<PAGE>
=============================================================================
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-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 September 28, 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 000-21517
Xomed Surgical Products, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1393528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6743 Southpoint Drive N. Jacksonville, FL 32216-0980
(Address of principal executive offices) (Zip Code)
(904) 296-9600
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date.
Common stock, $.01 par value - 7,259,799 shares as of November 20, 1996
=============================================================================
<PAGE>1
Xomed Surgical Products, Inc. and Subsidiaries
Index
Page Number
-----------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 28, 1996 and December 31, 1995 ........... 2
Condensed Consolidated Statements Of Operations
Three Months Ended September 28, 1996
and September 30, 1995, and Nine Months Ended
September 28, 1996 and September 30, 1995 .......... 3
Condensed Consolidated Statements Of Cash Flows
Nine Months Ended September 28, 1996 and
September 30, 1995 ................................. 4
Notes To Condensed Consolidated Financial Statements
September 28, 1996 ................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
Part II. Other Information
Item 1. Legal Proceedings....................................... 13
Item 6. Exhibits and Reports on Form 8-K........................ 13
Signatures ............................................................. 14
<PAGE>2
Xomed Surgical Products, Inc. and Subsidaries
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 28, December 31,
1996 1995
------------------ ------------------
(unaudited) (note)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ........................................................ $ 684 $ 417
Accounts receivable, less allowance .............................................. 8,743 11,951
Other receivables ................................................................ 588 1,348
Inventories ...................................................................... 15,056 11,994
Prepaid expenses ................................................................. 632 564
Income taxes receivable .......................................................... 318 274
Deferred income taxes ............................................................ 2,087 1,379
-------- --------
Total current assets ............................................................... 28,108 27,927
Investments ........................................................................ 531 861
Notes receivable from officers ..................................................... 932 332
Property, plant and equipment, net ................................................. 16,114 15,355
Cost in excess of net assets acquired, net ......................................... 44,888 46,381
Other assets ....................................................................... 3,360 2,068
Deferred income taxes .............................................................. 475 199
-------- --------
Total assets ....................................................................... $ 94,408 $ 93,123
======== ========
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable ................................................................. $ 4,035 $ 5,841
Accrued expenses ................................................................. 4,126 4,512
Accrued restructuring costs ...................................................... 2,617 695
Current portion long-term debt and capital lease obligation ...................... 5,736 4,645
-------- --------
Total current liabilities .......................................................... 16,514 15,693
Long-term debt and capital lease obligation, less current portion .................. 28,973 32,719
Redeemable preferred stock:
Series C, nonvoting, cumulative, $1.00 par value: 600,000 shares authorized,
299,459 shares issued and outstanding (aggregate liquidation value of $31,293) . 31,293 31,454
Redeemable convertible preferred stock:
Series A, convertible, voting, cumulative, $1.00 par value; 1,200,000 shares
authorized, 744,652 shares issued and outstanding (aggregate liquidation
value of $7,348) ............................................................ 7,348 3,841
Series B, convertible, nonvoting, cumulative, $1.00 par value; 3,500,000
shares authorized, 2,127,838 shares issued and outstanding (aggregate liq-
uidation value of $20,996 ................................................... 20,996 22,474
Shareholders' equity (deficit):
Common Stock:
Class A, voting, $.01 par value; 30,000,000 shares authorized, 690,120 shares
issued and outstanding ..................................................... 7 6
Class B, nonvoting, $.01 par value; 4,000,000 shares authorized, 426,777
shares issued and outstanding .............................................. 4 4
Retained deficit ................................................................ (10,707) (12,719)
Shareholders' notes receivable .................................................. (187) (349)
Additional paid-in capital ...................................................... 586 --
Unearned compensation ........................................................... (419) --
-------- --------
Total shareholders' equity...(deficit) ............................................. (10,716) (13,058)
