<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 15, 1997
------------------------
UROHEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 1-11150 98-0122944
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION)
</TABLE>
------------------------
5 CIVIC PLAZA, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------
(714) 668-5858
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
================================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
ACQUISITION OF X-CARDIA CORPORATION
On February 28, 1997, the Company completed the acquisition of X-Cardia
Corporation ("X-Cardia") through the merger of X-Cardia into a wholly owned
subsidiary of the Company. The total purchase price, contingent on achievement
of certain milestones, is approximately $33.0 million. The Company issued
1,295,700 shares of UROHEALTH Common Stock with a value equal to $12 million at
the closing. The remaining $21.0 million is contingent upon validation of the
product in human clinical trials and obtaining patent approval. Once clinical
trials are completed, $3.0 million in UROHEALTH Common Stock will be issued, and
upon receipt of patent approval payment of $16.5 million in cash and $1.5
million in UROHEALTH Common Stock will be made. In addition, the X-Cardia
shareholders are entitled to receive a royalty payment based on sales of
products developed using X-Cardia technology for the four-year period after
commercial introduction of the X-Cardia product. This 8K/A relates to a current
Form 8-K that was originally filed on March 14, 1997.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Auditors
Balance Sheet of X-Cardia, as of December 31, 1996
Statement of Operations of X-Cardia from inception (February 13, 1996)
to December 31, 1996
Statement of Shareholders' Equity (Deficit) of X-Cardia from inception
(February 13, 1996) to December 31, 1996
Statement of Cash Flows of X-Cardia from inception (February 13, 1996)
to December 31, 1996
Notes to Financial Statements
(B) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31,
1996.
Unaudited Pro Forma Condensed Combined Statement of Operations for the
nine months ended December 31, 1996.
Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements.
(C) EXHIBITS
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----
<S> <C>
2* Agreement and Plan of Merger dated February 4, 1997 by and between
UROHEALTH SYSTEMS, INC. UROHEALTH, INC (California) and X-Cardia
Corporation.
23.1 Consent of Ernst & Young LLP
</TABLE>
- ---------------
* Filed previously.
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/
Chief Financial Officer
Date: April 15, 1997
3
<PAGE> 4
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
X-Cardia Corporation
We have audited the accompanying balance sheet of X-Cardia Corporation (a
development stage company) as of December 31, 1996 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the period from
inception (February 13, 1996) to 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 audit.
We conducted our audit 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 audit provides 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 X-Cardia Corporation (a
development stage company) at December 31, 1996 and the results of its
operations and its cash flows for the period from inception (February 13, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Palo Alto, California
February 5, 1997
F-1
<PAGE> 5
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets -- cash and cash equivalents...................................... $ 830,979
Property and equipment, net...................................................... 30,035
Advances to Cybro Medical, Ltd................................................... 150,000
----------
$1,011,014
==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable................................................................. $ 11,926
Accrued liabilities.............................................................. 136,765
----------
Total current liabilities.............................................. 148,691
Convertible notes and accrued interest........................................... 1,017,100
Commitments
Shareholders' equity (deficit):
Preferred stock, 15,000,000 shares authorized, issuable in series:
Series A preferred stock; 13,000,000 shares authorized; 5,344,500 shares
issued and outstanding; aggregate liquidation preference of $5,344,500 as of
December 31, 1996........................................................... 460,751
Common stock, 25,000,000 shares authorized; none issued and outstanding........ --
Notes receivable from shareholders............................................. (751)
Deficit accumulated during the development stage............................... (614,777)
----------
Total shareholders' equity (deficit)............................................. (154,777)
----------
$1,011,014
==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 6
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Operating expenses:
Research and development....................................................... $ 353,856
General and administrative..................................................... 255,131
---------
Total operating expenses......................................................... 608,987
---------
Loss from operations............................................................. (608,987)
Interest expense................................................................. (17,100)
Interest income.................................................................. 11,310
---------
Net loss......................................................................... $(614,777)
=========
</TABLE>
See accompanying notes.
