<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997.
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
incorporation or organization) Identification No.)
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 than 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 July 31, 1997 was
23,835,046.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1997 and
June 30, 1997 3
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 1997 and June 30, 1996 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 17
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in thousands, except par value data)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 5,750 $ 2,591
Receivables, net of allowance for doubtful accounts of $1,695
and $1,684 on June 30, 1997 and March 31, 1997, respectively 22,044 17,272
Income tax receivable 377 377
Advances to officers 9 114
Inventories 29,728 20,945
Distributor inventories 6,307 6,307
Prepaid expenses 3,849 2,278
--------- ---------
Total current assets 68,064 49,884
Restricted cash 19,327 48
Receivables - long term 2,383 2,722
Property and equipment, net 27,421 26,035
Patents and intangibles, net of accumulated amortization of $3,573
and $2,646 on June 30, 1997 and March 31, 1997, respectively 6,099 6,285
Loans to officers 2,041 550
Deposits and other assets 1,753 2,232
Deferred debt issuance costs 11,394 5,986
Goodwill 42,867 43,417
--------- ---------
$ 181,349 $ 137,159
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities $ 20,679 $ 20,882
Compensation and employee benefits 2,911 3,250
Restructuring liabilities 5,482 6,192
Short-term debt 5,268 14,518
Current portion of long-term debt 3,216 3,328
--------- ---------
Total current liabilities 37,556 48,170
Long-term liabilities:
Long-term debt 53,269 98,292
Senior subordinated notes 110,000 --
Restructuring liabilities, less current portion 678 822
Other liabilities 3,822 4,149
Minority interest in consolidated subsidiary -- 237
Common Stockholders' Equity:
Common stock - $0.001 par value
Authorized shares - 50,000,000
Issued and outstanding shares - 23,825,000 and 23,807,000
at June 30, 1997 and March 31, 1997, respectively 24 24
Warrants 7,080 5,359
Additional paid-in capital 150,638 150,468
Foreign currency translation adjustment 44 (14)
Deficit (181,762) (170,348)
--------- ---------
Total common stockholders' equity (deficiency) (23,976) (14,511)
--------- ---------
$ 181,349 $ 137,159
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Net sales $ 25,237 $ 17,318
Cost of sales 11,702 6,120
-------- --------
Gross profit 13,535 11,198
Operating expenses:
Selling, general and administrative 16,863 10,685
Research and development 1,665 800
-------- --------
Total operating expenses 18,528 11,485
Loss from operations (4,993) (287)
Other income (expense):
Minority interest consisting of accrued dividends
on preferred stock of subsidiary (4) (18)
Interest income 389 59
Interest expense (5,433) (1,044)
Other 450 --
-------- --------
Loss before taxes and extraordinary item (9,591) (1,290)
Provision (benefit) for income taxes -- --
-------- --------
Loss before extraordinary item (9,591) (1,290)
Extraordinary item (early extinguishment of debt) (1,823) (2,973)
-------- --------
Net loss $(11,414) $ (4,263)
======== ========
Net loss per share:
Loss before extraordinary item $ (9,591) $ (1,290)
Dividends and accretion on redeemable
convertible preferred stock -- 398
-------- --------
Net loss before extraordinary item attributable
to common stockholders (9,591) (1,688)
Extraordinary item (1,823) (2,973)
-------- --------
Net loss attributable to common stockholders $(11,414) $ (4,661)
======== ========
Net loss per share before extraordinary item $ (0.40) $ (0.10)
======== ========
Net loss per share $ (0.48) $ (0.29)
======== ========
Weighted average number of common shares used
to compute loss per share 23,822 16,210
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,414) $ (4,263)
Non cash items included in net loss:
Extraordinary expense 1,823 2,433
Depreciation and amortization 2,535 649
Amortization of deferred debt issuance costs 414 271
Accretion and accrued interest on convertible notes -- 42
Loss on retirement/write-off of assets 37 --
Accrued dividend on preferred stock in subsidiary 4 17
Deferred income taxes -- --
Provision for doubtful accounts 27 (180)
Other (91) 10
Changes in operating assets and liabilities (16,225) (7,789)
--------- ---------
Net cash used in operating activities (22,890) (8,810)
Cash flows from investing activities:
Purchase of property and equipment, net (3,119) (3,642)
Purchase of patents (170) (56)
Payments for acquisition of businesses, net of cash acquired -- (2,784)
Proceeds from sale or maturity of marketable securities -- 243
Restricted cash (19,178) --
Purchase of technology -- (250)
Loans and advances to officers (1,345) --
--------- ---------
Net cash used in investing activities (23,812) (6,489)
