... 291,145 147,523
Convertible subordinated notes and accrued interest, net of
discount................................................... -- 5,503,343
------------ ------------
Total current liabilities............................. 1,680,119 10,656,102
Capital lease obligation........................................ 197,090 50,075
Other long term liability....................................... -- 225,000
Commitments (Notes 5, 8, 9 and 14)
Redeemable convertible preferred stock, $.001 par value;
12,000,000 shares authorized; 8,580,587 shares issued and
outstanding at December 31, 1995 and 1996; (liquidation
preference of $27,455,986 at December 31, 1996)............... 25,300,934 27,597,327
Stockholders' deficit:
Common stock, $.001 par value; 50,000,000 shares authorized;
405,330 and 417,259 shares issued and outstanding at
December 31, 1995 and 1996, respectively................... 405 417
Accumulated deficit........................................... (22,270,380) (31,724,589)
------------ ------------
Total stockholders' deficit .......................... (22,269,975) (31,724,172)
------------ ------------
Total liabilities and stockholders'
deficit ............................................ $ 4,908,168 $ 6,804,332
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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MICROSURGE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Product sales....................................... $ 1,547,545 $ 3,796,645 $ 5,875,696
Cost of goods sold.................................. 1,041,498 2,369,825 3,847,031
----------- ----------- -----------
506,047 1,426,820 2,028,665
----------- ----------- -----------
Operating expenses:
Research and development.......................... 2,010,427 1,913,006 1,713,732
Selling, general and administrative............... 3,311,777 5,911,955 7,216,882
----------- ----------- -----------
Total operating expenses....................... 5,322,204 7,824,961 8,930,614
----------- ----------- -----------
Other (income) expense:
Interest income................................... (172,660) (131,212) (50,654)
Interest expense.................................. 33,394 63,912 475,732
----------- ----------- -----------
Net loss....................................... $(4,676,891) $(6,330,841) $(7,327,027)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
MICROSURGE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............ 240,497 $241 $ -- $ (8,374,234) $ (8,373,993)
Issuance of common stock under license
agreements.......................... 23,184 23 12,577 -- 12,600
Issuance of common stock upon exercise
of stock options and warrants....... 108,966 108 456,043 -- 456,151
Accretion of redeemable convertible
preferred stock..................... -- -- (468,620) (982,270) (1,450,890)
Net loss.............................. -- -- -- (4,676,891) (4,676,891)
------- ---- --------- ------------ ------------
Balance, December 31, 1994............ 372,647 372 -- (14,033,395) (14,033,023)
Issuance of common stock upon exercise
of stock options.................... 32,683 33 15,192 -- 15,225
Accretion of redeemable convertible
preferred stock..................... -- -- (15,192) (1,906,144) (1,921,336)
Net loss.............................. -- -- -- (6,330,841) (6,330,841)
------- ---- --------- ------------ ------------
Balance, December 31, 1995............ 405,330 405 -- (22,270,380) (22,269,975)
Issuance of common stock upon exercise
of stock options.................... 8,065 8 4,033 -- 4,041
Issuance of warrants.................. -- -- 142,000 -- 142,000
Issuance of common stock.............. 3,864 4 23,178 -- 23,182
Accretion of redeemable convertible
preferred stock..................... -- -- (169,211) (2,127,182) (2,296,393)
Net loss.............................. -- -- -- (7,327,027) (7,327,027)
------- ---- --------- ------------ ------------
Balance, December 31, 1996............ 417,259 $417 $ -- $(31,724,589) $(31,724,172)
======= ==== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
MICROSURGE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(4,676,891) $(6,330,841) $(7,327,027)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 272,388 366,934 750,892
Provision for doubtful accounts................ 28,000 80,000 73,294
Loss on disposal of property and equipment..... -- 35,261 --
Issuance of common stock....................... 12,600 -- 23,182
Changes in operating assets and liabilities:
Accounts receivable.......................... (526,968) (236,998) (392,321)
Inventories.................................. (636,685) (205,230) (1,219,662)
Other current assets......................... 7,032 (40,485) (63,531)
Accounts payable and accrued expenses........ 244,715 542,084 786,262
Accrued interest on convertible subordinated
notes..................................... -- -- 296,426
----------- ----------- -----------
Net cash used in operating activities........ (5,275,809) (5,789,275) (7,072,485)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable securities................. (5,477,482) (2,082,639) --
Proceeds from sale or maturity of marketable
securities..................................... 5,057,967 4,072,307 1,540,700
Purchase of property and equipment................ (230,211) (226,341) (226,163)
Purchase of technology............................ -- (290,000) (1,000,000)
Decrease (increase) in other assets............... (13,883) 83 14,141
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................... (663,609) 1,473,410 328,678
----------- ----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations............. (163,544) (259,760) (290,637)
Proceeds from exercise of stock options and sale
of common stock................................ 1,151 15,225 4,041
Proceeds from exercise of warrants................ 455,000 -- --
Proceeds from note payable, net................... -- 150,000 2,650,000
Additions to restricted cash...................... (48,000) -- --
Proceeds from convertible subordinated notes and
related warrants............................... -- -- 5,268,180
Proceeds from redeemable convertible preferred
stock, net..................................... 5,970,350 4,149,391 --
----------- ----------- -----------
Net cash provided by financing
activities................................... 6,214,957 4,054,856 7,631,584
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 275,539 (261,009) 887,777
Cash and cash equivalents, beginning of period...... 250,359 525,898 264,889
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 525,898 $ 264,889 $ 1,152,666
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 9
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
Microsurge, Inc. (the "Company") was incorporated in Delaware on February
27, 1991. The Company utilizes proprietary and licensed technology to develop
and manufacture devices for sale to hospitals and other healthcare institutions
for use in minimally invasive surgery.