-------- --------
Total liabilities and shareholders' equity (deficit) ............................... $ 94,408 $ 93,123
======== ========
</TABLE>
Note: The balance sheet at December 1995 has been derived from the audited
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net .............................................. $ 15,846 $ 14,253 $ 48,788 $ 43,677
Cost of Sales ........................................... 6,283 5,234 18,973 16,839
-------- -------- -------- --------
Gross Margin ............................................ 9,563 9,019 29,815 26,838
Operating expenses:
Selling, general and administrative ................ 6,183 6,979 20,312 19,419
Amortization of intangibles ........................ 656 678 1,824 1,902
Writeoff of acquired research and development ...... -- -- 2,380 --
Restructuring expense .............................. -- -- 3,093 --
Research and development ........................... 857 633 2,576 1,791
-------- -------- -------- --------
Total operating expenses ................................ 7,696 8,290 30,185 23,112
-------- -------- -------- --------
Operating Income (loss) from continuing operations ...... 1,867 729 (370) 3,726
Interest expense ........................................ (687) (728) (2,223) (2,307)
Other income (expense), net ............................. 175 54 239 (82)
-------- -------- -------- --------
Income (loss) from continuing operations before income
tax expense ........................................... 1,355 55 (2,354) 1,337
Income tax expense ...................................... 542 142 48 997
-------- -------- -------- --------
Income (loss) from continuing operations ................ 813 (87) (2,402) 340
Discontinued operations:
Income from operations of dicontinued surgical
drapes (less applicable income tax expense) ...... -- 2 -- 297
Loss on disposal of surgical drapes (less
applicable income tax expense) ................... -- (2,485) -- (2,485)
-------- -------- -------- --------
Net Income (loss) ....................................... $ 813 $ (2,570) $ (2,402) $ (1,848)
======== ======== ======== ========
Pro forma:
Income (loss) from continuing operations ................ $ 813 ($ 182) ($ 2,478) $ 73
Preferrred stock dividends .............................. 538 -- 1,077 --
-------- -------- -------- --------
Income (loss) from continuing operations available to
common shareholders ................................. 275 (182) (3,555) 73
Interest expense, net of taxes .......................... 290 325 871 975
Preferred stock dividends ............................... 538 -- 1,077 --
-------- -------- -------- --------
Suplementary income (loss) from continuing operations ... $ 1,103 $ 143 ($ 1,607) $ 1,048
======== ======== ======== ========
Pro forma per share:
Income (loss) from continuing operations available to
common shareholders ................................. $ 0.06 ($ 0.04) ($ 0.77) $ 0.02
======== ======== ======== ========
Supplementary income (loss) from continuing
operations available to common shareholders ......... $ 0.15 $ 0.02 ($ 0.23) $ 0.15
======== ======== ======== ========
Pro forma weighted average common shares outstanding .... 4,623 4,617 4,621 4,617
======== ======== ======== ========
Supplementary pro forma weighted average common
shares outstanding .................................. 7,123 7,117 7,121 7,117
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
September 28, September 30,
1996 1995
------------------ ------------------
<S> <C> <C>
Operating activities
Net cash provided by operating activities ....................... $ 2,518 $ 6,214
Investing activities
Purchases of property and equipment ............................. (2,066) (2,314)
Proceeds from certificates of deposit ........................... 330 338
Cash and investments received from purchase of business for stock 2,000 --
-------- --------
Net cash provided by (used in) investing activities.............. 264 (1,976)
Financing activities
Proceeds from revolving line of credit .......................... 21,793 19,675
Payments on revolving line of credit ............................ (20,352) (18,883)
Payments on term notes payable .................................. (4,032) (4,805)
Payments on capital lease obligation ............................ (64) (119)
Issuance of stock ............................................... 140 --
-------- --------
Net cash used in financing activities ........................... (2,515) (4,132)
-------- --------
Net increase in cash and cash equivalents ....................... 267 106
Cash and cash equivalents at beginning of period ................ 417 260
-------- --------
Cash and cash equivalents at end of period ...................... $ 684 $ 366
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ................................................ $ 2,836 $ 2,277
======== ========
Taxes ................................................... $ 100 $ 18
======== ========
Increase in preferred stock attributable
to accretion of curmulative preferred stock dividends:
Series A ............................................ $ 159 $ 157
Series B ............................................ 612 921
Series C ............................................ 1,288 1,842
-------- --------
$ 2,059 $ 2,920
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X and should be
read in conjunction with the audited financial statements for the years
ended December 31, 1995, 1994, and 1993 of Xomed Surgical Products, Inc.
