================================================================================
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 JUNE 27, 1998
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 - 8,085,374 shares as of August 4, 1998
================================================================================
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheets
June 27, 1998 and December 31, 1997............. 2
Condensed Consolidated Statements Of Operations
Three Months Ended June 27, 1998
and June 28, 1997, and Six Months Ended
June 27, 1998 and June 28, 1997................. 3
Condensed Consolidated Statements Of Cash Flows
Six Months Ended June 27, 1998 and June 28, 1997 4
Notes To Condensed Consolidated Financial Statements
June 27, 1998................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K................... 10
SIGNATURES 11
1
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 27, DECEMBER 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 5,039 $ 1,712
Accounts receivable, less allowance ....... 14,939 13,277
Other receivables ......................... 625 620
Inventories ............................... 17,228 16,238
Prepaid expenses .......................... 456 1,083
Deferred income taxes ..................... 1,404 1,404
--------- ---------
Total current assets ......................... 39,691 34,334
Notes receivable from officers ............... 826 724
Property, plant and equipment, net ........... 16,575 15,403
Cost in excess of net assets acquired, net ... 41,402 42,399
Other assets ................................. 2,895 2,867
Deferred income taxes ........................ -- --
--------- ---------
Total assets ................................. $ 101,389 $ 95,727
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................... $ 4,759 $ 3,493
Accrued expenses .......................... 3,267 2,403
Accrued payroll & commissions ............. 2,166 2,332
--------- ---------
Total current liabilities .................... 10,192 8,228
Deferred Credits ............................. 670 990
Redeemable Preferred Stock - -0- shares issued
and outstanding .......................... -- --
Shareholders' equity:
Common stock, voting, $.01 par value;
30,000,000 shares authorized, 7,345,624
shares issued and outstanding ............. 73 73
Retained earnings (deficit) ............... 421 (3,459)
Additional paid-in capital ................ 90,364 90,264
Cumulative translation adjustments ........ (106) (88)
Unearned compensation ..................... (225) (281)
--------- ---------
Total shareholders' equity ................ 90,527 86,509
--------- ---------
Total liabilities and shareholders' equity ... $ 101,389 $ 95,727
========= =========
</TABLE>
Note: The balance sheet at December 31, 1997 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.
2
<PAGE>
<TABLE>
<CAPTION>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales, net ......................... $ 22,868 $ 19,203 $ 43,550 $ 37,007
Cost of sales ...................... 8,929 7,568 16,992 14,728
-------- -------- -------- --------
Gross margin ....................... 13,939 11,635 26,558 22,279
Operating expenses:
Selling, general and administrative 8,717 7,792 16,802 15,045
Research and development ........... 1,166 997 2,336 2,003
Amortization of intangibles ........ 584 589 1,168 1,204
-------- -------- -------- --------
Total operating expenses ........... 10,467 9,378 20,306 18,252
-------- -------- -------- --------
Operating income ................... 3,472 2,257 6,252 4,027
Interest income (expense), net ..... 62 (53) 92 (107)
Other income, net .................. 28 8 68 100
-------- -------- -------- --------
Income before income tax expense ... 3,562 2,212 6,412 4,020
Income tax expense ................. 1,407 885 2,532 1,606
-------- -------- -------- --------
Net income ......................... $ 2,155 $ 1,327 $ 3,880 $ 2,414
======== ======== ======== ========
Per share:
Net income - basic ................. $ 0.29 $ 0.18 $ 0.53 $ 0.33
======== ======== ======== ========
Net income - diluted ............... $ 0.28 $ 0.18 $ 0.51 $ 0.32
======== ======== ======== ========
Weighted average common shares
outstanding - basic ............. 7,343 7,334 7,342 7,312
======== ======== ======== ========
Weighted average common shares
outstanding - diluted ........... 7,673 7,477 7,653 7,458
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
-------------------------
JUNE 27, JUNE 28,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities ....... $ 5,604 $ 1,087
INVESTING ACTIVITIES
Purchases of property and equipment ............. (2,377) (1,302)
Proceeds from certificates of deposit ........... -- 140
Purchase of other assets ........................ -- --
Purchase of business (including cash received) .. -- --
-------- --------
Net cash used in investing activities ........... (2,377) (1,162)
FINANCING ACTIVITIES
Proceeds from revolving line of credit .......... -- 10,097
Payments on revolving line of credit ............ -- (10,745)
Payments on term notes payable and capital lease
obligations .................................. -- (43)
Proceeds from exercise of stock option .......... 100 638
Proceeds from issuance of stock ................. -- --