The Company is subject to a number of risks similar to other companies in
the industry, including rapid technological change, uncertainty of market
acceptance of products, competition from substitute products and larger
companies, customer's reliance on third party reimbursement, the need to obtain
additional financing, compliance with government regulations, protection of
proprietary technology, dependence on international distributors, third party
manufacturers and key suppliers, product liability, and dependence on key
individuals. In addition, a significant portion of the Company's sales relate to
two product lines.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and the satisfaction of liabilities in the
normal course of business. However, as a result of recurring losses from
operations, cash used in operating activities, the deficiency in working capital
and debt due currently which must be refinanced, there is uncertainty as to the
Company's ability to continue as a going concern. The Company anticipates that
it will continue to incur losses from operations and use cash for operating
purposes. Management's plans in regard to these matters include consummation of
the planned merger with Urohealth Systems, Inc. and additional debt financing
(see Notes 8 and 14). If the Company does not consummate this merger, the
Company will need to undertake other actions to continue operations, refinance
its existing debt which is currently due and obtain additional sources of
financing. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market.
The Company considers highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. At December 31, 1996
approximately 70% of cash and cash equivalents were held in a money market
account that was readily convertible to cash.
Marketable Securities
The Company has classified its marketable securities as "available for
sale". Marketable securities were reported at fair value, which was not
materially different from cost plus accrued interest. All marketable securities
held by the Company mature in less than a year. The effect of realized gains and
losses on the financial statements for the years 1994, 1995 and 1996 was
immaterial.
Marketable securities consist of Corporate debt securities at December 31,
1995.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
9
<PAGE> 10
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, typically three to five years, or, in the case of leasehold
improvements over the lesser of the useful life or the lease term. Equipment
under capital lease is amortized over the life of the lease.
Upon retirement or sale, the cost of the assets disposed of and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the determination of net income or loss.
Purchased Technology
Purchased technology is amortized on a straight line basis over three to
five years, the estimated useful life.
The Company evaluates the possible impairment in the value of intangible
assets by assessing the carrying value of the asset against the anticipated
future cash flows from related operating activities. Factors considered in
performing this assessment include current operating results, trends and
prospects, and, in addition, demand, competition, and other economic factors.
Revenue Recognition
The Company recognizes revenue upon the later of shipment of the product
or, if applicable, acceptance by the customer.
Research and Development Expenses
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the liability method. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is required
to offset any net deferred tax assets if, based upon the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
Industry Segments
The Company's operations are located solely within the United States and
relate to one industry segment. Operations consist of designing, manufacturing
and marketing medical instruments for use in minimally invasive surgery.
Export sales in 1994, 1995 and 1996 were $505,000, $1,160,000 and
$1,140,000, respectively .
Concentration of Credit Risk
The Company sells its products principally through a direct sales force
domestically and through distributors outside of the United States to hospitals
and other healthcare institutions. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company provides
10
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MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reserves for customer receivable balances which are considered potentially
uncollectible. One customer accounted for approximately 10% of 1994 product
sales. No customer accounted for more than 10% of product sales in 1995 or 1996.
3. INVENTORIES:
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Purchased parts and subassemblies.................... $388,384 $1,042,480
Work in process...................................... 63,558 3,957
Finished goods....................................... 532,813 1,157,980
-------- ----------
$984,755 $2,204,417
======== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Machinery and equipment............................. $ 570,131 $ 796,294
Leasehold improvements.............................. 73,226 73,226
Furniture and fixtures.............................. 14,672 14,672
Equipment under capital leases...................... 900,151 900,151
---------- ----------
1,558,180 1,784,343
Less accumulated depreciation and amortization...... 621,240 1,150,228
---------- ----------
$ 936,940 $ 634,115
========== ==========
</TABLE>
Accumulated depreciation and amortization amounted to $444,226 and $712,617 on
equipment under capital leases at December 31, 1995 and 1996, respectively.
Depreciation expense for all property and equipment was $268,188, $361,996 and
$528,988 for the years ended December 31, 1994, 1995 and 1996, respectively.
5. PURCHASED TECHNOLOGY:
In August 1995, the Company entered into an agreement to purchase certain
technology for $290,000 and pay royalties on related product sales for five
years.
In April 1996, the Company entered into a license agreement with a company
to license exclusive worldwide rights to certain technology for a 10 year term,
expiring in April 2006. In connection with this agreement, the Company agreed to
pay $1,000,000 in upfront license payments as well as royalties based on future
net sales, subject to minimum royalties of $540,000 which are creditable against
actual royalties. At December 31, 1996, future minimum royalty requirements are
$405,000, of which $180,000, $180,000, and $45,000 are due in 1997, 1998, and
1999, respectively. In October 1996, as consideration for the deferral of
certain payments, the Company issued warrants to the licensor for the purchase
of a number of shares of common stock determined by dividing $187,500 by the
price per share paid for the next purchase of capital stock in the Company in a
sale where the Company receives aggregate gross proceeds in excess of
$5,000,000, or if earlier, an underwritten public offering (the "Investor
Sale"). The warrants are exercisable at any time after the Investor Sale and
prior to August 12, 1999 at a price determined based on the terms of the
Investor Sale. The fair value of the warrants on the date of grant, which was
not material, is included in the cost of purchased technology.
11
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MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PURCHASED TECHNOLOGY: (CONTINUED)
Accumulated amortization of purchased technology amounted to $147,167 as of
December 31, 1996. Amortization commenced in 1996 when sales of the related
products began.