F-3
<PAGE> 7
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
DEFICIT
NOTES ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK RECEIVABLE DURING THE SHAREHOLDERS'
---------------------- ------------------------ FROM DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS STAGE (DEFICIT)
---------- -------- ----------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at inception
(February 13, 1996)...... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock to
founders in February
1996..................... -- -- 4,504,500 751 (751) -- --
Issuance of common stock to
investors at $0.50 per
share in March 1996...... -- -- 360,000 180,000 -- -- 180,000
Issuance of common stock to
investors at $0.583 per
share in August 1996..... -- -- 420,000 245,000 -- -- 245,000
Issuance of common stock to
investors at $0.583 per
share in October 1996.... -- -- 60,000 35,000 -- -- 35,000
Exchange of one share of
Series A preferred stock
for one share of common
stock in December 1996... 5,344,500 460,751 (5,344,500) (460,751) -- -- --
Net loss................... -- -- -- -- -- (614,777) (614,777)
--------- -------- ---------- --------- ----- --------- ---------
Balances at December 31,
1996..................... 5,344,500 $460,751 -- $ -- $(751) $(614,777) $(154,777)
========= ======== ========== ========= ===== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 8
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
PERIOD FROM INCEPTION
(FEBRUARY 13, 1996) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................................... $ (614,777)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation expense........................................................... 2,618
Changes in operating assets and liabilities:
Accounts payable............................................................ 11,926
Accrued interest on convertible note........................................ 17,100
Accrued liabilities......................................................... 136,765
----------
Cash used in operating activities................................................ (446,368)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances on investment........................................................... (150,000)
Expenditures for property and equipment.......................................... (32,653)
----------
Cash used in investing activities................................................ (182,653)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of common stock, net..................................... 460,000
Proceeds from issuance of convertible note....................................... 1,000,000
----------
Cash provided by financing activities............................................ 1,460,000
----------
Net increase (decrease) in cash and cash equivalents............................. 830,979
Cash and cash equivalents at beginning of period................................. --
----------
Cash and cash equivalents at end of period....................................... $ 830,979
==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 9
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Basis of Presentation
X-Cardia Corporation (the "Company") is a development stage company and was
incorporated on February 13, 1996 in the state of California. The Company is
engaged in development of noninvasive cardiac output monitoring devices. The
Company's primary activities since incorporation have been establishing offices
and research facilities, recruiting personnel, conducting research and
development activities, performing business and financial planning and raising
capital.
The Company has sustained operating losses since its inception and would
expect such losses would have continued, however, on February 4, 1997, the
Company entered into the Agreement and Plan of Merger with Urohealth Systems,
Inc. ("Urohealth"). Subject to the terms of the Merger, the Company is to be
merged with a wholly owned subsidiary of Urohealth, with Urohealth to be the
surviving corporation in the Merger (see Note 7). If the merger contemplated by
management is not consummated, management will have to seek other sources of
capital or reevaluate its operating plans to attempt to provide the Company the
means to continue as a going concern.
In September 1996, the board of directors of the Company authorized a stock
split, in which one share of common stock was exchanged for six shares of common
stock. Following shareholder approval, the stock split was effected on November
19, 1996. All share and per share amounts included in the financial statements
have been retroactively adjusted to reflect the stock split.
On December 27, 1996, the board of directors and the shareholders approved
the exchange of one share of common stock for one share of Series A preferred
stock. The exchange was effected on December 31, 1996.
Cash, Cash Equivalents and Short-Term Investments
The Company's cash and cash equivalents are maintained in demand deposit
and money market accounts with a commercial bank. The Company considers all
highly liquid investments with a maturity of three months or less from the date
of purchase to be cash equivalents.
Depreciation and Amortization
Equipment is recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, which is generally three
to five years.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, stock-based compensation is measured
using either the intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25") or the fair-value method described in SFAS 123.
Beginning in 1996, the Company implemented SFAS 123 using the intrinsic value
method. Accordingly, adoption of the SFAS 123 had no material effect on the
Company's financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-6
<PAGE> 10
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Furniture....................................................... $29,211
Office equipment................................................ 3,442
-------
32,653
Less accumulated depreciation and amortization.................. (2,618)
-------
$30,035
=======
</TABLE>
3. CONVERTIBLE NOTE AND COMMON STOCK PURCHASE AGREEMENT
On September 30, 1996, the Company entered into a convertible note and
common stock purchase agreement for the sale of 2,000,000 shares of its common
stock to be completed in two closings. The first closing, which took place on
September 30, 1996, involved the issuance of a convertible note for $1,000,000,
which note is automatically converted into 1,000,000 shares upon the completion
of the second closing initially scheduled to occur on March 31, 1997. If the
second closing is not consummated, the principal is repayable on or before
September 30, 2001. Interest accrues on the unpaid principal amount at a rate of
6.84% per annum and is payable beginning March 31, 1997 (see Note 7).