(the "Company") in the Company's Prospectus dated October 11, 1996.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 28, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996.
Note B- Inventories
The components of inventory consist of the following:
September 28, December 31,
1996 1995
------------------------- ------------------------
(000's omitted)
Raw Materials $ 5,510 $ 3,727
Work-In-Process 1,607 1,572
Finished Products 7,939 6,695
========================= ========================
$15,056 $11,994
========================= ========================
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - (Continued)
(dollars in thousands, except per share data)
Note C. - Pro Forma Statement of Operations
The following unaudited pro forma statements of operations for the
nine months ended September 28, 1996 and September 30, 1995 reflect: 1) the
statement of operations of the Company for the periods presented as if
TreBay Medical Corporation ("TreBay") was purchased on January 1, 1995; and
2) excludes the discontinued operations of the Company for the year ended
December 31, 1995. The pro forma statement of operations should be read in
conjunction with the Company's Prospectus dated October 11, 1996.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 28, 1996 March 30, 1996
-------------------- ----------------------
Pro
Xomed Trebay Adjustments Forma
------------------ ---------------------- ------------------ --------------
<S> <C> <C> <C> <C>
Sales, net........................... $48,788 $ 279 $ - $49,067
Cost of sales........................ 18,973 219 - 19,192
------------------ ---------------------- ------------------ --------------
Gross profit......................... 29,815 60 - 29,875
Operating Expenses:
Selling, general and administrative 20,312 299 (154) (a) 20,457
Research and development......... 2,576 138 (66) (a) 2,648
Amortization of intangibles...... 1,824 - - 1,824
Write-off of acquired research
and development................ 2,380 - - 2,380
Restructuring charges............ 3,093 - - 3,093
-------------------- ---------------------- ------------------ --------------
Total operating expenses............ 30,185 437 (220) 30,402
-------------------- ---------------------- ------------------ --------------
Operating income (loss) from
continuing operations............ (370) (377) 220 (527)
Interest expense (2,223) - - (2,223)
Other income (expense), net........ 239 54 - 293
-------------------- ---------------------- ------------------ --------------
Income (loss) before income tax
expense (benefit)................ (2,354) (323) 220 (2,457)
Income tax expense (benefit)........ 48 - (27) (a) 21
-------------------- ---------------------- ------------------ --------------
Net income (loss)................... $(2,402) $(323) $247 (2,478)
==================== ====================== ==================
Preferred stock dividends........... 1,077
--------------
Net (loss) attributable to
common shareholders................. $(3,555)
==============
Pro forma net (loss) per share...... $(.77)
==============
Pro forma weighted average shares
outstanding ..................... 4,621
==============
<FN>
(a) Elimination of general and administrative expenses which are
duplicative and will not be incurred subsequent to the purchase date,
amortization of acquired developed research and development, non-cash
compensation expense related to stock options granted, closing of the
TreBay facility and calculation of income tax benefit on the TreBay loss
after adjustments
</TABLE>
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - (Continued)
(dollars in thousands, except per share data)
Note C. - Pro Forma Statement of Operations (continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
-----------------------------------------
Pro
Xomed Trebay Adjustments Forma
------------------ ------------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net............................... $43,677 $ 200 $ - $43,877
Cost of sales........................... 16,839 290 - 17,129
------------------ ------------------- -------------- --------------
Gross profit............................ 26,838 (90) - 26,748
Operating Expenses:
Selling, general and administrative. 19,419 806 (545) (a) 19,680
Amortization of intangibles 1,902 - - 1,902
Research and development......... 1,791 315 (37) (a) 2,069
------------------ ------------------- -------------- --------------
Total operating expenses............. 23,112 1,121 582 23,651
------------------ ------------------- -------------- --------------
Operating income (loss) from
continuing operations.............. 3,726 (1,211) 582 3,097
Interest expense......................... (2,307) - - (2,307)
Other income (expense), net........... (82) 185 - 103
------------------ ------------------- -------------- --------------
Income (loss) before income tax
expense (benefit).................. 1,337 (1,026) 582 893
Income tax expense (benefit)......... 997 - (177) (a) 820
--------------
================== =================== ==============
Net income (loss)....................... $340 $(1,026) $759 73
================== =================== ==============
Dividends on preferred stock.......... -
--------------
Net income available to common
shareholders........................ $73
==============
Pro forma net income per share $.02
==============
Pro forma weighted average shares
outstanding ............................ 4,617
==============
<FN>
(a) Elimination of general and administrative expenses which are duplicative
and will not be incurred subsequent to the purchase date, amortization of
acquired developed research and development, non-cash compensation
expense related to stock options granted, closing of the TreBay facility
and calculation of income tax benefit on the TreBay loss after
adjustments.