6. INCOME TAXES:
No provision for income taxes was recorded in 1994, 1995 and 1996 as the
Company incurred net losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred income taxes were as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Gross deferred tax assets:
Net operating losses............................ $ 6,463,000 $ 8,888,000
Research and development credits................ 174,000 381,000
Start-up costs.................................. 555,000 319,000
Depreciation.................................... -- 41,000
Other........................................... 184,000 339,000
----------- -----------
Total................................... 7,376,000 9,968,000
Gross deferred tax liabilities:
Depreciation.................................... (19,000) --
Other........................................... (5,000) --
----------- -----------
Total................................... (24,000) --
Valuation allowance............................. (7,352,000) (9,968,000)
----------- -----------
Net deferred tax asset (liability).............. -- --
=========== ===========
</TABLE>
Management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets which are comprised
principally of net operating losses. Management has considered the Company's
history of losses and concluded that it is more likely than not that the Company
will not generate future taxable income prior to the expiration of these net
operating losses. Accordingly, the deferred tax assets have been fully reserved.
At December 31, 1996, the Company had approximately $23.3 million of net
operating losses and $216,000 of federal tax credit carryforwards available for
income tax purposes. These net operating losses and credits will expire in the
years 2006 through 2011. During 1992, in conjunction with the Series C
redeemable preferred stock offering a change in ownership, as defined in the
Internal Revenue Code, occurred. As a result of this change in ownership, the
use of approximately $1,638,000 of the net operating loss carryforward is
limited to approximately $187,000 per year beginning in 1992. The issuance of
stock subsequent to the 1992 change in ownership has not constituted an
additional change in ownership. However, ownership changes in future periods may
further limit the Company's ability to utilize net operating losses and tax
credit carryforwards.
12
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MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Trade accounts payable.............................. $ 834,686 $1,497,448
Payroll and payroll related items................... 190,840 252,211
Royalty payable..................................... -- 180,000
Deferred rent....................................... 87,711 112,583
Other............................................... 125,737 162,994
---------- ----------
$1,238,974 $2,205,236
========== ==========
</TABLE>
8. DEBT:
Capital Lease Obligation
Pursuant to a capital lease agreement entered into during 1993 and as
amended in 1994, the Company maintains $96,000 in restricted cash at December
31, 1995 and 1996 to collateralize a $96,000 standby letter of credit.
Additionally, the Company issued to the lessor in 1993 and 1994 certain warrants
for the purchase of preferred stock (see Note 11).
Future minimum lease payments under these capital lease obligations as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1997.............................................................. $159,560
1998.............................................................. 51,490
--------
Total minimum lease payments...................................... 211,050
Less -- amount representing interest.............................. 13,452
--------
Capital lease obligation.......................................... 197,598
Less -- current portion........................................... 147,523
--------
$ 50,075
========
</TABLE>
Notes Payable
In October 1996, the Company entered into an agreement with a bank to
provide for a $3,000,000 credit facility consisting of a $1,000,000 secured line
of credit, the availability of which is subject to borrowing base requirements,
and a note payable for a maximum amount of $2,000,000. Borrowings under the line
of credit bear interest at the bank's prime rate plus one-half percent (8.75% at
December 31, 1996), and mature on September 30, 1997. The note payable bears
interest at the bank's prime rate plus one percent on the first $1,000,000 in
borrowings, and at the bank's prime rate plus one and one-half percent on
borrowings exceeding $1,000,000 (9.25% and 9.75% at December 31, 1996,
respectively.) The note is due 90 days after issuance but in no event later than
March 31, 1997. At December 31, 1996, $2,800,000 was outstanding under this
credit agreement, with a weighted average interest rate of 9.3%.
The credit facility is collateralized by substantially all of the assets of
the Company and provides for the Company to maintain certain covenants as
amended, including minimum working capital ratios and limitations on losses. The
agreement also prohibits the payment of cash dividends, repurchase of stock by
the Company and the incurrence of additional indebtedness.
This agreement was amended in January 1997 to increase the maximum amount
of borrowings under the note payable from $2,000,000 to $3,000,000, to extend
the due date of the note to the earlier of April 30, 1997
13
<PAGE> 14
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DEBT: (CONTINUED)
or the final maturity date as defined in the agreement, and to modify the
covenants under the agreement. The final maturity date is defined in the
agreement and includes a change in control transaction or sale of debt or equity
securities resulting in aggregate gross proceeds of $5,000,000 or more.
Additionally, the amendment provides for a supplemental fee to be paid to the
bank upon maturity Equal to the difference between the amount of interest
accrued and paid on the unpaid principal of all advances under the credit
facility and the amount of interest that would have been required with an annual
interest rate of 26%.
In connection with this agreement, the Company issued warrants to the bank
for the purchase of a number of shares of common stock determined by dividing
$200,000 by the price per share paid for the next purchase of capital stock in
the Company in a sale subsequent to October 1996, where the Company receives
aggregate gross proceeds in excess of $5,000,000 (the "Investor Sale"). The
warrants are exercisable any time after the Investor Sale and prior to October
28, 1999 at a price determined based on terms of the Investor Sale. The fair
value of the warrants at date of grant was not material.
Prior to October 1996, the Company had a line of credit agreement with a
bank, established in 1994 and amended in 1995 and 1996, to allow for borrowings
not to exceed the lesser of $1,000,000 or a specified percentage of eligible
accounts receivable. At December 31, 1995, $150,000 was outstanding under this
line of credit. Borrowings under the line of credit were collateralized by
substantially all of the assets of the Company and bore interest at the bank's
prime rate plus two percent (10.5% at December 31, 1995.)
This agreement was canceled and amounts outstanding repaid upon the signing
of the new agreement in October 1996.