4. RELATED PARTY TRANSACTIONS
Consulting Agreement
The Company has engaged a shareholder and director to provide consulting
services related to its proprietary technology. For these services and for the
contribution of related patents, the Company has incurred fees totaling $43,750
for the period from inception (February 13, 1996) to December 31, 1996.
Facilities Sublease
The Company subleases its facilities from a company owned by the Company's
president and chief executive officer under a noncancelable operating sublease.
The facilities lease expires on September 14, 2001. Future minimum lease
payments under the operating leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
1997............................................................. $13,266
1998............................................................. 13,266
1999............................................................. 13,266
2000............................................................. 13,266
2001............................................................. 9,397
-------
Total.............................................................. $62,461
=======
</TABLE>
Rent expense for the period from inception (February 13, 1996) to December
31, 1996 was approximately $7,829.
F-7
<PAGE> 11
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. SHAREHOLDERS' EQUITY
Preferred Stock
The board of directors has the authority to issue 15,000,000 shares of
preferred stock, currently designated as Series A. Each share of Series A
preferred stock outstanding is convertible at the option of the holder into one
share of common stock, subject to adjustment, upon the occurrence of certain
specified events, and automatically converts upon the consummation of a public
offering of common stock.
Each share of Series A preferred stock entitles its holder to one vote for
each common share into which such shares would convert. Dividends at the rate of
$0.10 per share if and as declared by the board of directors are payable to the
preferred shareholders in preference to any dividends for common stock declared
by the board of directors. Dividends are non-cumulative. No dividends have been
declared as of December 31, 1996.
The holders of the Company's Series A preferred stock are entitled to an
amount per share equal to the original issue price, in liquidation, plus an
amount equal to all declared but unpaid dividends, prior and in preference to
any distribution of the holders of common stock. As of December 31, 1996, the
aggregate liquidation value of the Series A preferred stock is $5,344,500.
In the event of a merger, consolidation or sale of the Company's assets, as
defined, the holders of preferred stock are entitled to receive the liquidation
preference for such shares plus any declared but unpaid dividends in preference
to the holders of common stock.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") was adopted by the board
of directors in November 1996, approved by the shareholders in December 1996. As
of December 31, 1996, a total of 1,000,000 shares of common stock have been
reserved for issuance under the Plan. The Plan provides for the granting to
employees, directors and consultants of the Company, incentive stock options and
nonstatutory stock options.
The exercise price of all stock options granted under the Stock Plan must
be at least 100% of the fair value of the common stock of the Company on the
grant date. The term of an incentive stock option may not exceed 10 years from
the date of grant. An option shall be exercisable on or after each vesting date
in accordance with the terms set forth in the option agreement. No options were
granted out of the Plan in 1996.
Stock Option Grants Outside the Plan
In March, August and September 1996, the Company granted options to
purchase 184,500 shares of Series A preferred stock to employees and
consultants. The exercise price for all such options was $0.50, which price
represented the fair value of the underlying stock on the respective grant
dates. The stock option terms vary between the individual grants, and the terms
were approved by the board of directors.
Stock Compensation
During 1996, the Company adopted SFAS 123. In accordance with the
Statement, the Company applies APB 25 in accounting for option grants to
employees and, accordingly, does not recognize compensation expense for options
granted to employees with an exercise price equal to the fair value of the
underlying stock on the grant date.
F-8
<PAGE> 12
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
5. SHAREHOLDERS' EQUITY (CONTINUED)
Under SFAS 123, options granted to nonemployees must be accounted for at
fair value. The fair value of stock options granted to nonemployees was
immaterial and, therefore, no value was recorded in the financial statements.
For disclosure purposes, the Company used the minimum value method to
determine the fair value of stock options granted in 1996 using the following
weighted average assumptions: risk free interest rate of 5.91% and a weighted
average expected option life of 3.19 years. The effect of applying the minimum
value method of SFAS 123 in determining the fair values of stock options granted
in 1996 did not result in pro forma net loss that is materially different from
the amount reported. Therefore, such pro forma information is not presented
herein. Future pro forma results of operations may be materially different from
actual amounts reported.
