<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________ to _________.
Commission file number: 1-11150
UROHEALTH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 98-0122944
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 CIVIC PLAZA SUITE 100, NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (714) 668-5858
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding as of October 31, 1996
was 16,496,205.
This Report on Form 10-Q/A is being filed to amend in its entirety the
quarterly report on Form 10-Q, for the period ended September 30, 1996.
<PAGE> 2
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1996 and
September 30, 1996 3
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 1996 and 1995 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value data)
<TABLE>
<CAPTION>
September 30 March 31
1996 1996
------------ --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets :
Cash and equivalents $ 1,511 $ 1,185
Receivables, net of allowance for doubtful accounts of $1,503
and $1,644 on September 30, 1996 and March 31, 1996, respectively 14,817 7,337
Inventories 17,209 5,705
Prepaids and deposits 4,063 1,685
Income tax receivable 377 --
Deferred debt issuance costs -- 614
--------- --------
Total current assets 37,977 16,526
Property and equipment, net 23,692 8,132
Patents and intangibles, net of accumulated amortization of $2,349
and $2,102 on September 30, 1996 and March 31, 1996, respectively 4,490 2,135
Deposits and other assets 1,415 649
Deferred debt issuance costs 5,854 --
Goodwill 42,266 393
========= ========
$ 115,694 $ 27,835
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,075 $ 9,455
Restructuring accrual 2,593 1,345
Compensation and employee benefits 2,141 2,045
Revolving lines of credit 15,000 7,123
Current portion of notes payable and capital leases 310 286
--------- --------
Total current liabilities 34,119 20,254
Long-term liabilities:
Notes payable 6,023 641
Bank term loan 20,000 6,000
Capital leases 150 211
Convertible note -- 1,284
Deferred compensation 28 28
Other liabilities 113 157
Restructuring accrual, less current portion 1,853 823
Minority interest in consolidated subsidiary 1,109 1,073
Convertible subordinated debentures 50,000 --
Redeemable convertible preferred stock -- 3,554
Common stockholders' equity (deficit):
Preferred stock, $.001 par value
Authorized shares - 5,000,000
Issued and outstanding shares - none -- --
Common stock - $0.001 par value
Authorized - 50,000,000, Issued and outstanding - 16,495,205
and 12,465,000, respectively 16 12
Warrants 5,217 2,922
Additional paid-in capital 93,177 55,050
Deficit (96,029) (64,076)
Foreign currency adjustment (82) (98)
--------- --------
Total common stockholders' (deficit) equity 2,299 (6,190)
--------- --------
$ 115,694 $ 27,835
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net sales $ 20,064 $ 13,511
Cost of sales 6,958 4,825
-------- --------
Gross profit 13,106 8,686
Operating expenses:
Selling, general and administrative 10,689 10,007
Research and development 611 454
Merger and acquisition costs -- 1,058
Write-off acquired incomplete research and development 25,500 --
Restructuring charges 4,000 --
-------- --------
Total operating expenses 40,800 11,519
Loss from operations (27,694) (2,833)
Other income (expense):
Minority interest consisting of accrued dividends
on preferred stock of subsidiary (18) (21)
Interest income 96 30
Interest expense (1,747) (132)
Other -- (46)
-------- --------
Loss before tax (29,363) (3,002)
Provision (benefit) for income tax (377) 317
-------- --------
Net loss (28,986) (3,319)
======== ========
Net loss per share:
Loss before extraordinary item $(28,986) $ (3,319)
Dividends and accretion on redeemable convertible
preferred stock -- (163)
-------- --------
Loss attributable to common stockholders before
extraordinary item (28,986) (3,482)
Extraordinary item -- --
-------- --------
Loss attributable to common stockholders $(28,986) $ (3,482)
======== ========
Loss per share before extraordinary item $ (1.88) $ (.29)
======== ========
Loss per share $ (1.88) $ (.29)
======== ========
Weighted average number of shares used to compute
net loss per share 15,430 11,807
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Net sales $ 36,091 $ 26,218
Cost of sales 12,207 9,101
-------- --------
Gross profit 23,884 17,117
Operating expenses:
Selling, general and administrative 19,795 19,604
Research and development 954 1,001
Merger and acquisition costs -- 1,909
Write-off acquired incomplete research and development 25,500 --
Restructuring charges 4,000 --
-------- --------
Total operating expenses 50,249 22,514
Loss from operations (26,365) (5,397)
Other income (expense):
Minority interest consisting of accrued dividends