</TABLE>
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties, including risks associated with the ENT surgical products
industry and other risks detailed from time to time in the Company's filings
with the Securities and Exchange Commission.
Results of Operations
Sales by Market. The Company derives sales from various markets
within the ENT industry. Sinus and rhinology, head and neck and otology are
the three core markets in which the Company operates. In addition to products
for these markets, the Company has other product offerings, including a line
of ophthalmic products, which the Company has recently converted from
distributing through its direct sales force to distributing through
independent dealers. The following table summarizes the Company's worldwide
product line sales during the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------------------------- -----------------------------------------
September 28, 1996 September 30, 1995 September 28, 1996 September 30, 1995
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Sinus & Rhinology $5,407 $3,795 $16,327 $12,326
Head & Neck 4,080 3,611 11,911 10,392
Otology 3,069 2,965 10,674 9,185
------------------- ------------------ ------------------ -------------------
Total Core Business 12,556 10,371 38,912 31,903
Ophthalmic & Other 3,290 3,882 9,876 11,774
------------------- ------------------ ------------------ -------------------
Total Company $15,846 $14,253 $48,788 $43,677
- ------------------------------- =================== ================== ================== ===================
</TABLE>
Net Sales. Net sales increased 11.7% to $48.8 million in the first
nine months of 1996 from $43.7 million in the comparable period in 1995. For
the quarter ended September 28, 1996, net sales increased 11.2% to $15.8
million from $14.3 million for the comparable quarter of 1995. In the core
businesses of sinus and rhinology, head and neck and otology, sales increased
22.0% and 21.1% in the first nine months of 1996 and in the quarter ended
September 28, 1996, respectively, over the prior comparable periods, which
resulted in these product lines representing 79.8% of the Company's revenue
during the first nine months of 1996 as compared to 73.0% in the first nine
months of 1995. These increases were principally the result of sales generated
from several new products introduced recently including the Company's Wizard
and Wizard Plus powered tissue-removal systems, the Activent anti-microbial
vent tube line, an otology implant line acquired in the third quarter of 1995
and a line of facial implant products. In addition, several existing product
lines showed strong sales growth over the prior period including the Merocel
fluid-control products and the NIM-2 XL nerve monitoring system. The
increase in Merocel products sales was due partly to price increases resulting
from moving the distribution of these products, effective on January 1, 1996,
from an independent dealer network to the Company's U.S. direct sales force.
Sales in the non-core area were adversely affected, however, primarily by a
change in the distribution system for the Company's ophthalmic product line.
On January 1, 1996, the Company commenced distribution of its ophthalmic line
through an independent dealer network, with the Company selling to dealers at
wholesale prices. During the first nine months of 1995, these products were
distributed through the Company's direct sales force at retail pricing. This
change was made to better focus the direct sales force on the ENT market.