A summary of the Company's stock option activity related to options granted
outside of the Plan and related information for the period from inception
(February 13, 1996) to December 31, 1996 follows. No options were granted under
the Plan in 1996:
SERIES A WEIGHTED
PREFERRED STOCK AVERAGE
OPTIONS EXERCISE PRICE
--------------- --------------
Outstanding at beginning of period.... -- $ --
Options granted....................... 184,500 $0.50
Options exercised..................... -- $ --
Options forfeited..................... -- $ --
------- -----
Outstanding at December 31, 1996...... 184,500 $0.50
======= =====
The weighted-average remaining contractual life of those options is
approximately 9.5 years. As of December 31, 1996, 40,000 options were
exercisable.
6. INCOME TAXES
At December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $600,000. The net operating loss carryforward will
expire beginning in 2011, if not utilized.
Utilization of net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization.
As of December 31, 1996, the Company had a deferred tax asset of
approximately $200,000 which relates primarily to net operating loss
carryforwards and capitalized research and development costs. The net deferred
tax asset has been fully offset by a valuation allowance.
7. SUBSEQUENT EVENTS
On January 2, 1997, the Company entered into a share purchase agreement
with Cybro Medical, Ltd. ("Cybro") in which the Company purchased 80% of the
outstanding stock of Cybro, an Israeli research and development company engaged
in the development of blood oxygen saturation monitors. The purchase price was
$125,000. Concurrently, the Company entered into an option agreement under which
the Company may purchase the remaining (20%) of the outstanding stock of Cybro
upon the occurrence of specific events. The Company wired $150,000 to an escrow
account on December 30, 1996 in contemplation of the closing of the
F-9
<PAGE> 13
X-CARDIA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
7. SUBSEQUENT EVENTS (CONTINUED)
transaction and to advance to Cybro cash to fund operating expenses after the
transaction. This amount is included under the caption "Advances to Cybro
Medical, Ltd." in the balance sheet as of December 31, 1996. Upon the completion
of the acquisition in 1997, the entire $150,000 was charged to in-process
research and development expense.
In January and February 1997, the Company granted employees options to
purchase 30,500 shares of the Company's common stock and consultants options to
purchase 125,000 shares of the Company's common stock at an exercise price of
$0.25. The deemed fair value of the underlying shares on the grant date was
$4.00, therefore, the aggregate value of the options to employees was deemed to
be approximately $114,000, based on the intrinsic-value method. The valuation
related to stock options granted to nonemployees was deemed to be approximately
$469,000. The Company used the minimum-value method to determine the fair value
of stock options to nonemployees at the grant date using the following weighted
average assumptions: risk-free interest rate of 6.0% and a weighted average
expected option life of 0.25 years. The Company will recognize as expense the
aggregate valuation for these employee and nonemployee option grants over the
option life.
Also in January 1997, the Company issued 16,780 shares of common stock to
consultants for services rendered. The Company used the minimum value method to
determine the valuation and recorded $67,000 on the grant date.
In February 1997, the Company accelerated the vesting of certain
outstanding stock options in contemplation of the proposed merger with Urohealth
Systems, Inc. (see below). This change in the options terms resulted in the
establishment of a new measurement date for accounting purposes, and, therefore,
a value of $372,000 was expensed on the new measurement date based on the deemed
fair value of the underlying securities at that date.
On February 4, 1997, the Company entered into a Merger Agreement ("Merger")
with Urohealth Systems, Inc. ("Urohealth"), a Delaware corporation, Urohealth,
Inc. (California) ("Urohealth Sub"), a California corporation and a wholly owned
subsidiary of Urohealth Systems, Inc. Subject to terms of the Merger, the
Company was merged with Urohealth Sub, with Urohealth Sub being the surviving
corporation in the Merger. The Company's common and preferred shareholders
received an aggregate of 1,295,700 shares of Urohealth common stock. In
addition, the shareholders have the right to receive milestone payments totaling
$21 million dependent upon the successful achievement of specified milestones.