Convertible Subordinated Notes
In February 1996, the Company entered into a credit agreement with a group
of lenders ("Purchasers") who agreed to purchase a series of convertible
subordinated notes ("the Notes") up to $3,268,180 upon the request of the
Company. In August 1996, the agreement was amended to provide for total advances
of $5,268,180. The Company received advances of $2,334,414 in February and March
1996, $933,766 in June 1996 and $2,000,000 in August 1996. The Notes bear
interest at 9.25%, and mature on August 28, 1997. The Company may prepay amounts
outstanding on the Notes without penalty at any time after the Investor Sale (as
defined below) and prior to maturity date.
Upon the closing, or series of closings, in which the Company sells capital
stock of the Company for gross proceeds of $10,000,000 or more (the "Investor
Sale"), the Notes will be convertible, at the option of the Purchasers, into the
same type and class of stock issued in connection with the Investor Sale. Any
outstanding principal amount of the Notes plus accrued interest may convert at a
conversion price equal to 60% of the price per share paid by the purchasers of
capital stock in connection with the Investor Sale (the "Investor Sale Price").
Warrants for the purchase of common stock in the Company will be issued
under two circumstances in accordance with the credit agreements. All warrants
issued pursuant to these credit agreements will be exercisable at any time after
the Investor Sale and prior to February 28, 1999 for a purchase price equal to
the Investor Sale Price.
The first set of warrants were issued to the Purchasers upon the execution
of the credit agreement and amendment. Each Purchaser received a warrant,
subject to the terms above, for the purchase of a number of shares of common
stock determined by dividing (i) the maximum principal amount of the Notes that
could be purchased by such purchaser under the credit agreement, by (ii) the
Investor Sale Price, and the multiplying such number by 10%.
14
<PAGE> 15
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. DEBT: (CONTINUED)
The second set of warrants are issuable to the Purchasers upon each
advance. At such time each Purchaser will receive a warrant, subject to the
terms above, for the purchase of a number of shares of common stock determined
by dividing (i) the principal amount of the Note purchased on such date by such
Purchaser, by (ii) the Investor Sale Price, and then multiplying such number by
40%. The Company has issued warrants in connection with each advance on the
Notes.
The warrants are valued at $122,000 and the Notes are carried net of
original issue debt discount of $122,000 resulting in an effective annual
interest rate of 10.5%. Amortization of the discount, which is recorded as
interest expense, totaled $60,737 for the year ended December 31, 1996.
9. COMMITMENTS:
Operating Leases
The Company leases its facility and certain equipment under operating
leases. Rent expense for the leased facility and equipment was approximately
$155,000, $308,000 and $304,000 during the years ended December 31, 1994, 1995
and 1996, respectively. As of December 31, 1996, the minimum future rental
payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------- --------
<S> <C>
1997.............................. 258,402
1998.............................. 309,677
1999.............................. 239,510
--------
$807,589
========
</TABLE>
License Agreements
The Company has entered into agreements under which the Company has been
granted exclusive license and distribution rights for certain thoracic products,
technologies and procedures being developed. Under the agreements, the Company
is obligated to make royalty payments based on eventual net product sales of
licensed products. No sales or royalty amounts have been recorded to date.
In connection with these agreements, the Company issued 20,286 shares of
its common stock in 1994 and recorded a related charge to expense for the fair
value of the stock on the date of grant. The Company also issued nonqualified
options to purchase 117,852 shares of its common stock for $5.05 per share which
vest upon attainment of certain performance criteria (see Note 11). The fair
value of the options will be recorded as expense as the performance criteria are
attained.
15
<PAGE> 16
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized the issuance of up to 12,000,000 shares of
redeemable convertible preferred stock, $.001 par value (collectively, the
Preferred Stock). As of December 31, 1995 and 1996, the Preferred Stock
consisted of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Series A --
Authorized -- 750,000 shares
Issued and outstanding -- 750,000 shares at December 31,
1995 and 1996 (liquidation preference of $1,125,000 at
December 31, 1996)...................................... $ 1,050,000 $ 1,125,000
Series B --
Authorized -- 300,000 shares
Issued and outstanding -- 300,000 shares at December 31,
1995 and 1996 (liquidation preference of $1,350,000
at December 31, 1996)................................ 1,260,000 1,350,000
Series C --
Authorized -- 3,920,659 shares
Issued and outstanding -- 3,836,834 shares at December
31, 1995 and 1996 (liquidation preference of
$12,799,412 at December 31, 1996).................... 11,693,809 12,626,229
Series D --
Authorized -- 2,213,613 shares
Issued and outstanding -- 2,181,818 shares at December
31, 1995 and 1996 (liquidation preference of
$7,504,025 at December 31, 1996)..................... 7,022,706 7,721,587
Series E --
Authorized -- 1,511,935 shares
Issued and outstanding -- 1,511,935 shares at December
31, 1995 and 1996 (liquidation preference of
$4,677,549 at December 31, 1996)..................... 4,274,419 4,774,511
----------- -----------
$25,300,934 $27,597,327
=========== ===========
</TABLE>
In connection with the issuance of Series C and Series D redeemable
preferred stock the Company also issued warrants to purchase preferred stock
(see Note 11).
The rights and preferences of the Preferred Stock are described below.
Conversion
Preferred Stock is convertible, at the option of the holder, into shares of
common stock, at a rate of .644 shares for each share of preferred stock subject
to adjustment based on certain defined events.
All outstanding shares of the Preferred Stock shall automatically convert
into shares of the Company's common stock upon the closing of a public offering
of the Company's common stock if certain criteria are met.
Voting
The Preferred Stock has voting rights equal to the number of shares of
common stock into which the Preferred Stock is convertible.