Although unit volume in the ophthalmic business was comparable between the two
periods, net sales decreased as a result of the price differential from
changing the distribution channel. Associated ophthalmic operating expenses
also declined. Sales also declined in the non-ENT applications for the
Merocel sponge material. Sales increased in several other product lines
due to increased penetration of international markets primarily through
recently established direct sales sites. International sales increased 22.0%
and 14.9% in the first nine months of 1996 and in the quarter ended September
28, 1996, respectively, over the prior comparable periods and represented
32.8% of the Company's revenue in the first nine months of 1996 compared to
30.0% in the comparable period of 1995.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations - (continued)
Cost of Sales. Cost of sales increased 12.7% to $19.0 million, or
38.9% of sales, in the first nine months of 1996 from $16.8 million, or 38.6%
of sales, in the first nine months of 1995. For the quarter ended September
28, 1996, cost sales increased 20.0% to $6.3 million, or 39.7% of sales, from
$5.2 million, or 36.7% of sales for the comparable quarter of 1995. On April
15, 1994, Bristol-Myers Squibb Company sold Xomed-Treace, Inc. to the Company
for a purchase price of approximately $81.0 million (the "Xomed Acquisition").
In accounting for the Xomed Acquisition, the Company allocated a portion of
the excess cost of the acquisition over book value of the net assets acquired
to inventory (the "Inventory Valuation Adjustment"). This allocation resulted
in an increase in inventory value of $5.3 million, of which $4.8 million was
allocated to the inventory of continuing operations. The inventory valued on
this basis was charged to cost of sales on a FIFO basis as it was sold. This
increased cost of sales in the first quarter of 1995 by $0.9 million. No such
adjustment affected 1996. Without this charge, cost of sales would have
increased 19.2% to $19.0 million, or 38.9% of sales, in the first nine months
of 1996 from $15.9 million, or 36.4% of sales in the prior comparable period.
This increase was primarily due to the change in the distribution method
described above for the ophthalmic line which resulted in lower average
selling prices. This increase was partially offset by the change in the
distribution of the Merocel product line which resulted in higher average
selling prices.
Gross Profit. Gross profit decreased to 61.1% and 60.3% in the first
nine months of 1996 and quarter ended September 28, 1996, respectively, from
61.4% and 63.3% in the prior comparable periods. Without the effects of the
Inventory Valuation Adjustment discussed above, gross profit would have
decreased to 61.1% in the first nine months of 1996 from 63.6% in the prior
comparable period for the reasons discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 4.6% to $20.3 million in the first nine
months of 1996 from $19.4 million in the prior comparable period. This
increase was due primarily to higher commissions on a larger sales base, an
increase in the average commission rate, the operating expenses of a new
direct sales subsidiary in Germany, which began operations in the first
quarter of 1996, and promotional expenses related to the Company's line of
sinus endoscopy systems. These increases were partially offset by decreases in
certain marketing and administrative expenses as a result of the cost
reduction initiatives implemented in the second quarter of 1996. For the
quarter ended September 28, 1996, selling, general and administrative expense
decreased 11.4% to $6.2 million from $7.0 million in the prior comparable
period. This decrease was due to the cost reduction initiatives implemented in
the second quarter of 1996, noted above, offset partially by increases in
sales commissions. As a percent of sales, selling, general and administrative
expenses decreased to 41.6% and 39.0% for the first nine months and quarter
ended September 28, 1996, respectively, from 44.5% and 49.0% in the comparable
1995 periods. The decrease as a percent of sales relates to a higher level of
sales combined with certain cost reduction initiatives implemented in the
second quarter of 1996.
Write-off of Acquired Research and Development. The acquisition of
TreBay in April 1996 was accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $6.6 million was
allocated to the individual TreBay assets acquired and liabilities assumed,
based upon their respective fair values at the date of acquisition. The
transaction resulted in cost in excess of net assets acquired of approximately
$4.4 million, of which $2.4 million was allocated to in-process research and
development and charged to expense in the second quarter of 1996.
Restructuring Charges. During the second quarter of 1996, the
Company's new management team initiated cost savings programs that resulted in
reductions of 50 employees at the Company's three domestic locations. The
reductions included 20 management and administrative employees at the
Company's Mystic, Connecticut manufacturing facility, 17 management and
administrative employees at the Company's Jacksonville, Florida headquarters
and 13 management and production employees at the Company's St. Louis,
Missouri manufacturing facility. The restructuring eliminated redundant
overhead at the sites, and the Company expects these actions to yield cost
savings primarily in general and administrative expense. The Company
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations - (continued)
incurred a restructuring charge of approximately $3.1 million during the
second quarter of 1996 primarily to reflect the cost of the severance payments
to terminated employees. Most of the affected employees were terminated in the
second quarter of 1996 with severance beginning at that time. The company
expects to have paid out approximately 70% of the severance payments by
December 31, 1996.