Cash flows from financing activities:
Deferred financing fees paid (5,924) (4,911)
Issuance of common stock 170 814
Proceeds from Senior Subordinated Notes 110,000 --
Proceeds from long-term debt -- 35,234
Principal payments of long-term debt (54,385) (14,047)
--------- ---------
Net cash provided by financing activities 49,861 17,090
--------- ---------
Net increase in cash 3,159 1,791
Cash, beginning of period 2,591 3,345
--------- ---------
Cash, end of period $ 5,750 $ 5,136
========= =========
Cash paid for interest $ 5,389 $ 396
========= =========
Cash paid for taxes $ -- $ --
========= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(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. (the "Company") and its
subsidiaries. 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 June 30, 1997, its
condensed consolidated results of operations for the three month period ended
June 30, 1997 and June 30, 1996, and its condensed consolidated cash flows for
the three month period ended June 30, 1997 and June 30, 1996. Adjustments
consist of normal recurring accruals except for the extraordinary loss on early
extinguishment of debt in the accompanying unaudited condensed consolidated
statements of operations. The results of operations for the three month period
ended June 30, 1997 are not necessarily indicative of those to be expected for
the entire year.
These condensed 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, 1997, as filed with the
Securities and Exchange Commission.
Significant intercompany accounts and transactions have been eliminated in
consolidation and certain amounts have been reclassified in prior periods to
conform to the current presentation.
In interim periods the Company defers and amortizes over the fiscal year
certain administrative costs to more appropriately reflect the benefits
realized during the course of the fiscal year.
Financial information presented reflects the March 31, 1997 merger with
Microsurge, Inc., which has been accounted for as a pooling of interests.
6
<PAGE> 7
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. INTERIM REPORTING (Continued)
The results of operations previously reported by the Company and those of
Microsurge included in the accompanying interim consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1996
------------------
(in thousands)
<S> <C>
Net sales:
Urohealth $ 16,027
Microsurge 1,291
--------
$ 17,318
========
Net loss:
Urohealth $ (2,572)
Microsurge (1,691)
---------
$ (4,263)
========
</TABLE>
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. Net loss
per common share for the three months ended June 30, 1996 reflects $295,000 of
warrants issued to induce the conversion of the redeemable convertible preferred
stock.
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>
June 30, March 31,
1997 1997
------- ---------
<S> <C> <C>
Raw materials and supplies $12,157 $ 8,731
Work in progress 3,146 2,942
Finished goods 13,748 9,272
------- -------
$29,051 $20,945
======= =======
Distributor inventories $ 6,307 $ 6,307
======= =======
</TABLE>
7
<PAGE> 8
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
4. DEBT
On April 10, 1997, the Company completed the sale of $110 million of its 12.5%
Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. The notes bear interest, payable semi-annually, at
12.5% per annum, subject to increase if certain obligations are not satisfied,
and mature on April 1, 2004. There are no mandatory redemption or sinking fund
payments required on the Notes.
The Notes are general unsecured obligations of the Company subordinated in right
of payment to all existing and future senior indebtedness of the Company. The
indenture governing the Notes contains certain covenants which limit some of the
Company's ability to engage in certain transactions.
The Company used $19.2 million of the proceeds from the sale of the Notes to
purchase government securities (the "Pledged Securities") which that have been
pledged for the benefit of the holders of the Notes. The scheduled interest and
principal payments on the Pledged Securities is an amount sufficient to pay when
due the first three scheduled interest payments on the Notes.
The Company is a holding company with no material assets or operations other
than its investments in its subsidiaries. The Notes are guaranteed by all of the
Company's domestic and material foreign subsidiaries. The guarantees are full,
unconditional, and joint and several. All of the guarantor subsidiaries are
wholly-owned by the Company. In connection with the Notes, the Company issued
with each $1,000 principal amount of Notes, a warrant entitling the holder to
purchase 4.44 shares of Common Stock of the Company (or 9.06 shares, if a
certain EBITDA for fiscal 1998 is not achieved) at an exercise price of $9.50
per share. The warrants are exercisable on or after June 30, 1998 and expire
April 1, 2004.