on preferred stock of subsidiary (36) (36)
Interest income 147 74
Interest expense (2,708) (227)
Other -- (108)
-------- --------
Loss before tax and extraordinary item (28,962) (5,694)
Provision (benefit) for income tax (377) 634
-------- --------
Loss before extraordinary item (28,585) (6,328)
Extraordinary loss (early extinguishment of debt) (2,973) --
-------- --------
Net loss $(31,558) $ (6,328)
======== ========
Net loss per share:
Loss before extraordinary item $(28,585) $ (6,328)
Dividends and accretion on redeemable convertible
preferred stock (398) (208)
-------- --------
Loss attributable to common stockholders before
extraordinary item (28,983) (6,536)
Extraordinary item (2,973) -
-------- --------
Loss attributable to common stockholders $(31,956) $ (6,536)
======== ========
Loss per share before extraordinary item $ (2.01) $ (.56)
======== ========
Net loss per share $ (2.21) $ (.56)
======== ========
Weighted average number of shares used to compute
net loss per share 14,436 11,628
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(31,558) $(6,328)
Non cash items included in net loss:
Extraordinary loss on early extinguishment of debt 2,433 --
Write off of incomplete research and development 25,500 --
Depreciation and amortization 1,648 1,001
Deferred debt issue costs 442 36
Accretion and accrued interest on convertible note 42 22
Accrued dividend on preferred stock in subsidiary 36 --
Provision for doubtful accounts (300) --
Other 17 317
Changes in operating assets:
Receivables (3,386) (1,451)
Income tax receivable (377) --
Inventories (9,604) (909)
Prepaids and deposits (2,915) 667
Changes in operating liabilities:
Accounts payable and accrued expenses (3,926) 1,415
Compensation and employee benefits 96 (432)
Accrued dividend on preferred stock of subsidiary -- 62
Other liabilities (169) --
Accrued restructuring charges 2,278 (55)
-------- -------
Net cash used in operating activities (19,743) (5,655)
Cash flows from investing activities:
Purchase of property and equipment, net (8,542) (1,692)
Purchase of patents, net (102) (22)
Asset purchase from O. R. Concepts (2,784) --
Asset purchase from X-Med (3,443) --
Cash used to acquire Richard-Allan (27,560) --
Proceeds from sale of investments -- 779
Deposits and other assets -- (28)
Other -- (69)
-------- -------
Net cash used in investing activities (42,431) (1,032)
Cash flows from financing activities:
Deferred financing fees paid (5,913) --
Issuance of common stock 1,099 83
Proceeds from note payable -- 375
Repayment of revolving line of credit (7,323) --
Repayment of bank term loan (6,000) --
Proceeds from convertible subordinated debentures 50,000 --
Principal payments on capital leases and notes payable (4,363) (255)
Proceeds from revolving line of credit 15,000 1,790
Proceeds from term loan 20,000 --
Issuance of redeemable convertible preferred stock -- 4,000
Exercise of employee stock options -- 42
-------- -------
Net cash provided by financing activities 62,500 6,035
-------- -------
Net (decrease) increase in cash 326 (652)
Cash, beginning of period 1,185 1,331
-------- -------
Cash, end of period $ 1,511 $ 679
======== =======
Supplemental cash flow information:
Cash paid for interest $ 2,010 $ 277
======== =======
</TABLE>
See accompanying notes
5
<PAGE> 6
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. INTERIM REPORTING
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles (GAAP) and
include the accounts of Urohealth Systems, Inc. and its subsidiaries
("UroHealth" or the "Company"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The condensed consolidated financial
statements have been restated to reflect business combinations accounted for
using the pooling of interests method.
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 September 30, 1996,
its condensed consolidated results of operations for the three month and six
month periods ended September 30, 1996 and September 30, 1995, and its condensed
consolidated cash flows for the six month periods ended September 30, 1996 and
September 30, 1995. Adjustments consist of normal recurring accruals except for
the extraordinary loss on early extinguishment of debt, the related induced
accretion as a result of the conversion of the convertible notes and redeemable
convertible preferred stock, restructuring charges and the merger and
acquisition costs identified in the accompanying unaudited condensed
consolidated statements of operations. The results of operations for the six
month period ended September 30, 1996 are not necessarily indicative of those to
be expected for the entire year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended March 31, 1996, as filed with the Securities and
Exchange Commission.