16
<PAGE> 17
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
Dividends
Holders of the Preferred Stock are entitled to receive dividends if and
when declared by the Company's Board of Directors. The preferred stockholders'
rights to dividends are preferential to those of common stockholders. In
addition to the declared dividends rights, the Series C, Series D and Series E
preferred stockholders are entitled to cumulative dividends in preference to all
other classes of stock. These cumulative dividends accrue at an annual rate of
$0.237, $0.275 and $0.275 per share, respectively, subject to change, as
defined, commencing on the date of issuance. At December 31, 1996, cumulative
dividends of $3,706,115, $1,504,025 and $519,728 had accrued on the Series C,
Series D and Series E redeemable convertible preferred stock, respectively.
Following conversion, unpaid accrued dividends on the redeemable convertible
preferred stock will not be payable.
Liquidation
Upon liquidation or dissolution of the Company, the holders of the
Preferred Stock shall each be entitled to receive a preference in liquidation.
The holders of the Series E and Series D redeemable convertible preferred stock
are entitled to a preference, collectively prior to all other stockholders, of
$2.75 per share plus any accrued dividends ($519,728 and $1,504,025 at December
31, 1996, respectively). The holders of the Series C redeemable convertible
preferred stock are entitled to a preference of $2.37 per share plus any accrued
dividends ($3,706,115 at December 31, 1996). The holders of the Series A and
Series B redeemable convertible preferred stock are entitled to a preference of
$1.00 and $3.00 per share, plus an additional $.10 and $.30 per share upon each
anniversary of the issuance date, respectively, plus any accrued dividends.
After distribution of any preferential payments to the preferred stockholders,
the Series C, Series D and Series E preferred stockholders and the common
stockholders shall share equally in the remaining assets based on a pro rata
basis. If, after distribution to the Series E and Series D preferred
stockholders there are insufficient funds to pay the Series A, Series B and
Series C preferred stockholders their full preferential amount, the three
classes will share ratably the remaining assets in proportion to what would have
been due to them in full.
Redemption
The holders of the Preferred Stock have a redemption right that requires
the Company to repurchase outstanding shares of the Preferred Stock. The Series
C, Series D and Series E preferred stockholders may require the Company to
repurchase up to 25% of the shares outstanding, per year, for each of four
consecutive years beginning on June 29, 1999. The redemption value of the Series
E and Series D redeemable convertible preferred stock is 110% of $2.75 ($3.025)
per share plus accrued dividends and the redemption value of the Series C
redeemable convertible preferred stock is $2.37 per share plus accrued
dividends. The Series A and Series B preferred stockholders may require the
Company to repurchase up to 25% of the shares outstanding, per year, for each of
four consecutive years beginning on June 29 of the year that is the later of the
first year in which no shares of Series C, Series D and Series E redeemable
convertible preferred stock are outstanding or 1999. The redemption value per
share for the Series A and Series B redeemable convertible preferred stock is
$1.00 and $3.00 per share, plus $.10 and $.30 per share for every year
outstanding since issuance, respectively, plus accrued dividends. To the extent
that the repurchase right on any of the Preferred Stock is not exercised in one
year, the cumulative right may be exercised in future years, through the end of
the four-year redemption period.
17
<PAGE> 18
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY:
Common Stock
In April 1996 the Company announced a 0.644 for 1 reverse stock split of
the Company's common stock which was effected in June of 1996. All share data in
these financial statements have been retroactively restated to give effect to
the stock split.
The Company has authorized 50,000,000 shares of common stock, $.001 par
value. The Company has reserved 6,601,942 shares of common stock for issuance
upon the conversion of Preferred Stock and exercise of warrants and options at
December 31, 1996. The Company has also reserved shares for the exercise of
warrants pursuant to which the number of shares is determined by future
financings.
In connection with a license agreement, the Company issued 11,592 shares of
its common stock over a three year period commencing in 1992. The Company
recorded expense for the fair value of the stock on the dates of grant.
Stock Option Plan
In 1994, the Company's Board of Directors and stockholders approved an
amendment to its 1992 Stock Option Plan (the "Plan"). The Plan allows the Board
of Directors to grant either incentive stock options or nonstatutory stock
options to employees, directors and consultants. The Company has authorized the
granting of options to purchase 913,010 shares of common stock under the Plan,
as amended. As of December 31, 1996, 19,795 options are available for future
grants under the Plan. Options issued under the Plan to employees are generally
incentive stock options that vest in equal annual increments over a four-year
period beginning on the effective date of issuance and expire no later than 10
years from the date of grant, and are granted at not less than fair value of the
common stock, as determined by the Board of Directors at the date of grant. In
October 1996, certain options were amended to allow for accelerated vesting upon
a change of control in the Company which meets defined criteria.
Options have been issued outside of the Plan to certain directors and
consultants. These options vest according to varying terms and were granted at
$5.05 per share, which was in excess of the fair value of the common stock, as
determined by the Board of Directors on the dates of grant (see Note 9). No
options were granted outside of the plan in 1996 or 1995.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, which is effective for the Company's financial
statements for fiscal year 1996. SFAS 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees, but requires pro forma disclosure in the notes to
the financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company has continued to account for its stock-based compensation
in accordance with the provisions of APB 25. The application of SFAS 123 would
not result in a significant difference from the reported net loss.