The shareholders also have the right to receive additional payments termed
"Earn-Out Consideration" based on the sales of X-Cardia products (as defined in
the agreement) for the four-year period after the first commercial release of an
X-Cardia product. There can be no assurance that Urohealth will have sufficient
funds to make these payments.
In connection with the Merger, the Company amended the Convertible Note and
Common Stock Purchase Agreement of September 30, 1996 to complete the second
closing of the agreement concurrent with the closing of the Merger. In addition,
the Company exercised its call option with respect to the remaining 20% interest
in Cybro.
F-10
<PAGE> 14
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired X-Cardia on February 28, 1997 by merger of X-Cardia
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 X-Cardia, 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 X-Cardia as if such
acquisition had occurred on April 1, 1996. The X-Cardia acquisition has been
reflected as a purchase.
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 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 consolidated financial statements of X-Cardia
contained herein.
The unaudited pro forma condensed consolidated financial information is
based on the consolidated financial statements of UROHEALTH and X-Cardia 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 UROHEALTH 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.
F-11
<PAGE> 15
UROHEALTH SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
UROHEALTH X-CARDIA ADJUSTMENTS PRO FORMA
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................................. $ 2,272 $ 831 $(1,150)(a) $ 1,953
Receivables, net...................................... 24,958 -- -- 24,958
Inventories 21,373 -- -- 21,373
Prepaids and deposits................................. 3,307 -- -- 3,307
Income tax receivable................................. 377 -- -- 377
-------- ------ ------- --------
Total current assets.................................... 52,287 831 (1,150) 51,968
Property and equipment, net............................. 24,785 30 -- 24,815
Patents and intangibles, net............................ 6,264 -- -- 6,264
Deposits and other assets............................... 2,609 150 -- 2,759
Deferred debt issuance costs............................ 5,727 -- -- 5,727
Goodwill................................................ 42,081 -- 12,288(b) 54,369
-------- ------ ------- --------
$133,753 $1,011 $11,138 $145,902
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 12,067 $ 149 $ -- $ 12,216
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........................ -- -- -- --
Current portion of notes payable and capital leases... 521 -- -- 521
-------- ------ ------- --------
Total current liabilities............................... 33,924 149 -- 34,073
Long-term liabilities:
Notes payable......................................... 6,000 -- -- 6,000
Bank term loan........................................ 13,500 -- -- 13,500
Capital leases........................................ 152 -- -- 152
Deferred compensation................................. 29 -- -- 29
Convertible notes..................................... -- 1,017 (1,017)(c) --
Senior subordinated notes............................. -- -- -- --
Other liabilities..................................... 98 -- -- 98
Restructuring accrual, less current portion........... 1,684 -- -- 1,684
Minority interest in consolidated subsidiary............ 1,126 -- -- 1,126
Convertible preferred stock............................. -- -- -- --
Convertible subordinated debentures..................... 50,000 -- -- 50,000
Common Stockholders' Equity:
Common stock.......................................... 19 -- 1(a) 20
Preferred stock....................................... -- 461 (461)(b) --
Warrants.............................................. 5,217 -- -- 5,217
Additional paid-in capital............................ 113,204 -- 11,999(a) 125,203
Deficit............................................... (91,159) (615) 615(b) (91,159)
Note receivable from shareholders..................... -- (1) 1(b) --
Foreign currency adjustment........................... (41) -- -- (41)
-------- ------ ------- --------
Total common stockholders' (deficit) equity........ 27,240 (155) 12,155 39,240
-------- ------ ------- --------
$133,753 $1,011 $11,138 $145,902
======== ====== ======= ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 16
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 X-CARDIA(1) ADJUSTMENTS PRO FORMA
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 67,964 $ -- $ -- $ 67,964
Cost of sales.......................................... 23,193 -- -- 23,193
-------- ----- ----- --------
Gross profit........................................... 44,771 -- -- 44,771
Operating expenses:
Selling, general and administrative.................. 32,537 255 399(d) 33,191
Research and development............................. 2,149 354 -- 2,503
Write-off incomplete research and development........ 25,500 -- -- 25,500
Restructuring charges................................ 4,000 -- -- 4,000
-------- ----- ----- --------
Total operating expenses............................... 64,186 609 399 65,194
-------- ----- ----- --------
Profit (loss) from operations.......................... (19,415) (609) (399) (20,423)
Other income (expense):
Minority interest consisting of accrued dividends on
preferred stock of subsidiary..................... (54) -- -- (54)
Interest income...................................... 240 11 -- 251
Interest expense..................................... (4,864) (17) -- (4,881)
Other................................................ -- -- -- --
-------- ----- ----- --------
Net loss before tax and extraordinary loss............. (24,093) (615) (399) (25,107)
Provision (benefit) for income tax..................... (377) -- --(e) (377)
-------- ----- ----- --------
Net loss before extraordinary loss..................... (23,716) (615) (399) (24,730)
Extraordinary loss (early extinguishment of debt)...... (2,973) -- -- (2,973)
-------- ----- ----- --------
Net loss............................................... $(26,689) $(615) $(399) $(27,703)
======== ===== ===== ========
</TABLE>
- ---------------
(1) X-Cardia results of operations reflect activity from the company's inception
February 13, 1996 through December 31, 1996. Activity from February 13, 1996
through March 31, 1996 is immaterial.