This report on Form 10-Q/A is being filed to amend the Condensed Consolidated
Financial Statements of the Company which were included in the Company's
quarterly report on Form 10-Q, for the quarterly period ended September 30,
1996. The results for the quarter ended September 30, 1996 have been amended to
reflect the delayed recognition of revenue relating to the shipment of
introductory product, reduction of overhead capitalized in inventory, and
increased sales return allowances, which reduced net sales, cost of sales and
gross profit by $1.3 million, $67,000 and $1.3 million, respectively. As a
result of the restatement contained in this report, the Company is reporting a
net loss for the three and six months ended September 30, 1996 of $(29.0)
million or $(1.88) per share and $(32.0) million or $(2.21) per share,
respectively, versus a net loss of $(27.7) million or $(1.80) per share and
$(29.8) million or $(2.07) per share, respectively, which was reported in the
originally filed report on Form 10-Q, for its second quarter.
6
<PAGE> 7
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. INTERIM REPORTING (CONTINUED)
BUSINESS COMBINATIONS
On June 5, 1996, Urohealth 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 $2.8 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 Urohealth's 8.75% convertible
subordinated debentures issued May 13, 1996.
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 0.1242575 shares of Urohealth common stock,
plus cash in the amount of $1.5 million 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 Urohealth's
8.75% convertible subordinated debentures issued May 13, 1996.
On July 5, 1996, Urohealth entered into an agreement to acquire all of the
outstanding capital stock of Richard-Allan Medical Industries, Inc.
("Richard-Allan"), an Illinois corporation, in exchange for $27.5 million in
cash and 2,081,916 shares of Urohealth common stock. Richard-Allan manufactures
and markets surgical operating room supplies. 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 for the balance of
the purchase price. The acquisition was completed on August 14,1996.
7
<PAGE> 8
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. INTERIM REPORTING (CONTINUED)
The total purchase price of the Richard-Allan acquisition, including direct
acquisition costs and the cost of the related real estate, of $60.0 million was
determined as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Issuance of 2,081,916 shares of Urohealth Common Stock
at $13.21 per share $27.5
Cash 29.0
Note payable 3.0
Direct acquisition costs 0.5
-----
$60.0
=====
</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.
Subsequent to the acquisition, a study was conducted to determine the proper
allocation of the purchase price of Richard-Allan. An independent valuation of
Richard-Allan's assets was performed and used as an aid in determining the fair
market value of each identifiable tangible and intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of development projects that should be expensed pursuant to the provisions of
Interpretation 4 of SFAS No. 2. Accordingly, it was determined that acquired
in-process research and development costs of approximately $25.5 million should
be expensed.
All of these transactions have been accounted for as purchases whereby the
results of operations from each separate entity or group of assets will be
included in the results of operations of the Company from the date of purchase.
8
<PAGE> 9
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. INTERIM REPORTING (CONTINUED)
The following summarized, unaudited pro forma results of operations for the
three month and six month periods ended September 30, 1996 and 1995, reflects
the O.R. Concepts, Intermed and Richard-Allan acquisitions as though they had
occurred as of the beginning of the respective periods (dollars in thousands
except per share amounts):
Three Months Ended Six Months Ended
September 30 September 30
------------------- --------------------
1996 1995 1996 1995
-------- ------- -------- -------
Net sales $ 22,725 $20,217 $ 45,403 $39,681
Net loss (30,411) (4,984) (33,072) (8,072)
Net loss per common share $ (1.85) $ (0.36) $ (2.06) $ (0.58)
2. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of common
stock outstanding during the periods presented. Common stock equivalents have
not been included in the calculation because they are anti-dilutive.
3. INVENTORIES
Inventories are carried at the lower of cost or net realizable value. Cost is
determined on the first-in, first-out basis (in thousands).
<TABLE>
<CAPTION>
September 30 March 31
1996 1996
------- ------
<S> <C> <C>
Finished goods $ 9,229 $3,424
Raw materials and supplies 6,501 1,963
Work in progress 1,479 318
------- ------
$17,209 $5,705
======= ======
</TABLE>
4. DEBT
On July 9, 1996, the Company completed the last part of the issuance of $50.0
million of 8.75% convertible subordinated debentures (the "Debentures") and
warrants to purchase 250,000 shares of the Company's common stock at $13.00 per
share. The Debentures mature May 2006 and interest is payable quarterly in
arrears. The warrants expire in five years.