18
<PAGE> 19
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY: (CONTINUED)
Stock option activity for 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding, December 31, 1993...................... 346,484 $ .47
Granted............................................. 402,435 1.98
Canceled............................................ (16,100) .47
Exercised........................................... (2,415) .47
------- -----
Outstanding, December 31, 1994...................... 730,404 1.30
Granted............................................. 171,032 .57
Canceled............................................ (36,963) .47
Exercised........................................... (32,683) .47
------- -----
Outstanding, December 30, 1995...................... 831,790 1.22
Granted............................................. 195,230 1.00
Canceled............................................ (35,499) .51
Exercised (8,065) .50
------- -----
Outstanding, December 31, 1996...................... 983,456 $ 1.21
======= =====
</TABLE>
Summarized information about stock options outstanding at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGES OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- -------------- ----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.47 - .54 655,949 7 $ .50 407,631 $ .49
$1.00 195,230 10 $ 1.00 -- --
$4.27 - 5.05 132,277 12 $ 5.02 11,849 $ 4.92
</TABLE>
Common Stock Warrants
During 1994, the Company received $455,026 from the sale of common stock
and the exercise of warrants for 106,551 shares of common stock. During 1994,
the Company also entered into a consulting agreement in which the Company
committed to issue a maximum of 19,320 shares of common stock to a consultant
upon achievement of certain performance criteria. During 1996 3,864 shares were
granted and the Company recorded a charge for their fair value as determined on
the date of grant. This agreement expired in July 1996.
Preferred Stock Warrants
In connection with the Series C redeemable convertible preferred stock
offering in 1992, the Company issued a warrant to purchase 52,320 shares of
Series C redeemable convertible preferred stock. The warrant is exercisable at
$2.37 per share and expires August 3, 1997. The Company has reserved 52,320
shares of Series C redeemable convertible preferred stock for issuance upon
exercise of this warrant.
In connection with the Series D redeemable convertible preferred stock
offering in 1994, the Company issued a warrant to purchase 17,250 shares of
Series D redeemable convertible preferred stock. The warrant is exercisable at
$2.75 per share and expires June 29, 1999. The Company has reserved 17,250
shares of Series D redeemable convertible preferred stock for issuance upon
exercise of this warrant.
19
<PAGE> 20
MICROSURGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY: (CONTINUED)
In connection with equipment lease financing transactions (see Note 8), the
Company issued warrants for the purchase of 28,977 shares of Series C redeemable
convertible preferred stock at an exercise price of $2.37 per share and 14,545
shares of Series D redeemable convertible preferred stock at an exercise price
of $2.75 per share. The warrant to purchase Series C redeemable convertible
preferred stock, and the warrant to purchase Series D redeemable convertible
preferred stock, expire on June 17, 2000 and September 12, 2001, respectively,
or on the second anniversary of the closing of an initial public offering of the
Company's common stock, whichever is earlier. The Company has reserved 28,977
shares of Series C redeemable convertible preferred stock and 14,545 shares of
Series D redeemable convertible preferred stock for issuance upon exercise of
the warrants.
Upon the closing of an initial public offering of the Company's common
stock, all preferred stock warrants convert into common stock warrants at the
applicable conversion rate for preferred stock then in effect (see Note 10).
12. EMPLOYEE BENEFIT PLAN:
On January 1, 1993, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan allows all employees to
make contributions up to a specified percentage of their compensation. Under the
plan, the Company may, but is not obligated to, match a portion of the
employees' contribution up to a defined maximum. The Company did not make a
matching contribution in 1994, 1995 or 1996.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company incurred capital lease obligations to obtain certain equipment
in amounts of $286,371 and $244,398 in 1994 and 1995, respectively. There were
no additions to leased equipment in 1996.
Cash paid for interest was $33,394, $63,912 and $104,067 in 1994, 1995 and
1996, respectively.
14. SUBSEQUENT EVENT:
In March of 1997 the Company signed a definitive merger agreement with
Urohealth Systems, Inc. ("Urohealth"). The merger is expected to become
effective after shareholder approval is received and certain other conditions
are met.
20
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired Microsurge, Inc. on March 31, 1997 by merger (the
"Merger") of Microsurge, Inc. ("Microsurge") into a wholly-owned subsidiary of
the Company.
The following unaudited pro forma condensed consolidated balance sheet at
December 31, 1996 reflects the historical consolidated balance sheets of
Urohealth and Microsurge, adjusted to give effect to the acquisition, as if
such acquisition had occurred at December 31, 1996.
The following unaudited pro forma condensed consolidated statements of
operations are presented to reflect the acquisition of Microsurge as if such
acquisition had occurred on July 1, 1995 for the nine month period ended March
31, 1996; and on April 1, 1996 for the nine months ended December 31, 1996. The
Merger has been reflected as a pooling of interests. Additionally, unaudited
pro forma condensed consolidated statements of operations are presented for the
years ended June 30, 1994 and 1995 to reflect the results of operations of
Urohealth combined with the results of operations of Microsurge for its fiscal
years ended December 31, 1993 and 1994, respectively.
The unaudited pro forma condensed consolidated balance sheet and statements
of operations and accompanying notes should be read in conjunction with the
respective historical audited financial statements of Microsurge contained
herein and the historical audited consolidated financial statements of the
Company not contained herein.
The unaudited pro forma condensed consolidated financial information is
based on the consolidated financial statements of UROHEALTH contained in its
Annual Report on Form 10-K, as amended, for the year ended March 31, 1996 and
the audited financial statements of Microsurge giving effect to the
transactions under the assumptions and adjustments outlined in the accompanying
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company's management believes are reasonable given
the circumstances. The unaudited pro forma condensed consolidated balance sheet
and statements of operations 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 date indicated or that may be achieved in the
future.
