<PAGE>
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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 March 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________to____________
Commission file number 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__X__ No____
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 - 7,333,899 shares as of April 15, 1997
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<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Index
Part I. Financial Information Page Number
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 29, 1997 and December 31, 1996....................... 2
Condensed Consolidated Statements Of Income
Three Months Ended March 29, 1997 and March 30, 1996....... 3
Condensed Consolidated Statements Of Cash Flows
Three Months Ended March 29, 1997 and March 30, 1996....... 4
Notes To Condensed Consolidated Financial Statements
March 29, 1997........................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
Part II. Other Information
Item 1. Legal Proceedings............................................. 9
Item 6. Exhibits and Reports on Form 8-K.............................. 9
Signatures 10
1
<PAGE>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Xomed Surgical Products, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
March 29, December 31,
1997 1996
---------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................................... $ 685 $ 629
Accounts receivable, less allowance............................... 11,305 9,935
Other receivables................................................. 598 1,056
Inventories....................................................... 14,861 14,846
Prepaid expenses.................................................. 806 853
Income taxes receivable........................................... -- 217
Deferred income taxes............................................. 1,815 1,721
---------------- -----------------
Total current assets................................................... 30,070 29,257
Notes receivable from officers......................................... 724 724
Property, plant and equipment, net..................................... 15,314 15,377
Cost in excess of net assets acquired, net............................. 43,892 44,389
Other assets........................................................... 3,271 3,273
Deferred income taxes.................................................. 695 1,036
---------------- -----------------
Total assets........................................................... $93,966 $94,056
================ =================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.................................................. $ 4,337 $ 4,848
Accrued expenses.................................................. 4,148 4,835
Accrued restructuring costs....................................... 541 1,155
Current portion long-term debt and capital lease obligation....... 482 88
---------------- -----------------
Total current liabilities.............................................. 9,508 10,926
Long-term debt and capital lease obligation, less current portion...... 2,975 3,563
Redeemable Preferred Stock - -0- shares issued and outstanding........ -- --
Shareholders' equity :
Common stock, voting, $.01 par value; 30,000,000 shares authorized,
7,333,899 shares issued and outstanding........................... 73 73
Common stock, non-voting, $.01 par value; 4,000,000 shares authorized,
-0- shares issues and outstanding -- --
Retained deficit....................................................... (8,502) (9,589)
Additional paid-in capital............................................. 90,276 89,475
Unearned compensation.................................................. (364) (392)
---------------- -----------------
Total shareholders' equity............................................. 81,483 79,567
---------------- -----------------
Total liabilities and shareholders' equity ............................ $93,966 $94,056
================ =================
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial 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.
</TABLE>
2
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
March 29, March 30,
1997 1996
--------------- ------------------
<S> <C> <C>
Sales, net............................................................. $17,804 $ 16,308
Cost of sales.......................................................... 7,160 6,449
--------------- ------------------
Gross margin........................................................... 10,644 9,859
Operating expenses:
Selling, general and administrative............................... 7,253 7,338
Research and development.......................................... 1,006 762
Amortization of intangibles....................................... 615 555
--------------- ------------------
Total operating expense................................................ 8,874 8,655
--------------- ------------------
Operating income ...................................................... 1,770 1,204
Interest expense, net.................................................. (54) (740)
Other income, net...................................................... 92 164
--------------- ------------------
Income before income tax expense....................................... 1,808 628
Income tax expense..................................................... 721 251
--------------- ------------------
Net income............................................................. $ 1,087 $ 377
=============== ==================
Pro forma:
Net income............................................................. $ 301
Preferred stock dividends.............................................. -
------------------
Net income available to common shareholders............................ 301
Interest expense, net of taxes......................................... 379
Preferred stock dividends.............................................. -
------------------
Supplementary net income............................................... $ 680
==================
Per share:
Net income (pro forma net income in 1996) .............................. $ 0.15 $ 0.07
=============== ==================
Supplementary pro forma net income ..................................... $ 0.09
==================
Weighted average common shares outstanding (pro forma in 1996).......... 7,438 4,617
=============== ==================
Supplementary pro forma weighted average common shares outstanding...... 7,492
==================
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
March 29, March 30,
1997 1996
---------------- --------------------
<S> <C> <C>
Operating activities
Net cash (used in )provided by operating activities.................... $ (80) $ 781
Investing activities
Purchases of property and equipment.................................... (448) (859)
Proceeds from certificates of deposit.................................. 140 --
Purchase of other assets............................................... -- (113)
---------------- --------------------
Net cash used in investing activities.................................. (308) (972)
Financing activities
Proceeds from revolving line of credit................................. 5,336 7,466
Payments on revolving line of credit................................... (5,509) (6,732)
Payments on term notes payable......................................... -- (960)
Payments on capital lease obligation................................... (21) --
Exercise of stock options.............................................. 638 --
---------------- --------------------
Net cash (used in) provided by finance activities...................... 444 (226)
---------------- --------------------
Net increase (decrease) in cash and cash equivalents................... 56 (417)
Cash and cash equivalents at beginning of period....................... 629 417
---------------- --------------------
Cash and cash equivalents at end of period............................. $ 685 $ --
================ ====================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest........................................................ $ 52 $ 945
================ ====================
Taxes........................................................... $ 38 $ --
================ ====================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(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, 1996, 1995, and 1994 of Xomed Surgical Products, Inc.