The Company used $54.2 million of the net proceeds from the offering to repay
amounts outstanding under the Company's term and revolving credit facility.
Concurrently with the consummation of the sale of the Notes, the Company entered
into a new $50 million revolving credit facility with the Company's senior
lender (the "Senior Credit Facility"). The Senior Credit Facility is secured by
substantially all of the Company's assets and matures in March 2002. The Company
is required to meet certain financial covenants under the Senior Credit Facility
and available amounts under the revolving credit facility are based on eligible
inventory and accounts receivable. The
8
<PAGE> 9
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
4. DEBT (Continued)
Company was not in compliance with certain financial covenants under its Senior
Credit Facility for the quarter ended June 30, 1997, but was granted a waiver
through September 15, 1997 by its senior lender that permits borrowings equal to
the lesser of the $15.0 million and 80% of eligible accounts receivable under
the facility. As of June 30, 1997, the Company's borrowing eligibility was
approximately $13.4 million of which $5.0 million was borrowed subsequent to
June 30, 1997. As of June 30, 1997, the Company had working capital of
approximately $30.5 million.
The Company recorded during the quarter an extraordinary loss of $1.8 million in
connection with the early retirement of bank debt of $54.2 million on April 10,
1997 from its previous bank credit facility.
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. Through June 30, 1997, cash
payments have reduced the components of the restructuring accrual to $5,000.
The Company's restructuring plan to consolidate redundant facilities and reduce
personnel resulting from the mergers with Dacomed Corporation, Osbon Medical
Systems, Ltd. and Advanced Surgical, Inc. was initiated in December 1995.
The remaining restructuring accrual at June 30, 1997 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 June 30,
(in thousands) Accrual Charges Charges Reclassifications 1997
------------ -------- ------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Personnel reduction costs $2,620 $ -- $1,822 $ (730) $ 68
Facility reduction costs 2,836 1,199 1,865 730 502
------ ------ ------ ------ ----
$5,456 $1,199 $3,687 $ -- $570
====== ====== ====== ====== ====
</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.
9
<PAGE> 10
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
5. RESTRUCTURING (Continued)
<TABLE>
<CAPTION>
Beginning Balance at
Restructuring Non-Cash Cash June 30,
(in thousands) Accrual Charges Charges 1997
- -------------- ------------- -------- ------- ----------
<S> <C> <C> <C> <C>
Personnel reduction cost $2,412 $ -- $1,196 $1,216
Facility reduction costs 1,588 -- 263 1,325
------ ----- ------ ------
$4,000 $ -- $1,459 $2,541
====== ===== ====== ======
</TABLE>
In March 1997, the Company implemented a restructuring plan to consolidate
redundant facilities and reduce personnel resulting from mergers with Osbon and
Microsurge. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred through June 30,
1997 are summarized in the table below. Non-cash charges consist of the
write-down of existing assets to their estimated net realizable value.
<TABLE>
<CAPTION>
Beginning Balance at
Restructuring Non-Cash Cash June 30,
(in thousands) Accrual Charges Charges 1997
- -------------- ------------- -------- ------- ----------
<S> <C> <C> <C> <C>
Personnel reduction costs $7,067 $ -- $ 4,405 $ 2,662
Facility reduction costs 933 473 78 382
------ ---- ------- -------
$8,000 $473 $ 4,483 $ 3,044
====== ==== ======= =======
</TABLE>
Although subject to future adjustment, management of the Company believes that
restructuring reserves as of June 30, 1997 are adequate to complete the various
restructuring plans.
6. MINORITY INTEREST REDEMPTION
The minority interest in Urohealth, Inc. (California) consisted of 42,000 shares
of its Series A preferred stock. As of June 20, 1997, these shares were redeemed
or exchanged for shares of common stock. The redemption price was $6.41 per
share,
10
<PAGE> 11
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
6. MINORITY INTEREST REDEMPTION (Continued)
consisting of the redemption price of $5.00 per share plus accrued and unpaid
dividends and a $.20 per share redemption premium.
7. INCOME TAXES
The Company did not record an income tax provision or benefit for the quarter
ended June 30, 1997 since the realization of tax benefits of operating losses is
not assured.
