<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 DECEMBER 31, 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
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 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 January 31,
1997 was 19,360,001.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1996 and
March 31, 1996 3
Condensed Consolidated Statements of Operations for the Three
Months Ended and the Nine Months Ended December 31, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1996 and December 31, 1995 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 5. Other 17
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except par value data)
<TABLE>
<CAPTION>
December 31 March 31
1996 1996
---------- ---------
(Audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 2,272 $ 1,185
Receivables, net of allowance for doubtful accounts of $1,479
and $1,644 on December 31, 1996 and March 31, 1996, respectively 24,958 7,337
Inventories 21,373 5,705
Prepaids and deposits 3,307 1,685
Income tax receivable 377 0
Deferred debt issuance costs 0 614
-------- -------
Total current assets 52,287 16,526
Property and equipment, net 24,785 8,132
Patents and intangibles, net of accumulated amortization of $2,489
and $2,102 on December 31, 1996 and March 31, 1996, respectively 6,264 2,135
Deposits and other assets 2,609 649
Deferred debt issuance costs 5,727 0
Goodwill 42,081 393
-------- -------
$133,753 $27,835
======== =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 12,067 $ 9,455
Restructuring accrual 1,810 1,345
Compensation and employee benefits 3,026 2,045
Revolving lines of credit 16,500 7,123
Current portion of notes payable and capital leases 521 286
-------- -------
Total current liabilities 33,924 20,254
Long-term liabilities:
Notes payable 6,000 641
Bank term loan 13,500 6,000
Capital leases 152 211
Convertible note 0 1,284
Deferred compensation 29 28
Other liabilities 98 157
Restructuring accrual, less current portion 1,684 823
Minority interest in consolidated subsidiary 1,126 1,073
Redeemable convertible preferred stock 0 3,554
Convertible subordinated debentures 50,000 0
Common Stockholders' Equity:
Common stock - $0.001 par value
Authorized - 50,000,000, Issued and outstanding - 19,352,501
and 12,465,000, respectively 19 12
Warrants 5,217 2,922
Additional paid-in capital 113,204 55,050
Accumulated deficit (91,159) (64,076)
Foreign currency adjustment (41) (98)
-------- -------
Total common stockholders' equity (deficit) 27,240 (6,190)
-------- -------
$133,753 $27,835
======== =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
$29,684 $ 11,592 $ 67,964 $ 37,810
10,911 4,417 23,193 13,518
------- -------- -------- --------
Gross profit 18,773 7,175 44,771 24,292
Operating expenses:
Selling, general and administrative 12,742 12,712 32,537 32,316
Research and development 1,195 455 2,149 1,456
Merger and acquisition costs - 3,429 - 5,338
Write-off of purchased research and development - - 25,500 -
Restructuring charges - 5,456 4,000 5,456
------- -------- -------- --------
Total operating expenses 13,937 22,052 64,186 44,566
Income (loss) from operations 4,836 (14,877) (19,415) (20,274)
Other income (expense):
Minority interest consisting of accrued dividends
on preferred stock of subsidiary (18) (18) (54) (54)
Interest income 93 12 240 86
Interest expense (2,179) (268) (4,864) (495)
Other - 10 - (98)
------- -------- -------- --------
Income (loss) before tax and extraordinary item 2,732 (15,141) (24,093) (20,835)
Provision (benefit) for income tax - 14 (377) 648
------- -------- -------- --------
Income (loss) before extraordinary item 2,732 (15,155) (23,716) (21,483)
Extraordinary item (early extinguishment of debt) - - (2,973) -
------- -------- -------- --------
Net income (loss) $ 2,732 $(15,155) $(26,689) $(21,483)
======= ======== ======== ========
Net income (loss) per share:
Net income (loss) $ 2,732 $(15,155) $(26,689) $(21,483)
Dividends and accretion on redeemable
convertible preferred stock - 119 398 327
------- -------- -------- --------
Net income (loss) attributable to common stockholders $ 2,732 $(15,274) $(27,087) $(21,810)
======= ======== ======== ========
Income (loss) per share before extraordinary item $ 0.15 $ (1.24) $ (1.55) $ (1.77)
======= ======== ======== ========
Net income (loss) per share $ 0.15 $ (1.24) $ (1.74) $ (1.77)
======= ======== ======== ========
Weighted average number of common shares used
to compute income (loss) per share 18,782 12,316 15,595 12,306
======= ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
UROHEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(26,689) $(21,483)
Non cash items included in net loss:
Extraordinary expense 2,433 -
Write off of purchased research and development 25,500 -
Depreciation and amortization 3,075 1,937
Deferred debt issue costs 569 212
Accretion and accrued interest on convertible note 42 22
Accrued dividend on preferred stock in subsidiary 54 81
Inventory reserve allowance - 692
Deferred income taxes - 124
Provision for doubtful accounts (300) 1,184
Retired assets due to restructuring - 133
Other 58 (151)
Changes in operating assets, net of assets acquired:
Receivables (13,523) (1,068)
Income tax receivable (377) -
Inventories (13,768) (880)
Prepaids and deposits (3,353) 517