See accompanying notes.
F-13
<PAGE> 17
UROHEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Adjustments
BUSINESS ACQUISITIONS
Acquisition of X-Cardia
On February 28, 1997, the Company completed the acquisition of X-Cardia
Corporation through a merger of X-Cardia into a wholly owned subsidiary of the
Company. The total purchase price, contingent on certain requirements, is
approximately $33.0 million. The Company issued 1,295,700 shares of UROHEALTH
Common Stock with a value equal to $12 million. The additional $21.0 million is
contingent upon validation of the product in human clinical trials and obtaining
patent approval, which is not assured. Once clinical trials are completed, $3.0
million in UROHEALTH Common Stock will be issued, and upon receipt of patent
approval payment of $16.5 million in cash and $1.5 million in UROHEALTH Common
Stock will be made. Because the $16.5 million cash payment and $4.5 million in
additional Common Stock issuance are contingent upon product validation and
patent approval, they have not been reflected in the accompanying unaudited pro
forma condensed consolidated balance sheets.
(a) The initial payment for the X-Cardia acquisition, including direct
acquisition costs of $14,150,000 was determined as follows:
<TABLE>
<S> <C>
Issuance of 1,295,700 shares of UROHEALTH Common Stock at $9.26
per share...................................................... $12,000,000
Direct acquisition costs......................................... 2,150,000
-----------
$14,150,000
===========
</TABLE>
(b) Allocation of the purchase price of $14,150,000 based on the Company's
estimate of the fair market value of asset acquired and liabilities assumed
results in the following:
<TABLE>
<S> <C>
Net assets at historical amounts................................. $ 862,000
Common Stock proceeds............................................ $ 1,000,000
Costs in excess of net assets acquired........................... 12,288,000
-----------
$14,150,000
===========
</TABLE>
Common Stock proceeds represent $1,000,000 of cash received by X-Cardia (in
exchange for the issuance of 1,000,000 shares of X-Cardia Common Stock) just
prior to UROHEALTH's acquisition of X-Cardia pursuant to the terms of the
Convertible Note and Common Stock Purchase Agreement (see Note 3 to the X-Cardia
financial statements).
(c) Subsequent to December 31, 1996 and prior to the acquisition of
X-Cardia Corporation, by UROHEALTH, the convertible notes were converted to
common stock.
(d) Amortization of costs in excess of book value of assets acquired in the
X-Cardia transaction, $12,288,000. Costs in excess of net assets acquired are
amortized over 25 years.
The Company plans to evaluate the value of acquired incomplete research and
development incident to this acquisition. The evaluation will include, among
other factors, the stage of development of each product, the time and resources
needed to complete each product, expected income and associated risks (including
the inherent difficulties and uncertainties in developing and manufacturing new
products and potential alternative procedures in future target markets). The
Company expects to record a one-time non-cash charge to earning which is
estimated to be approximately $13.0 million for incomplete research and
development related to the acquired company. This amount has not been reflected
in the pro forma adjustments.
(e) 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.
F-14
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Form
S-8 Nos. 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 dated February 5, 1997, with respect
to the financial statements of X-Cardia Corporation included in UROHEALTH
Systems, Inc.'s Current Report (Form 8-K/A) dated April 15, 1997, as amended.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 9, 1997