9
<PAGE> 10
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
4. DEBT (CONTINUED)
The Debentures are redeemable at the option of the Company after two years, if
the average market price of the Company's common stock is above $22.00 per share
for 60 consecutive days, or after three years without regard to the Company's
common stock price. The redemption price is equal to 105% of the principal
amount decreasing annually to the principal amount in 2004, plus accrued and
unpaid interest.
The Debentures are convertible into common stock at $11.00 per share, subject to
anti-dilution adjustments, are subordinate to all future senior borrowings and
have voting rights on all matters on an "as converted" basis. The holders of the
Debentures must approve any dividend, payment or other distribution to
stockholders, as well as any redemption of shares of common stock, options or
warrants of the Company or any subsidiary other than the preferred stock issued
by Urohealth-California.
The holders of the Debentures required that the Company induce the holders of
the convertible debt and redeemable preferred stock to convert these securities
into Urohealth common shares. This resulted in a charge to net loss attributable
to common shareholders of $0.3 million or $0.02 per share for the six months
ended September 30, 1996.
In connection with the financing, the Company incurred an extraordinary loss of
$2.9 million in connection with the early retirement of bank debt of $16.5
million on May 13, 1996.
5. RESTRUCTURING
During the year ended June 30, 1995, the Company hired a new senior management
team which adopted and implemented a restructuring plan (the Plan) under which
it has refocused the Company's strategic direction. Under the Plan, the Company
terminated or amended certain distribution, consulting and employment
agreements. All significant restructuring charges were paid in cash during the
1995 calendar year. Through September 30, 1996, cash payments have reduced the
components of the restructuring accrual to $0.1 million primarily relating the
settlement of certain claims with the former Chief Executive Officer.
In December 1995, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from the mergers with
Dacomed Corporation, Osbon Medical Systems, Ltd. and Advanced Surgical, Inc.
Under the Plan, the Company has eliminated approximately 70 manufacturing,
engineering, and administrative personnel, and closed all operations at two
10
<PAGE> 11
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
5. RESTRUCTURING (CONTINUED)
acquired facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred during fiscal 1996
are summarized in the table below. Non-cash charges consist of the write-down of
exiting assets to their estimated net realizable value. Reclassifications during
the period relate to decreases in severance amounts payable to officers of
acquired companies, offset by increases in estimates for facility closure costs
including losses on sale of discontinued product lines and closure costs related
to international operations of acquired companies. The remaining restructuring
accrual at September 30, 1996 relates primarily to terminated employee severance
and facility lease obligations, which are expected to be paid in cash.
<TABLE>
<CAPTION>
Beginning Balance at
Restructuring Non-Cash Cash September 30
(in thousands) Accrual Charges Charges Reclassifications 1996
- -------------- ------------- -------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Personnel reduction costs $2,620 $ - $1,813 $(730) $ 77
Facility reduction costs 2,836 1,199 1,722 730 645
------ ------ ------ ----- ----
$5,456 $1,199 $3,535 $ -- $722
====== ====== ====== ===== ====
</TABLE>
In September 1996, the Company established a restructuring plan to eliminate
redundant manufacturing facilities resulting from Richard-Allan, Intermed and
O.R. Concepts acquisitions and their consolidation with some of the existing
manufacturing locations. This restructuring is expected to be completed within
one year except for redundant facilities, lease costs and payments under certain
severance agreements that may continue over their terms. The Company has
provided a restructuring charge of $4.0 million, of which all are cash
expenditures. This restructuring includes severance costs for approximately 17
employees, certain facility closures and elimination of other redundant selling
and administrative costs. Although subject to future adjustment, management of
the Company believes that restructuring reserves as of September 30, 1996 are
adequate to complete the restructuring.
<TABLE>
<CAPTION>
Beginning Balance at
Restructuring Non-Cash Cash September 30
(in thousands) Accrual Charges Charges Reclassifications 1996
- -------------- ------------- -------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Personnel reduction costs $2,412 $ -- $160 $ -- $2,252
Facility reduction costs 1,588 -- 253 -- 1,335
------ ---- ---- ------ ------
$4,000 $ -- $413 $ -- $3,587
====== ==== ==== ====== ======
</TABLE>
11
<PAGE> 12
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
6. MINORITY INTEREST REDEMPTION
The Company has approved the redemption of the Series A Preferred Stock issued
by Urohealth, Inc., a wholly owned subsidiary. The Board authorized the Company
to redeem the remaining 203,000 shares of the Series A Preferred Stock at $5.00
per share plus a $0.25 premium and accrued interest, for a total consideration
of $6.20 per share. The share repurchase will eliminate the accumulation of
dividends which accrue at 7% per annum. It is anticipated that during the next
quarter the Company will complete this transaction.