-------- --------
Net cash (used in) provided by financing
activities ................................... 100 (53)
-------- --------
Net increase (decrease) in cash and cash
equivalents .................................. 3,327 (128)
Cash and cash equivalents at beginning of period 1,712 629
-------- --------
Cash and cash equivalents at end of period ...... $ 5,039 $ 501
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ................................... $ 45 $ 119
======== ========
Taxes ...................................... $ 2,320 $ 572
======== ========
</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)
(Unaudited)
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, 1997,
1996, and 1995 of Xomed Surgical Products, Inc. (the Company) in the
Company's 1997 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 six-month period ended June 27, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
NOTE B - INVENTORIES
The components of inventory consist of the following:
JUNE 27, DECEMBER 31,
1998 1997
-------- ------------
Raw Materials $ 5,422 $ 5,818
Work-In-Process 2,085 1,447
Finished Products 9,721 8,973
------- -------
$17,228 $16,238
======= =======
NOTE C - EARNINGS PER SHARE
The following table sets forth the computation of shares for purposes of the
earnings per share calculation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares outstanding .. 7,343 7,334 7,342 7,312
Net effect of dilutive stock options -
based on the treasury stock method ... 330 143 311 145
----- ----- ----- -----
Totals ............................... 7,673 7,477 7,653 7,457
===== ===== ===== =====
</TABLE>
5
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share data)
(Unaudited)
NOTE D - COMPREHENSIVE INCOME
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997. The standard requires companies to report another measure of
operations called Comprehensive Income. This measure, in addition to "Net
Income," includes as income or loss, the following items, which if present are
included in the equity section of the Balance Sheet. 1) unrealized gains and
losses on certain investments in debt and equity securities; 2) foreign currency
translation; and 3) minimum pension liability adjustments. The following table
depicts comprehensive income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income ................. $2,155 $1,327 $ 3,880 $2,414
Foreign currency translation
adjustment .............. 36 -- (18) --
------ ------ ------- ------
Comprehensive income ....... $2,191 $1,327 $ 3,862 $2,414
====== ====== ======= ======
</TABLE>
NOTE E - SUBSEQUENT EVENT
On July 20, 1998 the Company completed its secondary offering of 1,500,000
shares of common stock at an offering price of $30.50 per share. Of these
shares, 615,500 were sold by the Company and 884,500 were sold by certain
shareholders of the Company. Additionally, on July 29, 1998 the underwriters
exercised their overallotment option and the Company sold an additional 112,500
shares and the selling shareholders sold an additional 112,500. Gross proceeds
including the overallotment option to the Company were $20,930,000 which will be
used for future business and product development expansion.
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
FILINGS OF XOMED SURGICAL PRODUCTS, INC. (THE COMPANY) 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
ENT 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 (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- -------------------------------
PRODUCT LINE JUNE 27, 1998 JUNE 28, 1997 JUNE 27, 1998 JUNE 28, 1997
- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sinus & Rhinology ...... $ 9,818 $ 6,944 $18,299 $13,214
Head & Neck ............ 5,242 4,412 9,794 8,031
Otology ................ 3,962 3,999 8,094 7,861
------- ------- ------- -------
Total Core ENT
Business .......... 19,022 15,355 36,187 29,106
Ophthalmic & Other ..... 3,846 3,848 7,363 7,901
------- ------- ------- -------
Total Company ....... $22,868 $19,203 $43,550 $37,007
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- ------------------------------------
GEOGRAPHIC JUNE 27, 1998 JUNE 28, 1997 JUNE 27, 1998 JUNE 28, 1997
- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Domestic ......... $16,050 $13,245 $30,705 $25,556
International .... 6,818 5,958 12,845 11,451
------- ------- ------- -------
$22,868 $19,203 $43,550 $37,007
======= ======= ======= =======
</TABLE>
NET SALES. For the three months ended June 27, 1998, net sales increased
19.1% to $22.9 million from $19.2 million in the comparable quarter of 1997. Net
sales increased 17.7% to $43.6 million in the first six months of 1998 from
$37.0 million in the comparable period in 1997. In the core ENT business of
sinus and rhinology, head and neck and otology, sales increased 23.9% and 24.3%
for the three and six-month periods ended June 27, 1998, respectively, compared
to the 1997 comparable periods. Domestic core ENT sales increased by 25.4% to
$13.3 million and by 26.4% to $25.5 million for the three and six months ended
June 27, 1998, respectively, over the comparable periods in 1997. International
core ENT sales increased by 20.5% to $5.7 million for the three-month period and