(the Company) in the Company's 1996 Annual Report on Form 10-K.
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 month period ended
March 29, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
Note B - Inventories
The components of inventory consist of the following:
March 29, December 31,
1997 1996
------------------------- ------------------------
Raw Materials $ 5,542 $ 5,601
Work-In-Process 2,020 2,006
Finished Products 7,299 7,239
------------------------- ------------------------
$14,861 $14,846
========================= ========================
5
<PAGE>
Xomed Surgical Products, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - (Continued)
(in thousands, except per share data)
Note C - Pro Forma Statement of Operations
The following unaudited pro forma statement of operations for the three
months ended March 30, 1996 reflects the statement of operations of the
Company for the period presented as if TreBay Medical Corporation (TreBay)
was purchased on January 1, 1996. The pro forma statement of operations
should be read in conjunction with the Company's 1996 Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Three Months
Ended
March 30, 1996
----------------------------------------
<S> <C> <C> <C> <C>
Pro
Xomed TreBay Adjustments Forma
----------------- ------------------ ------------- ----------------
Sales, net.................... $16,308 $279 $ - $16,587
Cost of sales................. 6,449 219 - 6,668
----------------- ------------------ ------------- ----------------
Gross margin.................. 9,859 60 - 9,919
Operating Expenses:
Selling, general and 7,338 299 (154) (a) 7,483
administrative
Research and development... 762 138 (66) (a) 834
Amortization of intangible. 555 - - 555
----------------- ------------------ ------------- ----------------
Total operating expenses...... 8,655 437 (220) 8,872
----------------- ------------------ ------------- ----------------
Operating income (loss)....... 1,204 (377) 220 1,047
Interest expense (740) - - (740)
Other income, net............. 164 54 - 218
----------------- ------------------ ------------- ----------------
Income (loss) before income tax
expense (benefit).......... 628 (323) 220 525
Income tax expense (benefit).. 251 - (27)(a) 224
----------------- ------------------ ------------- ----------------
Net income (loss)............. $ 377 $(323) $247 $ 301
================= ================== ============= ================
Pro forma net income per share. $ 0.07
================
Pro forma weighted average shares
outstanding................ 4,617
================
</TABLE>
(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.
Note D - Subsequent Event
On May 5, 1997, the Company entered into an Amended and Restated Credit
Agreement (the Credit Agreement) which provides for borrowings up to $25 million
under a secured revolving credit facility based on levels of accounts
receivable, inventory and other assets. The Credit Agreement provides for
interest at the lenders' prime rate (8.50% at May 5, 1997) or alternatively at
LIBOR (5.69% at May 5, 1997) plus 1.50%, and a commitment fee of 1/4 to 1/8 of
one percent on the amount under the revolving credit facility available for
additional borrowing. The outstanding principal amount under the Credit
Agreement is due on May 5, 2000.