Research and Development. Research and development expenses increased
41.7% to $2.5 million in the first nine months of 1996 from $1.8 million in
the first nine months of 1995 and increased as a percent of sales to 5.2% from
4.1% during the same period. Similarly, research and development expenses
increased 35.4% to $857,000 or 5.4% of sales for the quarter ended September
28, 1996 from $633,000, or 4.4% of sales for the comparable period in 1995.
This increase is primarily the result of project expenses related to the
development of the new XPS powered tissue-removal system and the Powerforma
drill system.
Interest and Other. Interest expense decreased 3.6% and 5.6% during
the first nine months of 1996 and for the quarter ended September 28, 1996,
respectively, over comparable periods of 1995 due primarily to lower average
debt levels during the current year periods. Interest expense related
principally to the Company's secured term loan facility (the "Term Loan") and
the Company's secured revolving credit facility (the "Revolving Credit
Facility") as described below in "Liquidity and Capital Resources." Other
income (expense) reflected income of $239,000 for the first nine months of
1996 compared to expense of $82,000 in the comparable period of 1995. Other
income (expense) for the quarter ended September 28, 1996 reflected income of
$175,000 compared to income of $54,000 in the comparable period of 1995. These
increases in income are principally related to a lump sum settlement payment
of $150,000 received from a third party related to a non-compete agreement
violation.
Income Taxes. The Company's tax expense of $48,000 on a $2.4 million
loss for the first nine months of 1996 varies from an effective tax rate of
approximately 40.0% due to the lack of tax benefit related to the write-off of
in-process research and development costs, described above. Tax expense for
the comparable period of 1995 was $997,000 on income of $1.3 million for an
effective tax rate of 74.6%. For the quarter ended September 28, 1996, tax
expense was $542,000 on income of $1.4 million, or an effective tax rate of
40.0%, and for the comparable quarter of 1995, tax expense was $142,000 on
income of $55,000 for an effective tax rate of 158.2%. The tax rates for the
periods in 1995 were higher than 40.0% due to losses recorded on a less than
80% owned subsidiary and losses incurred in foreign subsidiaries for which a
valuation account was provided on the potential carry forward benefit.
Liquidity and Capital Resources
The Company historically has financed its operations (including
capital expenditures) through cash flows from operations. Since the Xomed
Acquisition in April 1994, which was financed in part by the incurrence of
$45.9 million of debt under the Term Loan and the Revolving Credit Facility,
all cash flow generated from operations has been applied to repay the
outstanding principal on the Term Loan or the Revolving Credit Facility. By
September 28, 1996, the aggregate principal balance of the Term Loan and the
Revolving Credit Facility had been reduced to approximately $34 million.
During the nine months ended September 28, 1996, the Company
generated cash from operating activities of $2.5 million as compared with $6.2
million in the prior comparable period. In the first nine months of 1996, the
Company had a net use of approximately $1.2 million within inventory, accounts
receivable and accounts payable as compared to a net use of approximately
$200,000 in the comparable 1995 period. The inventory component increase in
1996 principally related to new products introduced during the latter part of
1995 and early 1996. In addition, the restructuring expense of $3.1 million
recorded during the second quarter of 1996 lowered cash flow from operations
by $1.2 million after taking into account the increase in accrued
restructuring costs of $1.9 million. Additionally, increases in other
operating assets were approximately $1.3 million for the nine months ended
September 28, 1996.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources - (continued)
Cash generated in investing activities was $0.3 million in the first
nine months of 1996 as compared to cash used in investing activities of $2.0
million in the prior comparable period. During the second quarter of 1996, the
Company acquired TreBay by issuing preferred stock. The assets acquired in
this transaction included $2.0 million in cash, which is reported as a source
of cash from investing activities. In addition, certificates of deposit
related to a foreign subsidiary matured during the first nine months of 1996
generating $0.3 million in cash. Capital expenditures were $2.1 million and
$2.3 million in the first nine months of 1996 and 1995, respectively, and
related principally to purchases of manufacturing equipment.