by 19.6% to $10.7 million for the six-month period ended June 27, 1998 as
compared to the same periods in 1997. The increase in core ENT business sales
was primarily the result of sales generated from several new products introduced
principally over the last 18 months, including within sinus and rhinology, the
XPS tissue removal system and within head and neck, the NIM XL2 nerve monitoring
system, the Company's Powerforma surgical drill system and several new cutter
blades. The increase in domestic core ENT sales was led by the Company's sinus
and rhinology product line, which increased by 46.5% to $6.6 million for the
three months and by 46.1% to $12.5 million for the six months ended June 27,
1998. Total International sales increased by 14.4% and 12.2% for the three and
six months ended June 27, 1998. Excluding the unfavorable effects of foreign
currency comparisons on foreign currency translations international sales
increased by 17.6% for the three months and by 16.0% for the six months ended
June 27, 1998. Strong sales increases were reported in Japan, the U.K., Germany
and Italy, as well as several other European countries, in both the three-month
and six-month periods ended June 27, 1998. International sales were negatively
impacted by a 44.6% and 41.9% decrease in the Asia/Pacific region (excluding
Japan) for the three months and six months ended June 27, 1998, respectively, as
compared to the same periods in 1997. International sales accounted for 29.8% of
the Company's total sales for the three months ended June 27, 1998 and 29.5% of
total sales for the six months ended on the same date. Sales in the ophthalmic
and other category were flat in the quarter compared to the prior comparable
quarter ended June 28, 1997 and decreased 6.8% for the six months ended June 27,
1998 as compared to the 1997 comparable period primarily due to decreases of
approximately $270,000 and $770,000, respectively, in sales
7
<PAGE>
of orthopaedic instruments in 1998 over the prior comparable periods, which
included a large initial stocking order to an OEM distributor. Sales of these
orthopaedic instruments are expected to resume during the second half of 1998.
GROSS MARGIN. Gross margin as a percent of sales was 61.0% for both the
three and six-month periods ended June 27, 1998 compared to 60.6% and 60.2%,
respectively, in the 1997 comparable periods. The increase in the gross margin
percentage relates partially to a higher mix of the Company's higher margin core
products during the current periods and partially to lower per unit
manufacturing cost due to a higher volume of production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 11.9% and 11.7% to $8.7 million and $16.8
million in the three-month and six-month periods ended June 27, 1998,
respectively, from the comparable periods in 1997. As a percent of sales
selling, general and administrative expenses were 38.1% and 38.6% in the three
and six month periods ended June 27, 1998, respectively, as compared to 40.6%
and 40.7%, respectively, in the 1997 comparable periods.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
17.0% and 16.6% to $1.2 million and $2.3 million in the three-month and
six-month periods ended June 27, 1998, respectively, from the comparable periods
in 1997. As a percent of sales research and development expenses for 1998 were
5.1% and 5.4%, respectively, as compared to 5.2% and 5.4% in the 1997 comparable
periods.
INTEREST AND OTHER. The Company had net interest income of $62,000 and
$92,000 in the three months and six months ended June 27, 1998, respectively.
This compares favorably to net interest expense of $53,000 and $107,000 in the
comparable 1997 periods. This favorability relates to having an average invested
amount during the first six months of 1998 as compared to an average borrowed
amount during the 1997 period. Other income was $28,000 for the three months and
$68,000 for the six months ended June 27, 1998. This compares to other income of
$8,000 and $100,000 in the comparable periods in 1997.
INCOME TAXES. The Company's effective tax rate was 39.5% for the first six
months of 1998 compared to an effective tax rate of 40.0% for the comparable
period of 1997.
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. As of June 27, 1998, the Company has
no outstanding long-term debt as compared to a balance of $2.5 million in the
comparable prior period.
During the six months ended June 27, 1998, the Company generated cash of
$5.6 million in operating activities as compared with $1.1 million cash
generated from operating activities in the prior comparable period. In the first
six months of 1998, the Company had a net use of cash of $449,000 within
inventory, accounts receivable and accounts payable as compared to a net use of
cash within these components of operations of $3.2 million in the comparable
1997 period, which included a use of cash related to payments of accounts
payable related to the Company's IPO completed in the fourth quarter of 1996.
The use of cash within the working capital accounts, except for the use related
to the IPO, stems primarily from the Company's growth in sales and related
increase in accounts receivable and inventories offset somewhat by cash provided
by an increase in accounts payable.