Changes in operating liabilities, net of liabilities acquired:
Accounts payable and accrued expenses (6,174) 3,488
Compensation and employee benefits 981 542
Other liabilities (184) 180
Accrued restructuring charges 1,326 3,670
-------- --------
Net cash used in operating activities (30,330) (10,800)
Cash flows from investing activities:
Purchase of property and equipment (13,404) (2,629)
Purchase of patents (1,150) (40)
Payments for acquisitions of businesses, net of cash acquired (33,880) -
Proceeds from sale of investments - 1,599
-------- --------
Net cash used in investing activities (48,434) (1,070)
Cash flows from financing activities:
Deferred financing fees paid (5,913) -
Issuance of common stock 1,129 263
Secondary Offering of common stock, net of issuance costs 19,131 -
Proceeds from note payable 2,977 -
Proceeds from revolving line of credit 15,000 1,640
Proceeds from bank term loan 13,500 6,000
Proceeds from redeemable convertible debentures 50,000 0
Repayment of revolving line of credit (5,823) (257)
Repayment of bank term loan (6,000) -
Principal payments on capital leases and notes payable (4,150) (577)
Issuance of redeemable convertible preferred stock - 4,000
-------- --------
Net cash provided by financing activities 79,851 11,069
-------- --------
Net increase (decrease) in cash 1,087 (801)
Cash, beginning of period 1,185 1,331
-------- --------
Cash, end of period $ 2,272 $ 530
======== ========
Supplemental cash flow information:
Cash paid for interest $ 3,923 $ 545
======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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. (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 December 31, 1996,
its condensed consolidated results of operations for the three month and nine
month periods ended December 31, 1996 and December 31, 1995, and its condensed
consolidated cash flows for the nine month periods ended December 31, 1996 and
December 31, 1995. Adjustments consist of normal recurring accruals except for
the extraordinary loss on early extinguishment of debt, and 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
interim periods are not necessarily indicative of those to be expected for the
entire year. Certain 1995 financial statement amounts have been reclassified
to conform with the December 31, 1996 presentation.
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.
6
<PAGE> 7
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
1. INTERIM REPORTING (CONTINUED)
BUSINESS COMBINATIONS
On June 5, 1996, Urohealth Systems, Inc. ("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 purchase price for the acquired
assets was $2.8 million, payable in cash upon the closing of the transaction.
The acquired assets are used in the development, manufacture, and marketing of
laparoscopic surgery products and accessories.
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. 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. The aggregate amount of cash paid for all of
the outstanding Intermed common stock was $1.5 million and the aggregate number
of shares of Urohealth common stock issued was 149,306. Intermed is engaged in
the development, manufacture, and marketing of disposable medical products.
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.
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:
<TABLE>
<CAPTION>
(in millions)
-------------
<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>
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.
7
<PAGE> 8
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
1. INTERIM REPORTING (CONTINUED)
All of these transactions have been accounted for as purchases whereby the
results of operations from each separate entity or group of assets have been
included in the results of operations of the Company from the date of purchase.
The following summarized, unaudited pro forma results of operations for the
nine months ended December 31, 1996 and 1995, reflects the acquisitions as
though they had occurred as of the beginning of the respective periods (dollars
in thousands except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Net sales $ 77,267 $46,293
Net loss (28,314) (9,797)
Net loss per common share $ (1.95) $ (0.59)
</TABLE>
2. PER SHARE INFORMATION
The computations of earnings per share in each of the periods presented is
based on weighted average number of common shares outstanding. When dilutive,
stock options and warrants are included as share equivalents using the treasury
stock method. Primary and fully dilutive earnings per share are the same for
each of the periods presented as the Company's convertible debentures and
convertible redeemable preferred stock 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>
December 31, March 31,
1996 1996
----------- ---------
<S> <C> <C>
Finished goods $12,216 $3,424
Raw materials and supplies 7,545 1,963
Work in progress 1,612 318
------- ------
$21,373 $5,705
======= ======
</TABLE>
8
<PAGE> 9
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
4. DEBT
During the nine month period ended December 31, 1996, the Company issued $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 $12.88 per
share, subject to anti-dilution adjustments. The Debentures mature May 2006
and interest is payable quarterly in arrears. The warrants expire in five
years.