6
<PAGE>
Item 2. 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 risk associated with the ear, nose and throat ("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 lines of ophthalmic,
orthopaedic and other products. The following table summarizes the Company's
worldwide product line sales during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
March 29, March 30,
1997 1996
------------------- -------------------
(in thousands)
<S> <C> <C>
Sinus & Rhinology................... $6,195 $5,010
Head & Neck......................... 3,599 3,956
Otology............................. 3,996 3,772
------------------- -------------------
Total Core Business.............. 13,790 12,738
Ophthalmic & Other.................. 4,014 3,570
------------------- -------------------
Total Company.................... $17,804 $16,308
=================== ===================
</TABLE>
Net Sales. Net sales increased 9.2% to $17.8 million in the first three
months of 1997 from $16.3 million in the comparable period in 1996. In the core
business of sinus and rhinology, head and neck and otology, sales increased 8.3%
over the prior comparable period. The increase in core business sales was
principally the result of sales generated from several new products introduced
recently, including the XPS tissue removal system, a line of sinus instruments
and the Activent antimicrobial vent tube line. Sales in the head and neck
product line decreased 9.0% versus the prior year primarily due to reductions in
monitoring and drill equipment sales in international markets. The strong U.S.
dollar relative to the currencies in several markets in which the Company
participates contributed to the decline in equipment sales. Sales in the
ophthalmic and other category increased 12.4% primarily due to the first
shipments of orthopaedic instruments under a worldwide distribution agreement
with a major orthopaedic company. Domestic sales increased 13.5% and
international sales increased 0.6% in the first three months of 1997 over the
prior comparable period. International sales represented 30.9% of total sales
for the first three months of 1997 compared to 33.5% in the comparable period of
1996.
Cost of Sales. Cost of sales increased 11.0% to $7.2 million, or 40.2%
of sales in the first three months of 1997 from $6.4 million, or 39.5% of sales
in the first three months of 1996. The increase in cost of goods sold as a
percent of sales is primarily due to a higher mix of somewhat lower margin
products during the current period such as the orthopaedic instrument line.
Gross Margin. Gross margin as a percent of sales decreased to 59.8% in
the first three months of 1997 from 60.5% in the prior comparable period
primarily due to the sales mix considerations mentioned above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 1.2%, or $85,000 in the first three months of
1997 from the prior comparable period. The decrease in total selling, general
and administrative expenses is primarily due to cost reduction initiatives
implemented in the second quarter of 1996. Selling, general and administrative
expenses decreased to 40.7% of sales for the first three months of 1997 from
45.0% in the prior comparable period.
7
<PAGE>
Research and Development. Research and development expenses increased
32.0% to $1.0 million in the first three months of 1997 from $0.8 million in the
prior comparable period and increased as a percent of sales to 5.6% from 4.7%
during the same respective periods. The increase was primarily due to project
expenses related to the XPS powered tissue removal system and other new
products.
Amortization Expense. Amortization expense increased $60,000 to
$615,000 for the first three months of 1997 as compared to the comparable period
in 1996, due to amortization related to two product distribution agreements
signed in the first quarter of 1996. The agreements were not in force for the
full quarter in 1996.
Interest and Other. Interest expense decreased 92.7% to $54,000 for the
first three months of 1997 from $740,000 in the prior comparable period due to
lower average debt levels during the current period. Other income was $92,000
for the first three months of 1997 compared to $164,000 for the prior comparable
period. Prior year other income included royalty income under an agreement that
terminated at the end of 1996. Current year other income includes royalties and
income received from a third party related to a non-compete agreement violation.
Income Taxes. The Company's effective tax rate was 40% for both the
first three months of 1997 and the prior comparable period.
Liquidity and Capital Resources
The Company historically has financed its operations (including capital
expenditures) through cash flows from operations. Since the Company's
acquisition of Xomed, Inc. in April 1994, which was financed in part by the
incurrence of $45.9 million of debt under the Company's secured term loan
facility ("the Term Loan") and its secured revolving credit facility (the
"Revolving Credit Facility"), all cash flow generated from operations had been
applied to repay the outstanding principal on the Term Loan or the Revolving
Credit Facility. In October, 1996 the Company completed its initial public stock
offering, the proceeds of which were used to repay the entire Term Loan and the
majority of the Revolving Credit Facility. At the end of the third month of
1997, total long-term debt was $3.5 million as compared to $37.1 million in the
comparable prior period. Consequently, interest expense has been substantially
reduced.