21
<PAGE> 22
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and
equivalents...... $ 2,272 $ 1,153 $(2,800)(a) $ 625
Receivables, net... 24,958 1,031 -- 25,989
Inventories 21,373 2,204 -- 23,577
Prepaids and
deposits......... 3,307 108 -- 3,415
Income tax
receivable....... 377 -- -- 377
-------- -------- ------- --------
Total current
assets............. 52,287 4,496 (2,800) 53,983
Property and
equipment, net..... 24,785 634 -- 25,419
Patents and
intangibles, net... 6,264 1,554 -- 7,818
Deposits and other
assets............. 2,609 120 -- 2,729
Deferred debt
issuance costs..... 5,727 -- -- 5,727
Goodwill............. 42,081 -- -- 42,081
-------- -------- ------- --------
$133,753 $ 6,804 $(2,800) $137,757
======== ======== ======= ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable
and accrued
expenses......... $ 12,067 $ 2,205 $ 3,625(b) $ 17,897
Restructuring
accrual.......... 1,810 -- -- 1,810
Compensation and
employee
benefits......... 3,026 -- -- 3,026
Revolving lines of
credit........... 16,500 -- -- 16,500
Convertible
subordinated
notes............ -- 5,503 -- 5,503
Current portion of
notes payable and
capital leases... 521 2,948 (2,800)(a) 669
-------- -------- ------- --------
Total current
liabilities........ 33,924 10,656 825 45,405
Long-term
liabilities:
Notes payable...... 6,000 -- -- 6,000
Bank term loan..... 13,500 -- -- 13,500
Capital leases..... 152 50 -- 202
Deferred
compensation..... 29 -- -- 29
Other
liabilities...... 98 225 -- 323
Restructuring
accrual, less
current
portion.......... 1,684 -- -- 1,684
Minority interest in
consolidated
subsidiary......... 1,126 -- -- 1,126
Convertible
subordinate
debentures......... 50,000 -- -- 50,000
Redeemable
convertible
preferred stock.... -- 27,597 (27,597)(c) --
Common Stockholders'
Equity:
Common stock....... 19 -- 3(c) 22
Preferred stock -- -- -- --
Warrants........... 5,217 -- -- 5,217
Additional paid-in
capital.......... 113,204 -- 27,594(c) 140,798
Deficit............ (91,159) (31,724) (3,625)(b) (126,508)
Foreign currency
adjustment....... (41) -- -- (41)
-------- -------- ------- --------
Total common
stockholders'
(deficit)
equity......... 27,240 (31,724) 23,972 19,488
-------- -------- ------- --------
$133,753 $ 6,804 $(2,800) $137,757
======== ======== ======= ========
</TABLE>
See accompanying notes.
22
<PAGE> 23
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............ $ 67,964 $ 4,703 $ -- $ 72,667
Cost of sales........ 23,193 3,123 -- 26,316
-------- -------- ----- ---------
Gross profit......... 44,771 1,580 -- 46,351
Operating expenses:
Selling, general
and
administrative... 32,537 5,780 -- 38,317
Research and
development...... 2,149 1,218 -- 3,367
Write-off
incomplete
research and
development...... 25,500 -- -- 25,500
Restructuring
charges.......... 4,000 -- -- 4,000
-------- -------- ----- ---------
Total operating
expenses........... 64,186 6,998 -- 71,184
-------- -------- ----- ---------
Profit (loss) from
operations......... (19,415) (5,418) -- (24,833)
Other income
(expense):
Minority interest
consisting of
accrued dividends
on preferred
stock of
subsidiary....... (54) -- -- (54)
Interest income.... 240 31 -- 271
Interest expense... (4,864) (444) 220(a) (5,088)
Other.............. -- -- -- --
-------- -------- ----- ---------
Net loss before tax
and extraordinary
loss............... (24,093) (5,831) 220 (29,704)
Provision (benefit)
for income tax..... (377) -- --(d) (377)
-------- -------- ----- ---------
Net loss before
extraordinary
loss............... (23,716) (5,831) 220 (29,327)
Extraordinary loss
(early
extinguishment of
debt).............. (2,973) -- -- (2,973)
-------- -------- ----- ---------
Net loss............. $(26,689) $ (5,831) $ 220 $ (32,300)
======== ======== ===== =========
</TABLE>
- ---------------
See accompanying notes.