Cash used in financing activities was $2.5 million in the first nine
months of 1996 as compared with $4.1 million in the comparable period of 1995.
In general, all cash generated from operations that is not used in investing
activities is used to reduce outstanding debt under the Term Loan and the
Revolving Credit Facility.
Under the terms of the Revolving Credit Facility, the Company may borrow
up to $14.0 million for working capital and operating needs. The amount
available to the Company at any given time is based upon various percentages
of the Company's outstanding inventories and accounts receivable as determined
periodically throughout the year (the "Borrowing Base"). Any excess of the
principal amount outstanding under the Revolving Credit Facility over the
Borrowing Base must be repaid by the Company. The outstanding principal under
the Revolving Credit Facility is due and payable on April 15, 1999. Management
expects that the Borrowing Base will remain at a level for the next twelve
months that will not require the Company to make any repayments of principal
outstanding under the Revolving Credit Facility during such period. At
November 15, 1996, the Borrowing Base under the Revolving Credit Facility was
$13.4 million, of which $3.5 million was outstanding and $9.9 million was
available for additional borrowing. The Revolving Credit Facility is secured
by substantially all the assets of the Company, contains restrictions
regarding payment of dividends, incurrence of additional debt and capital
expenditures and requires compliance with various financial covenants. The
indebtedness under the Revolving Credit Facility bears interest, at the
Company's election, either at an annual rate of 1% plus a "base rate", or at 2
1/4% plus a "eurodollar rate".
The Company was not in compliance as of December 31, 1995 or March 30,
1996 with a financial covenant of the Term Loan and the Revolving Credit
Facility that requires the consolidated shareholders' equity of the Company at
the end of each fiscal quarter to be not less than $47 million plus 50% of the
Company's annual net income on a cumulative basis. Waivers were obtained for
this noncompliance, which resulted primarily from the write-off of goodwill in
connection with the sale of the Company's surgical drapes segment. The
acquisition of TreBay in the second quarter of 1996 increased the Company's
shareholders' equity and brought the Company into compliance with this
covenant. In addition, as of June 29, 1996, the Company was not in compliance
with financial covenants under the Term Loan and the Revolving Credit Facility
that require the Company, for any consecutive four quarter period, to maintain
a ratio of operating cash flow to financial obligations of not less than 1.25
to 1.0 and a ratio of earnings before interest and taxes to interest expense
of not less than 3.5 to 1.0. This noncompliance, for which the Company
obtained waivers on September 3, 1996, resulted primarily from (i) the $3.1
million charge associated with the restructuring actions taken by the Company
in the second quarter of 1996; and (ii) the $2.4 million charge in the second
quarter of 1996 for costs allocated to in-process research and development in
connection with the acquisition of TreBay. In conjunction with the September
3, 1996 waivers, the Company obtained amendments to the two financial
covenants that, among other things, offset the effect of the foregoing charges
and made the covenants less rigorous for the four-quarter period ending
September 28, 1996. The Company currently anticipates that it will be in
compliance with the amended financial covenants for at least one year (from
the September 28, 1996 balance sheet date), although there can be no assurance
of such future compliance.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial condition and Results of Operations
Subsequent Event
On October 17, 1996 the Company closed on the sale of 2.5 million shares
of its common stock, and on October 31, the Company's underwriters exercised
their right to purchase an additional 375,000 shares of common stock
(together, the "Offering"). In addition, on October 17, 1996, the Company
converted its Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock and Non-Voting Common Stock into approximately 3,372,000
shares of common stock. As contemplated by its Prospectus dated October 11,
1996, the Company used the approximately $54.7 million of net proceeds after
expenses to repay the entire principal and accrued interest under the Term
Loan of approximately $20.9 million, redeem $25.0 million of the Company's
Series C Redeemable Preferred Stock and repay a portion of the balance on the
Revolving Credit Facility. On October 31, 1996, the Company exchanged the
remaining Balance of Series C Redeemable Preferred Stock for approximately
300,000 shares of common stock at the initial public offering price of $21 per
share.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Part II. Other Information
Item 1. Legal Proceedings.