7. INCOME TAXES
The Company recorded an income tax benefit in the amount of $0.4 million for the
quarter ended September 30, 1996. The income tax benefit is recognized due to
the availability of separate company operating losses which can be carried back
to Osbon Medical Ltd.'s separate return years' taxable income resulting in
refundable income taxes. The Company maintains its valuation allowance on
remaining operating loss carryforwards since the realization of tax benefits on
these carryforwards in not assured.
8. CONTINGENCIES
The Company is a defendant in approximately five lawsuits seeking damages
against the Company in products liability and related theories. The Company has
also been notified of certain other products liability claims that may become
the subject of lawsuits in the future. The Company is being defended in such
lawsuits by law firms selected by the Company's products liability insurer(s).
In addition, the Company is involved from time to time in various claims and
legal actions in the ordinary course of business. No provision for any
liability that may result from the ultimate resolution of such matters has been
included in the accompanying consolidated financial statements.
9. LITIGATION
See Part II, Item 1.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report on Form 10-Q/A is being filed to amend the Condensed
Consolidated Financial Statements of the Company which were included in the
Company's quarterly report on Form 10-Q, for the quarterly period ended
September 30, 1996. The results for the quarter ended September 30, 1996 have
been amended to reflect the delayed recognition of revenue relating to the
shipment of introductory product, reduction of overhead capitalized in
inventory, and increased sales return allowances, which reduced net sales, cost
of sales and gross profit by $1.3 million, $67,000 and $1.3 million,
respectively. As a result of the restatement contained in this report, the
Company is reporting a net loss for the three and six months ended September 30,
1996 of $(29.0) million or $(1.88) per share and $(32.0) million or $(2.21) per
share, respectively, versus a net loss of $(27.7) million or $(1.80) per share
and $(29.8) million or $(2.07) per share, respectively, which was reported in
the originally filed report on Form 10-Q, for its second quarter.
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1995.
Net sales. For the six months ended September 30, 1996, net sales of $36.1
million were $9.9 million or 37.7% higher than sales of $26.2 million for the
same period in 1995. This increase was largely due to higher sales of the
Company's impotence products which increased $6.8 million or 36% to $25.9
million. The recent purchase of Richard-Allan on August 19, 1996 increased
revenues by approximately $3.1 million for the six months ended September 30,
1996. Additionally, the Company shipped $2.2 million of introductory products
during the six months ended September 30, 1996, which the Company expects to
recognized as revenue as those products are modified to make minor enhancements
and subsequently shipped back to customers.
Gross profit. For the six months ended September 30, 1996, gross profit
increased $6.8 million or 40% over the same period in 1995. The gross margin
percentage increased from 65% to 66% for the six months ended September 30, 1996
largely due to sales growth in the Company's higher margin impotence product
lines and operational efficiencies as a result of consolidation of duplicate
facilities, which margin increases and operational efficiencies were partially
offset by the cost of introductory products shipped during the quarter ended
June 30, 1996. Inventory carrying values were also adjusted for manufacturing
variances incurred at the Company's incontinence division which had to increase
production to meet growing product demand. These inventory adjustments had a
negative impact on the gross margin by approximately 2%.
Selling, general and administrative. Selling, general and administrative
expenses for the six months ended September 30, 1996 increased $0.2 million or
0.01% over the same period in 1995. The Company's sales commissions increased in
proportion to the increase in sales during the six months. Overall
administrative costs during the six months ended September 30, 1996 decreased
due to the Company's ability to reduce some of the duplicative costs associated
with its acquisitions.
Research and development. Research and development costs for the six months
ended September 30, 1996 decreased $47,000 or 5% over the same period in 1995.
Interest expense. Interest expense for the six months ended September 30,
1996 increased $2.5 million or 1,093% over the same period in 1995, primarily
due to increased borrowings on term loans, lines of credit and the issuance of
the convertible subordinated debentures to fund acquisitions.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995.
Net sales. For the quarter ended September 30, 1996, net sales of $20.1
million were $6.6 million or 49% higher than sales of $13.5 million for the same
period in 1995. This increase was largely due to higher sales of the Company's
impotence products which increased $2.7 million or 28% to $12.4 million.
13
<PAGE> 14
The recent purchase of Richard-Allan on August 19, 1996 increased revenues by
approximately $3.1 million for the quarter ended September 30, 1996.