23
<PAGE> 24
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales...................... $ 39,641 $ 3,313 $ -- $ 42,954
Cost of sales.................. 12,896 2,069 -- 14,965
-------- -------- ---- ---------
Gross profit................... 26,745 1,244 -- 27,989
Operating expenses:
Selling, general and
administrative............ 32,218 4,838 -- 37,056
Research and development..... 1,324 1,452 -- 2,776
Merger and acquisition
costs..................... 4,232 -- -- 4,232
Restructuring charges........ 5,456 -- -- 5,456
-------- -------- ---- ---------
Total operating expenses....... 43,230 6,290 -- 49,520
-------- -------- ---- ---------
Loss from operations........... (16,485) (5,046) -- (21,531)
Other income (expense):
Minority interest consisting of
accrued dividends on
preferred stock of
subsidiary................... (55) -- -- (55)
Interest income.............. 23 78 -- 101
Interest expense............. (1,002) (57) -- (1,059)
Other........................ (48) -- -- (48)
-------- -------- ---- ---------
Net loss before tax............ (17,567) (5,025) -- (22,592)
Provision for income tax....... 431 -- --(d) 431
-------- -------- ---- ---------
Net loss....................... $(17,998) $ (5,025) $ -- $ (23,023)
======== ======== ==== =========
</TABLE>
See accompanying notes
24
<PAGE> 25
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 45,453 $ 3,797 $ -- $ 49,250
Cost of sales.......................................... 16,159 2,370 -- 18,529
-------- -------- ----- ---------
Gross profit........................................... 29,294 1,427 -- 30,721
Operating expenses:
Selling, general and administrative.................. 35,145 5,912 -- 41,057
Research and development............................. 8,805 1,913 -- 10,718
Merger and acquisition costs......................... 851 -- -- 851
Settlement of litigation............................. 300 -- -- 300
Restructuring charges................................ 1,200 -- -- 1,200
-------- -------- ----- ---------
Total operating expenses............................... 46,301 7,825 -- 54,126
-------- -------- ----- ---------
Loss from operations................................... (17,007) (6,398) -- (23,405)
Other income (expense):
Minority interest consisting of accrued dividends on
preferred stock of subsidiary..................... (78) -- -- (78)
Interest income...................................... 263 131 -- 394
Interest expense..................................... (303) (64) -- (367)
Other................................................ 5 -- -- 5
-------- -------- ----- ---------
Net loss before tax and extraordinary loss............. (17,120) (6,331) -- (23,451)
Provision for income tax............................... 1,386 -- -- 1,386
-------- -------- ----- ---------
Net loss............................................... $(18,506) $ (6,331) $ -- $ (24,837)
======== ======== ===== =========
</TABLE>
See accompanying notes
25
<PAGE> 26
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH MICROSURGE ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 37,828 $ 1,548 $ -- $ 39,376
Cost of sales.......................................... 13,993 1,041 -- 15,034
-------- -------- ----- ---------
Gross profit........................................... 23,835 507 -- 24,342
Operating expenses:
Selling, general and administrative.................. 32,802 3,312 -- 36,114
Research and development............................. 9,470 2,010 -- 11,480
Settlement of litigation............................. 1,000 -- -- 1,000
-------- -------- ----- ---------
Total operating expenses............................... 43,272 5,322 -- 48,594
-------- -------- ----- ---------
Loss from operations................................... (19,437) (4,815) -- (24,252)
Other income (expense):
Minority interest consisting of accrued dividends on
preferred stock of subsidiary..................... (175) -- -- (175)
Interest income...................................... 318 173 -- 491
Interest expense..................................... (267) (34) -- (301)
-------- -------- ----- ---------
Net loss before tax.................................... (19,561) (4,676) -- (24,237)
Provision for income tax............................... 566 -- -- 566
-------- -------- ----- ---------
Net loss............................................... $(20,127) $ (4,676) $ -- $ (24,803)
======== ======== ===== =========
</TABLE>
See accompanying notes
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<PAGE> 27
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Acquisition of Microsurge
On March 31, 1997, the Company acquired Microsurge. The agreement provides
for the issuance of shares of Urohealth Common Stock and the assumption of $5.5
million in convertible Microsurge notes. The value of this transaction is
approximately $38.0 million. The Microsurge merger is expected to be accounted
for as a pooling of interests.
(a) Repayment of Microsurge Notes Payable upon consummation of the
transaction and the elimination of the associated interest.
(b) Under the pooling of interests accounting method, direct transaction
costs are deferred and expensed upon completion of the merger. Such costs are
estimated to be $3.6 million and include investment banking, legal, accounting,
printing, solicitation, filing fees and similar expenses. The accrual of these
expenses has been reflected in the unaudited pro forma condensed combined
balance sheet at December 31, 1996, but not in the unaudited pro forma condensed
combined statements of operations. Direct transaction costs reflected in the
unaudited pro forma condensed combined statements of operations relate to
previous mergers.
In the event the Merger should fail to qualify as a pooling of interests,
the transaction will be accounted for as a purchase. If the transaction were
accounted for as a purchase, goodwill on the unaudited pro forma condensed
consolidated balance sheet would be increased by $46 million, as of December 31,
1996, and amortization expense on the unaudited pro forma condensed consolidated
statement of operations would be increased by $1.4 million in each of the nine
months ended December 31, 1996 and March 31, 1996. Direct acquisition costs of
$3.6 million would be added to goodwill, with a corresponding increase in
retained earnings on the unaudited pro forma condensed consolidated balance
sheet at December 31, 1996 (direct transaction costs are capitalized in the
purchase price for the purchase method vs. expensed for a pooling of interest
transaction).
(c) Common stock and additional paid-in capital have been adjusted to
reflect the issuance of Urohealth Common Stock in exchange for the issued and
outstanding shares of Microsurge Common Stock and Convertible Preferred Stock.
(d) No income tax provision or benefit has been recorded in the pro forma
adjustments, since the combined historical operations of the companies would
not result in the recognition of additional income tax provision or benefit.
27
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to (a) the inclusion in this Current Report of UroHealth Systems,
Inc. on Form 8-K/A and (b) the incorporation by reference in Registration
Statements (Form S-8 No. 33-59918, 33-59916, 33-59920, 33-91900, 33-92684 and
333-19487) pertaining to the Davstar Industries Ltd. Stock Option Plan, 1992
Employee Stock Option Plan, the Non-Employee Directors Stock Option Plan, the
Davstar Industries, Ltd. 1994 Stock Incentive Plan, Dacomed 1989 Stock Option
Plan, 1996 Directors Non-Qualified Stock Incentive Plan, Employee Stock Purchase
Plan, Advanced Surgical 1992 Stock Plan and Employee Reserved Stock Agreements
of UroHealth Systems, Inc. of our report on Microsurge, Inc., which includes an
explanatory paragraph related to the Company's ability to continue as a going
concern, dated March 14, 1997 on our audits of the financial statements of
Microsurge, Inc. as of December 31, 1996 and 1995 and for the three years in
the period ended December 31, 1996.
/s/ COOPERS & LYBRAND L.L.P.
------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 25, 1997