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 initially 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 $10.90 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.
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, which was
subsequently increased to $16.5 million in November 1996. A portion of the
proceeds from the secondary offering in November 1996 were used to reduce the
term loan by $6.5 million. The credit facility is secured by substantially all
the assets of the Company with a five year term and bears interest at December
31, 1996 at a rate of approximately 8.75%. Additionally, the Company is
required to meet certain financial covenants. As of December 31, 1996, the
Company had repaid approximately $5.0 million of the $35.0 million outstanding
under the bank credit facility and the revolving portion of the credit facility
was fully utilized.
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
9
<PAGE> 10
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
5. RESTRUCTURING (CONTINUED)
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 December 31, 1996, cash payments have reduced the
components of the restructuring accrual to $96,000 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
acquired facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred during the nine
months ended December 31, 1996 are summarized in the table below. Non-cash
charges consist of the write-down of existing 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 loss on sale of
discontinued product lines and closure costs related to international
operations of acquired companies. The remaining restructuring accrual at
December 31, 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 December 31,
(in thousands) Accrual Charges Charges Reclassifications 1996
- -------------- ------- ------- ------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Personnel reduction costs $2,620 $ - $1,819 $ (730) $ 71
Facility reduction costs 2,836 1,199 1,865 730 502
------ ------ ------ ------ ----
$5,456 $1,199 $3,684 $ - $573
====== ====== ====== ====== ====
</TABLE>
In September 1996, the Company established a restructuring plan to eliminate
redundant manufacturing facilities resulting from the 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
10
<PAGE> 11
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
5. RESTRUCTURING (CONTINUED)
selling and administrative costs. Although subject to future adjustment,
management of the Company believes that restructuring reserves as of December
31, 1996 are adequate to complete the restructuring. However, with the recent
acquisitions and those noted in subsequent events, it is possible the Company
will incur additional restructuring charges in the future.
<TABLE>
<CAPTION>
Beginning Balance at
Restructuring Non-Cash Cash December 31,
(in thousands) Accrual Charges Charges Reclassifications 1996
- -------------- ------- ------- ------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Personnel reduction costs $ 2,412 $ - $ 906 $ - $ 1,506
Facility reduction costs 1,588 - 269 - 1,319
------- ----- ------ -------- -------
$ 4,000 $ - $1,175 $ - $ 2,825
======= ===== ====== ======== =======
</TABLE>
6. MINORITY INTEREST REDEMPTION
The Company has approved the redemption of the Series A Preferred Stock issued
by Urohealth, Inc. (California), 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 total consideration of $6.20 per share. The share repurchase will
eliminate the accumulation of dividends which accrue at 7% per annum.
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 Systems Ltd's separate return years' taxable income resulting
in refundable taxes. The Company did not record an income tax provision or
benefit for the quarter ended December 31, 1996 due to the availability of
operating losses to offset any taxable income generated.
8. CONTINGENCIES
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.
11
<PAGE> 12
UROHEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
9. LITIGATION
See Part II, Item 1.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1995.
Net sales. For the nine months ended December 31, 1996, net sales of $68.0
million were $30.2 million or 80% higher than sales of $37.8 million for the
same period in 1995. This increase was largely due to higher sales of the
Company's impotence products which increased $13.8 million or 48% to $42.7
million. The recent purchase of Richard-Allan on August 19, 1996 also
increased revenues by approximately $11 million for the nine months ended
December 31, 1996.
Gross profit. For the nine months ended December 31, 1996, gross profit
increased $20.5 million or 84% over the same period in 1995. The gross margin
percentage increased from 64% to 66% for the nine months ended December 31,
1996 largely due to the increase in sales of the Company's higher margin
impotence product lines and operational efficiencies as a result of
consolidation of duplicate facilities.