During the three months ended March 29, 1997, the Company used cash of
$80,000 in operating activities as compared with $781,000 cash generated from
operating activities in the prior comparable period. In the first three months
of 1997, the Company had a net use of approximately $2.1 million within
inventory, accounts receivable and accounts payable as compared to net cash
provided within these components of operations of approximately $400,000 in the
comparable 1996 period. Accounts payable and accrued expenses comprised the
majority of this use of cash, due to a $1.2 million decrease from December 31,
1996, related principally to payments of amounts related to the Company's
initial public offering. In addition, payments related to the $3.1 million
restructuring expense recorded during the second quarter of 1996 lowered cash
flow from operations in the first three months of 1997 by $614,000.
Cash used in investing activities was $0.3 million in the first three
months of 1997 as compared to cash used in investing activities of $1.0 million
in the prior comparable period. Capital expenditures were $448,000 and $859,000
in the first three months of 1997 and 1996, respectively. Cash used to purchase
capital assets for the start-up of the Company's subsidiary in Germany
contributed to the larger amount expended in the first three months of 1996.
Cash provided by financing activities was $444,000 in the first three
months of 1997 as compared with a use of cash of $226,000 in the comparable
period of 1996. The Company received cash from the exercise of stock options of
$638,000 in the first three months of 1997. In the first three months of 1996,
the Company made payments under the then outstanding Term Loan totaling
$960,000.
Subsequent Event
On May 5, 1997, the Company amended and restated the Revolving Credit
Facility to increase the amount available for borrowing to up to $25 million
based on levels of accounts receivable, inventory and other assets. As amended,
the Revolving Credit Facility provides for interest at the lenders' prime rate
(8.50% at May 5, 1997) or alternatively at LIBOR (5.69% at May 5, 1997) plus
1.50%, and a commitment fee of 1/4 to 1/8 of one percent on the amount under the
Revolving Credit Facility available for additional borrowing. The outstanding
principal amount under the amended Revolving Credit Facility is due on May 5,
2000.
8
<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
(a) The following exhibits are included herein:
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended March 29, 1997.
9
<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 on the dates indicated.
Xomed Surgical Products, Inc.
(Registrant)
Date May 8, 1997 /S/ James T. Treace
----------------- -------------------
James T. Treace, Chairman, President
and Chief Executive Officer (duly
authorized officer)
Date May 9, 1997 /S/ Thomas E. Timbie
----------------- --------------------
Thomas E. Timbie, Vice President and
Chief Financial Officer (principal
financial officer)
10
Xomed Surgical Products, Inc. and Subsidiaries
Exhibit (11) - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
March 29, March 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Average common shares outstanding...................................... 7,289 1,019
Net effect of conversion of convertible
preferred stock........................................................ -- 3,258
Net effect of dilutive stock options - based on the
treasury stock method................................................. 149 340
---------------- ----------------
Totals................................................................. 7,438 4,617
================ ================
Net income (pro forma in 1996) available to
common shareholders.................................................... $1,087 $ 301
================ ================
Net income per share (pro forma net income in 1996).................... $ 0.15 $ 0.07
================ ================
Supplementary net income .............................................. $ 680
================
Supplementary net income per share..................................... $ 0.09
================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-29-1997
<CASH> 685
<SECURITIES> 0
<RECEIVABLES> 12,337
<ALLOWANCES> 434
<INVENTORY> 14,861
<CURRENT-ASSETS> 30,070
<PP&E> 15,314
<DEPRECIATION> 733
<TOTAL-ASSETS> 93,966
<CURRENT-LIABILITIES> 9,508
<BONDS> 0
<COMMON> 73
0
0
<OTHER-SE> 81,410
<TOTAL-LIABILITY-AND-EQUITY> 93,966
<SALES> 17,804
<TOTAL-REVENUES> 17,804
<CGS> 7,160
<TOTAL-COSTS> 7,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 34
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 1,808
<INCOME-TAX> 721
<INCOME-CONTINUING> 1,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,087
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