The Company is currently involved in certain legal
proceedings incidental to the normal conduct of its business. The Company does
not believe that any liabilities relating to the legal proceedings to which it
is a party are likely to be, individually or in the aggregate, material to its
consolidated financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
*3.1.2 Second Restated Certificate of Incorporation.
*3.2.2 Restated By-laws.
*10.11 Fifth Amendment and Waiver Agreement, dated as of September
3, 1996, by and among Xomed Surgical Products, Inc.,
formerly known as Merocel/Xomed Holdings, Inc., Merocel
Corporation, Xomed, Inc., formerly known as Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., TreBay Medical Corporation,
Bank of Boston Connecticut, The Chase Manhattan Bank
(formerly known as Chemical Bank), Bank of Scotland,
Internationale Nederlanden (U.S.) Capital Corporation and
Bank of Boston Connecticut, as Agent.
*10.13 Agreement, dated as of September 12, 1996, by and among the
Company, Warburg, Pincus Investors, L.P., Accel IV L.P.,
Accel Investors '94 L.P., Accel Keiretsu L.P., Elmore C.
Patterson Partners, Prosper Partners, Vertical Fund
Associates, L.P., Mark K. Adams, Solomon Rosenblatt, Ronald
J. Cercone, William R. Miller, Robert A. Reeves, First
Union Capital Partners, Inc., James T. Treace, John R.
Treace, Dan H. Treace, F. Barry Bays, Thomas E. Timbie,
Thomas Drury and David R. Grant.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
- ------------------
* Incorporation herein by reference to the identically numbered Exhibit
to Xomed Surgical Products, Inc.'s Registration Statement on Form
S-1, Registration No. 333-10515.
The Company did not file any reports on Form 8-K during the three months ended
September 28, 1996.
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
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 thereunto duly authorized.
Xomed Surgical Products, Inc.
(Registrant)
Date: November 25, 1996 /s/ James T. Treace
James T. Treace, Chairman, President
and Chief Executive Officer (duly
authorized officer)
_____________________________
Thomas E. Timbie, Vice President and
Chief Financial Officer (principal
financial officer)
<PAGE>
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Exhibit (11) - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------- -------------------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Average common shares outstanding........ 1,108 1,019 1,078 1,019
Net effect of conversion of
convertible preferred stock.............. 3,258 3,258 3,258 3,258
Net effect of dilutive stock options -
based on the treasury stock method....... 257 340 285 340
----------------- ----------------- ----------------- ----------------
Totals 4,623 4,617 4,621 4,617
================= ================= ================= ================
Proforma net income (loss) from
continuing operations available to
common shareholders...................... $275 $(182) $(3,555) $73
================= ================= ================= ================
Per share income (loss).................. $0.06 $(0.04) $(0.77) $0.02
================= ================= ================= ================
Supplementary income (loss) from
continuing operations.................... $1,103 $143 $(1,607) $1,048
================= ================= ================= ================
Supplementary per share income
(loss)................................... $0.15 $0.02 $(0.23) $0.15
================= ================= ================= ================
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001016181
<NAME> XOMED SURGICAL PRODUCTS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-28-1996
<CASH> 684
<SECURITIES> 0
<RECEIVABLES> 9,380
<ALLOWANCES> (637)
<INVENTORY> 15,056
<CURRENT-ASSETS> 28,108
<PP&E> 22,061
<DEPRECIATION> (5,947)
<TOTAL-ASSETS> 94,408
<CURRENT-LIABILITIES> 16,514
<BONDS> 28,973
<COMMON> 11
31,293
28,344
<OTHER-SE> (10,727)
<TOTAL-LIABILITY-AND-EQUITY> 94,408
<SALES> 48,788
<TOTAL-REVENUES> 48,788
<CGS> 18,973
<TOTAL-COSTS> 18,973
<OTHER-EXPENSES> 30,185
<LOSS-PROVISION> 53
<INTEREST-EXPENSE> 2,223
<INCOME-PRETAX> (2,354)
<INCOME-TAX> 48
<INCOME-CONTINUING> (2,402)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,402)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> 0
</TABLE>