8. CONTINGENCIES
In July 1997, several complaints were filed against the Company, certain of its
officers and directors and, in certain complaints, the lead underwriters of the
Company's November 1996 public offering, requesting certification of a class
action, alleging various violations of Federal securities laws and seeking
unspecified compensatory damages.
The suits were filed in the United States District Court for the Central
District of California. All the suits are based on substantially the same facts
and have been brought on behalf of purchasers of Common Stock of the Company
during various periods between July 18, 1996 and July 1, 1997. No proceedings
have taken place in any of the suits, and no provision for any liability that
may result from the ultimate resolution of this matter has been included in the
accompanying consolidated financial statements.
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. PENDING ACQUISITION
On April 19, 1997, the Company entered into a definitive agreement pursuant to
which the Company would acquire Imagyn Medical, Inc. ("Imagyn") in a stock for
stock merger (the "Merger"). The Merger is expected to be accounted for as a
pooling of interests and each share of Imagyn common stock will exchanged for
1.4 shares of Common Stock of the Company. The consummation of the Merger is
subject to approval by the Company's and Imagyn's stockholders, and other
customary closing conditions. No assurances can be given that the Merger will be
successfully consummated.
11
<PAGE> 12
UROHEALTH Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
10. SUBSEQUENT EVENTS
On August 5, 1997, the Company received United States Patent Office approval
covering its Endotracheal Cardiac Output Monitoring technology. This technology
was acquired in the X-Cardia acquisition completed in February 1997. The devices
under development incorporate this patented technology into a standard
endotracheal tube allowing for continuous cardiac output monitoring of patients
undergoing surgery or on respiratory support.
Based upon the issuance of the patent, the Company is obligated to pay the
former X-Cardia shareholders on or prior to October 3, 1997, $16.5 million in
cash and $1.5 million in Urohealth Common Stock.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Receivables $ (4,460) $(2,289)
Inventories (8,692) (2,995)
Prepaid expenses (1,092) (597)
Accounts payable and accrued liabilities (468) (1,193)
Compensation and employee benefits (339) 96
Restructuring liabilities (854) (726)
Deposit and other assets -- (60)
Other liabilities (320) (25)
-------- -------
$(16,225) $(7,789)
======== =======
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996.
Net sales. For the three months ended June 30, 1997, net sales of $25.2
million were $7.9 million or 46% higher than sales of $17.3 million for the
corresponding period in 1996. This increase was largely due to the acquisition
of Richard Allan, recorded as a purchase, on August 19, 1996 which increased
revenues by approximately $9.6 million for the three months ended June 30, 1997
compared to the corresponding period in 1996. Sales for the three months ended
June 30, 1997 include approximately $6.3 million of reorders received from the
Company's new surgical products distributors. The increase in surgical products
sales were offset by a decrease of $3.7 million in sales of Urology products for
the three months ended June 30, 1997 compared to the corresponding period of the
prior year. The Company believes that the introduction of a new drug-based
treatment for impotence adversely affected the sale of vacuum erection devices
during the quarter as patients opted to try the new treatment modality. While it
is impracticable for the Company to predict the long-term effect of the new
treatment modality, the Company had an increase in vacuum erection device sales
after quarter end. The Company's shipments of approximately $15.1 million of
surgical products to certain new distributors during fiscal 1997 as part of
initial stocking orders are expected to be recognized as revenue later this
fiscal year.
Gross profit. For the three months ended June 30, 1997, gross profit
increased $2.3 million or 21% over the same period in 1996. The gross profit
percentage decreased from 65% for the three months ended June 30, 1996 to 54%
for the three months ended June 30, 1997. The decrease in gross profit
percentage was primarily due to the large increase in lower margin surgical
product sales. For the three months ended June 30, 1996, higher margin urology
products accounted for 78% of sales, decreasing to approximately 39% of sales
during the three months ended June 30, 1997.
Selling, general and administrative. Selling, general and
administrative expenses of $16.9 million for the three months ended June 30,
1997 were $6.2 million or 58% higher than selling, general and administrative
expenses of $10.7 million for the corresponding period in 1996. The increase was
due to the increased sales levels and selling, general and administrative
expenses included in the quarter ended June 30, 1997 relating to Richard-Allan
operations and the infrastructure for the Company's visualization and
gynecology divisions which expenses were not included in the corresponding
quarter of the prior year.
Research and development. Research and development costs for the three
months ended June 30, 1997 increased $865,000 over the corresponding period in
1996. During fiscal 1997, the Company made significant investments in, and
acquisitions of, technology. The increase in R&D expenditures is related to the
development of new products using the acquired technologies.