Additionally, the Company shipped $1.3 million of introductory products during
the quarter ended September 30, 1996, which the Company expects to recognize as
revenue as those products are modified to make minor enhancements and
subsequently shipped back to customers.
Gross profit. For the quarter ended September 30, 1996, gross profit
increased $4.4 million or 51% over the same period in 1995. The gross margin
percentage increased from 64% to 65% for the quarter ended September 30, 1996
largely due to sales growth in the Company's higher margin impotence product
line. Inventory carrying values were also adjusted for manufacturing variances
incurred at the Company's incontinence division which had to increase production
to meet growing product demand. These inventory adjustments had a negative
impact on the gross margin by approximately 2.6%.
Selling, general and administrative. Selling, general and administrative
expenses for the quarter ended September 30, 1996 increased $0.7 million or 7%
over the same period in 1995. The Company increased sales commissions as a
result of the increase in sales during the quarter which contributed to
increased administrative costs during the quarter ended September 30, 1996, as
well as the increased selling, general and administrative as a result of the
recent acquisition of Richard-Allan.
Research and development. Research and development costs for the quarter
ended September 30, 1996 increased $0.1 million or 35% over the same period in
1995 due to the Company's acquisition of Richard-Allan
Interest expense. Interest expense for the quarter ended September 30, 1996
increased $1.6 million or 1,223% over the same period in 1995, primarily due to
increased borrowings on term loans, lines of credit and the issuance of the
convertible subordinated debentures.
LIQUIDITY AND CAPITAL RESOURCES
Through September 1996, the Company's operations have been funded partially by
the sale of equity securities in both public and private offerings and debt
financing. The Company had working capital of approximately $3.9 million at
September 30, 1996, and has historically had negative cash flows from
operations. The Company completed the $50.0 million securities purchase
agreement, under which the Company received net proceeds of approximately $45.2
million, in exchange for 8.75% convertible subordinated debentures. The
debentures are convertible into Common Stock of the Company at $11.00 per share.
Through September 30, 1996, the Company has used net proceeds for the repayment
of previous debt obligations, to complete two business acquisitions and to
finance the Company's operations.
To finance the cash portion of the Richard-Allan acquisition, the Company
obtained a $35.0 million bank credit facility. The facility consists of a $20.0
million dollar term loan and a $15.0 million revolving line of credit. The
credit facility is secured by substantially all the assets of the Company with
the term of five years and to be at a rate of approximately 8.75% interest.
Additionally, the Company is required to meet certain financial covenants.
14
<PAGE> 15
Approximately $2.6 million of the Company's restructuring charges are projected
to be paid over the next twelve months. The long-term portion consists of
redundant facility lease costs to be paid out through 2003 and severance costs
to be paid out over the next two years.
The Company has filed an S-3 Registrative Statement with the Securities and
Exchange Commission to sell approximately 5.0 million shares of common stock,
2.5 million are being sold by the Company and 2.5 million by selling
stockholders. The Company anticipates completing this transaction during the
month of November 1996.
The Company's business strategy includes efforts to expand business operations
through the acquisition of new products, product lines and businesses. The
Company expects to use a portion of its cash balances or future debt or equity
financings to make such future acquisitions.
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. More
information on potential factors which could affect the Company's financial
results are included in the Company's Annual Report on Form 10-K, as amended,
for fiscal 1996 which has been filed with the Securities and Exchange
Commission.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. The Company is involved from time to time in
various claims and legal actions arising in the ordinary course of business. No
provision for any liability that may result from the ultimate resolution of such
matters has been included in the consolidated financial statements. In
management's opinion, the ultimate resolution of claims currently pending will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 - Credit Agreement among UroHealth Systems, Inc. and Banque
Indosuez
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K
Form 8-K - Current Report dated July 15, 1996
Form 8-K/A - Amendment No. 1 to the Current Report on Form 8-K dated
July 15, 1996
Form 8-K/A - Amendment No. 2 to the Current Report on Form 8-K dated
July 15, 1996
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on
Form 10-Q/A to be signed on its behalf by the undersigned, thereunto duly
authorized, this 29th day of August, 1997.
UROHEALTH Systems, Inc.
a Delaware corporation
By: /s/ Joseph T. Artino
-------------------------------
Joseph T. Artino
Assistant Treasurer (Acting Principal
Financial Officer and Acting Principal
Accounting Officer)
18
<PAGE> 19
INDEX OF EXHIBITS
Exhibit No.
- -----------
27 -- Financial Data Schedule
19
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