Selling, general and administrative. Selling, general and administrative
expenses for the nine months ended December 31, 1996 were at a comparable level
for the same period in 1995. Over the nine months ended December 31, 1996, the
Company was able to reduce duplicative expenses arising from acquisitions
through its implementation of the various restructuring plans. As a percentage
of net sales, selling, general and administrative expenses have decreased to
48% for the nine months ended December 31, 1996 from 85% for the corresponding
period of 1995. As the Company is becoming more efficient, selling, general
and administrative expenses are becoming smaller as a percentage of net sales.
Research and development. Research and development costs for the nine
months ended December 31, 1996 increased $0.7 million or 48% over the same
period in 1995. The increase was largely due to the Company devoting
additional resources to accelerate the development of new products for its
gynecological and visualization product lines.
Write-off of Purchased Research and Development. 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 the purchase price
properly attributed to incomplete research and 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.
Restructuring. 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 December 31, 1996 are adequate to complete the
restructuring.
<TABLE>
<CAPTION>
Beginning Balance at
Restructuring Non-Cash Cash December 31,
Accrual Charges Charges Reclassifications 1996
------------- -------- ------- ----------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Personnel reduction costs . . . . . . $2,412 $ - $ 906 $ - $1,506
Facility reduction costs . . . . . . 1,588 - 269 - 1,319
------ --- ------ ----- ------
$4,000 $ - $1,175 $ - $2,825
====== === ====== ===== ======
</TABLE>
13
<PAGE> 14
Interest expense. Interest expense for the nine months ended December 31,
1996 increased $4.4 million 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.
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995.
Net sales. For the quarter ended December 31, 1996, net sales increased by
$18.1 million or 156% over the same period in 1995. This increase was largely
due to higher sales of the Company's impotence products which increased by $6.9
million or 70%. The acquisition of Richard-Allan increased revenues for the
quarter by approximately $8 million.
Gross profit. For the quarter ended December 31, 1996, gross profit
increased by $11.6 million over the same period in 1995. The gross margin
percentage increased from 62% to 63% for the quarter ended December 31, 1996
largely due to sales growth in the Company's higher margin impotence product
lines and manufacturing efficiencies resulting from the Company's consolidation
of its manufacturing locations.
Selling, general and administrative. Selling, general and administrative
expenses for the quarter ended December 31, 1996 were comparable to the same
period in 1995. As a percent of net sales, selling, general and administrative
expenses have decreased to 43% for the three months ended December 31, 1996
compared to 110% for the three months ended December 31, 1995.
Research and development. Research and development costs for the quarter
ended December 31, 1996 increased $0.7 million over the same period in 1995 due
to the Company devoting additional resources to develop new products for its
gynecological and visualization product lines.
Interest expense. Interest expense for the quarter ended December 31,
1996 increased $1.9 million 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 in the previous quarter.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996 the Company has continued to have negative cash flow
from operations, primarily due to increases in accounts receivable and
inventories. These increases in working capital components are primarily
attributed to the Company's increased sales growth. Cash used by operations
totaled $30.3 million for the nine months ended December 31, 1996. During this
period, the Company's operations have been funded primarily from the proceeds
of debt and equity offerings, including the sale of $50 million of convertible
subordinated debentures and the sale of 2,684,000 shares of the Company's
common stock. As of December 31, 1996, the Company had working capital of
$18.4 million.
In November 1996, the Company completed a secondary public offering of 2,684,000
shares of common stock, at a price of $8.00 per share. The net proceeds of
$19.1 million were used to reduce $6,500,000 worth of debt, to finance the
Company's operations, and for several acquisitions of new product lines.
14
<PAGE> 15
In July 1996, the Company completed the sale of $50.0 million of 8.75%
convertible subordinated debentures resulting in net proceeds to the Company of
approximately $45.2 million. The debentures are convertible into Common Stock
of the Company at $10.90 per share. Through December 31, 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,
which was subsequently increased to $16.5 million in November 1996. A
portion of the proceeds from the secondary offering in November 1996 were used
to reduce the term loan by $6.5 million. The credit facility is secured by
substantially all the assets of the Company with a five year term and bears
interest at December 31, 1996 at a rate of approximately 8.75%. Additionally,
the Company is required to meet certain financial covenants. As of December
31, 1996, the Company had repaid approximately $5.0 million of the $35.0
million outstanding under the bank credit facility and the revolving portion of
the credit facility was fully utilized.