Interest expense. Interest expense for the three months ended June 30, 1997
increased $4.4 million over the corresponding period in 1996. The increase was
primarily due to interest expense associated with the Company's sale of the
12.5% Senior Subordinated Notes in April 1997 as well as a full three months of
interest on the sale of convertible subordinated debentures which was completed
during May 1996.
Extraordinary expense. The Company used approximately $54 million of
the net proceeds from the offering of the Notes to repay amounts outstanding
under its term and
13
<PAGE> 14
revolving credit facility. The Company recorded an extraordinary loss of $1.8
million consisting of the write-off of deferred financing costs, related to the
early retirement of this credit facility.
LIQUIDITY AND CAPITAL RESOURCES
In April 1997, Urohealth completed the sale of $110 million of its
12.5% Senior Subordinated Notes due 2004 (the "Notes") raising net proceeds of
approximately $105 million. Urohealth used $54.2 million of the net proceeds
from the offering to repay amounts outstanding under Urohealth's term and
revolving credit facility. Concurrently with the consummation of the sale of the
Notes, Urohealth entered into a new $50 million revolving credit facility with
Urohealth's senior lender (the "Senior Credit Facility"). The Senior Credit
Facility is secured by substantially all of the Company's assets and matures in
March 2002. The Company is required to meet certain financial covenants under
the Senior Credit Facility and available amounts under the revolving credit
facility are based on eligible inventory and accounts receivable. The Company
was not in compliance with certain financial covenants under its Senior Credit
Facility for the quarter ended June 30, 1997, but was granted a waiver through
September 15, 1997 by its senior lender that permits borrowings equal to the
lesser of the $15.0 million and 80% of eligible accounts receivable under the
facility. As of June 30, 1997, the Company's borrowing eligibility was
approximately $13.4 million. The Company borrowed $5.0 million subsequent to
June 30, 1997. As of June 30, 1997, Urohealth had working capital of
approximately $30.5 million.
The Company used $19.2 million of the proceeds from the sale of the
Notes to purchase government securities (the "Pledged Securities") that
have been pledged for the benefit of the holders of the Notes. The scheduled
interest and principal payments on the Pledged Securities is an amount
sufficient to pay when due the first three scheduled interest payments on the
Notes. During fiscal 1998, the Company is obligated to repay at maturity
approximately $5.8 million of notes and accrued interest assumed in the
acquisition of Microsurge. In addition, the Company is obligated to pay $16.5
million to the former X-Cardia shareholders on or prior to October 3, 1997
relating to the achievement of the patent approval milestone.
Approximately $5.5 million of Urohealth's restructuring charges are
projected to be paid over the next 12 months. The long-term portion consists of
redundant facility lease costs to be paid through 2003 and severance costs to be
paid out over the next two years. The Company currently expects to pay these
restructuring charges from cash flow from operations or from financing
activities.
The Company's capital expenditures for the three months ended June 30,
1997 were $3.1 million and relate primarily due to the acquisition of a
building, the consolidation and expansion of manufacturing and upgrade of
management information systems. Urohealth currently has a $2.7 million
commitment for a corporate aircraft and anticipates capital expenditures,
14
<PAGE> 15
primarily for increased manufacturing capacity and information systems, for the
next nine months will exceed $10.0 million.
The Company is a holding company whose material assets consist
primarily of the capital stock of its subsidiaries. Consequently, the Company is
dependent upon dividends paid by its subsidiaries to pay the Company's debt
obligations, including its obligations under the Notes and the Senior Credit
Facility. Except for applicable restrictions under state corporate laws, there
are currently no restrictions on any subsidiaries ability to pay dividends to
the Company.
Through June 30, 1997, Urohealth has continued to have negative cash
flows from operations, primarily due to increases in operating losses, accounts
receivable and inventories. Accounts receivable balances were approximately $4.8
million higher at June 30, 1997 primarily due to increased sales during the June
quarter. Management anticipates further increases in accounts receivable in
fiscal 1998, as sales volume increases and payment terms are possibly extended
under a number of distribution agreements. Urohealth's inventory balances were
$8.1 million higher at June 30, 1997 than at March 31, 1997 due to an increase
in inventories to levels to support increased sales volumes. Urohealth expects
further increases in inventories to support anticipated sales under group
purchasing organization and distribution agreements. Cash used in operations
totaled approximately $22.9 million for the three months ended June 30, 1997.