Approximately $1.8 million of the Company'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 out 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 business strategy includes efforts to expand business operations
through the acquisition of new products, product lines and businesses. The
Company anticipates that its future liquidity requirements for operations and
for expansion will be met by a combination of cash flow from operations and the
proceeds of future debt and equity financings. In addition, business
acquisitions may continue to be financed through the issuance of shares of the
Company's common stock and other financing activities. Management is actively
pursuing various sources of additional financing. However, there can be no
assurance that any such transactions will be consummated. Should the Company
not be able to obtain such financing, the Company will be required to proceed
with its planned expansion at a slower rate.
OTHER
On November 22, 1996, the Company listed its common stock and warrants on The
Nasdaq Stock Market National Market System (NASDAQ) under the ticker symbols
"UROH" for the common stock and "UROHW" for the warrants. The Company's stock
and warrants were previously listed on the American Stock Exchange (AMEX) under
the symbols "URO" and "URO%," respectively.
On December 13, 1996, the Company entered into an agreement with VISTA Medical
Technologies, Inc., of Carlsbad California, to exclusively license VISTA's
visualization technology for use in gynecological procedures. The products
developed under this technology will be subject to 510(k) approval by the
United States Food and Drug Administration. The license fee consisted of $1.0
million in cash and 110,000 shares of the Company's common stock valued at
$866,250. The cash portion of the licensing fee
15
<PAGE> 16
was funded using a portion of the proceeds from the sale of the Company's
common stock during the November 1996 secondary public offering.
On December 18, 1996, the Company entered into a distribution agreement with
UroMetrics, Inc., a privately held medical device company specializing in
ultrasonics. The Company will receive exclusive distribution rights for a
unique impotence diagnostic tool that measures penile blood flow, called the
Knoll/MIDUS System(TM), which is a key variable in diagnosing and selecting an
appropriate course of treatment for erectile dysfunction. Under the agreement,
the Company is required to purchase a minimum amount of product each year.
SUBSEQUENT EVENTS
In February 1997, the Company entered into an agreement to acquire X-Cardia
Corporation by the merger of X-Cardia into a wholly owned subsidiary of the
Company. X-Cardia is a developer of cardiac output technology. Under the
agreement, at the closing, the Company will issue a number of Urohealth shares
with a value equal to $12 million. In addition, the X-Cardia shareholders are
entitled to receive milestone payments based on the completion of human clinical
trials and issuance of certain patent rights. The milestone payments
aggregating $21 million are to be made in a combination of cash and the
Company's stock. Finally, 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. The closing is subject to a number of customary closing conditions.
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.
16
<PAGE> 17
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.
ITEM 2. CHANGES IN SECURITIES. In connection with the payment of a
licensing fee to VISTA Technologies, the Company issued 110,000 shares of
common stock to VISTA on December 13, 1996. The shares were issued in reliance
on the exemption from the registration requirements of the Securities Act of
1933 contained in Section 4(2) of the Act.
ITEM 5. OTHER. In February 1997, the Company entered into an agreement to
acquire X-Cardia Corporation by the merger of X-Cardia into a wholly owned
subsidiary of the Company. X-Cardia is a developer of cardiac ouput
technology. Under the agreement, at the closing, the Company will issue a
number of Urohealth shares with a value equal to $12 million. In addition, the
X-Cardia shareholders are entitled to receive milestone payments based on the
completion of human clinical trials and issuance of certain patent rights. The
milestone payments aggregating $21 million are to be made in a combination of
cash and the Company's stock. Finally, 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. The closing is subject to a number of customary closing
conditions.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
27 Financial Data Schedule
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 February 1997.
UROHEALTH Systems, Inc.
a Delaware corporation
By: /s/ CHARLES A. LAVERTY
--------------------------------
Charles A. Laverty
Chairman of the Board and
Chief Executive Officer
By: /s/ JAMES L. JOHNSON
-------------------------------
James L. Johnson
Executive Vice President/Chief
Financial Officer/Treasurer
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,272
<SECURITIES> 0
<RECEIVABLES> 24,958
<ALLOWANCES> 1,479
<INVENTORY> 21,373
<CURRENT-ASSETS> 52,287
<PP&E> 24,785
<DEPRECIATION> 0
<TOTAL-ASSETS> 133,753
<CURRENT-LIABILITIES> 33,924
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 27,221
<TOTAL-LIABILITY-AND-EQUITY> 133,753
<SALES> 29,684
<TOTAL-REVENUES> 29,684
<CGS> 10,911
<TOTAL-COSTS> 10,911
<OTHER-EXPENSES> 13,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,179
<INCOME-PRETAX> 2,732
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,732
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