The Company's operations have been funded primarily from the proceeds of debt
and equity offerings.
The Company believes currently available cash balances, amounts
available under the Senior Credit Facility and funds generated from operations
will provide adequate liquidity to finance its operations for the next twelve
months. The Company's business strategy includes efforts to expand business
operations through the acquisition of new products, product lines and
businesses. Business acquisitions may continue to be financed through the
issuance of shares of Urohealth's Common Stock and other financing activities.
However, there can be no assurance that any such transactions will be
consummated. Should Urohealth not be able to obtain such financing, Urohealth
will be required to proceed with its planned expansion at a slower rate.
Urohealth may require additional funds to support its working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity and/or debt financings or from other sources.
No assurance can be given that additional financing will be available or that,
if available, such financing will be obtainable on terms favorable to
Urohealth. In the absence of such financing the Company's ability to absorb
adverse operating results or to fund capital expenditures on research and
development, to respond to changes in business and economic conditions and to
make future acquisitions may be adversely affected.
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,
15
<PAGE> 16
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 1997 which has been filed
with the Securities and Exchange Commission.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July 1997, several complaints were filed against the Company,
certain of its officers and directors and, in certain complaints, the lead
underwriters of the Company's November 1996 public offering, requesting
certification of a class action, alleging various violations of Federal
securities laws and seeking unspecified compensatory damages. The suits were
filed in the United States District Court for the Central District of
California. All the suits are based on substantially the same facts and have
been brought on behalf of purchasers of Common Stock of the Company during
various periods between July 18, 1996 and July 1, 1997. No proceedings have
taken place in any of the suits, and no provision for any liability that may
result from the ultimate resolution of this matter has been included in the
accompanying consolidated financial statements.
In addition, 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.
ITEM 2. CHANGES IN SECURITIES.
On April 10, 1997, the Company completed the sale of its 12-1/2% Senior
Subordinated Notes due 2004 (the "Notes"), and in connection with the sale
issued to the purchasers of the Notes warrants to purchase Common Stock of the
Company. The warrants are exercisable for an aggregate of 488,400 shares (or
996,600 shares, if certain EBITDA levels are not achieved for fiscal 1998). The
warrants are exercisable at $9.50 per share on and after June 30, 1998, and the
warrants expire on April 1, 2004.
The Notes and related warrants (the "Units") were sold in a Rule 144A
transaction to Bear, Stearns & Co Inc., as initial purchaser, which resold the
Units to qualified institutional buyers and institutional accredited investors.
The warrants were not separately sold but were included as part of a Unit with
each $1,000 principal amount of notes purchased. The securities were sold in
reliance upon the exemption from the registration requirements of the
Securities Act of 1933 contained in Rule 144A.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed on April 28, 1997 reporting the
sale of $110 million Senior Subordinated Notes.
Current Report on Form 8-K filed on April 15, 1997 reporting the
acquisition of Microsurge, Inc.
18
<PAGE> 19
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 to be signed on its behalf by the undersigned, thereunto duly
authorized, this 14th day of August 1997.
UROHEALTH Systems, Inc.,
a Delaware corporation
By: /s/ CHARLES A. LAVERTY
-----------------------------------
Charles A. Laverty
Chief Executive Officer/
Chairman of the Board
By: /s/ JOSEPH T. ARTINO
-----------------------------------
Joseph T. Artino
Assistant Treasurer (Acting
Principal Financial Officer and
Acting Principal Accounting Officer)
19
<PAGE> 20
INDEX OF EXHIBITS
Exhibit No.
- -----------
27 Financial Data Schedule
20
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,750
<SECURITIES> 0
<RECEIVABLES> 23,739
<ALLOWANCES> 1,695
<INVENTORY> 35,358
<CURRENT-ASSETS> 68,064
<PP&E> 27,421
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<TOTAL-ASSETS> 181,349
<CURRENT-LIABILITIES> 36,879
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0
0
<COMMON> 24
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<TOTAL-LIABILITY-AND-EQUITY> 181,349
<SALES> 25,237
<TOTAL-REVENUES> 25,237
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<INTEREST-EXPENSE> 5,433
<INCOME-PRETAX> (9,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,993)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,823)
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