Cash used in investing activities was $2.4 million in the first six months
of 1998 as compared to cash used in investing activities of $1.2 million in the
prior comparable period. Cash used in investing activities is expected to
increase as the Company plans to spend approximately $5 million on its
Jacksonville, Florida headquarters expansion in 1998. Cash provided by financing
activities totaled $100,000 during the first six months of 1998. Those funds
were provided entirely from the exercise of stock options. During the comparable
period in 1997, cash used in financing activities was $53,000. This amount was
the net result of using cash to reduce long-term debt by approximately $700,000
offset by $638,000 provided by the exercise of stock options.
Based on the Company's ability to generate cash from operations and with
the availability of borrowing under its Amended and Restated Credit Agreement,
which allows borrowings up to $25 million, the Company believes it will be able
to finance its working capital needs for at least the next 24 months. Also see
Footnote E, in Notes to Condensed Consolidated Financial Statements on page 6 of
this Form 10Q.
8
<PAGE>
European Union Conversion to a Common Currency
Eleven European Countries have entered into agreements that include a
process of converting to a common currency, the "euro". On January 1, 1999 the
eleven European Countries will establish a fixed conversion rate for
transactions between their existing currencies ("legacy currencies"). After this
date, for a three year transition period the legacy currencies remain legal
tender. Beginning January 1, 2002 the participating countries will issue
euro-demoninated bills for use in transactions and will withdraw all bills
denominated in the legacy currencies by July 1, 2002. The Company has two
distribution sites that operate in these countries (France and Germany). Sales
from these sites totaled $2.9 million or 6.6% of consolidated sales for the six
months ended June 27, 1998. The Company has begun an internal analysis to
address euro related issues and plan for the conversion, including review of
information systems, current contracts, foreign currency hedging activities and
physical conversion procedures. Based on existing information the Company does
not believe that the impact to the Company of the conversion to a common
currency by these eleven countries will be material to its results of
operations, financial position on cash flows.
9
<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 4. Submission of Matters to a Vote of Security Holders.
The Company held its 1997 annual meeting of stockholders on May 21, 1998.
At the meeting all of the Company's directors were elected to serve until the
next annual meeting of stockholders and until their respective successors are
elected and so qualify. The vote for each nominee for director was as follows:
NAME OF DIRECTOR VOTES FOR ABSTAIN
----------------------- --------- -------
James T. Treace 6,969,950 250
Richard B. Emmitt 6,969,950 250
William R. Miller 6,969,950 250
Rodman W. Moorhead, III 6,969,950 250
James E. Thomas 6,969,950 250
Elizabeth H. Weatherman 6,969,950 250
The stockholders also voted on the following proposals:
/bullet/ Amendments to the Company's Stock Option Plan (the "Plan") to increase
the number of shares of the Company's Common Stock covered by the Plan
by 500,000 shares, from 1,078,000 to 1,578,000 shares and to increase
the number of shares that may be granted to any single optionee during
any calendar year from 60,000 to 150,000. The vote on the amendment was
as follows: 6,102,396 shares "for," 863,300 shares "against," and 1,232
shares "abstain."
/bullet/ To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for fiscal 1998. The vote on such appointment was
as follows: 6,969,967 shares "for," 1 share "against" and 232 shares
"abstain."
/bullet To approve amendments to the Company's Second Restated Certificate of
Incorporation to eliminate the Company's (1) Non-Voting Common Stock,
(2) Series A Convertible Preferred Stock, (3) Series B Convertible
Preferred Stock and (4) Series C Redeemable Preferred Stock from the
Company's authorized capital stock. This proposal was approved with
6,786,680 shares "for", 1100 shares "against," and 232 shares
"abstain."
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
*10.19 Term Sheet related to a License and Distribution Agreement
between Xomed Surgical Products, Inc. and ArthroCare
Corporation.
27 1998 Financial Data Schedule
27.1 1997 Financial Data Schedule
*Confidentiality treatment requested.
10
<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 8-11-98 /s/ JAMES T. TREACE
----------------------------------------
James T. Treace, Chairman, President
and Chief Executive Officer
(duly authorized officer)
Date 8-11-98 /s/ THOMAS E. TIMBIE
----------------------------------------
Thomas E. Timbie, Vice President and
Chief Financial Officer
(principal financial officer)
11
EXHIBT 10.19
MATERIAL INDICATED BY [*****] HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
TERM SHEET
LICENSE AND DISTRIBUTION AGREEMENT
BETWEEN XOMED AND ARTHROCARE
June 25, 1998
1. LICENSE GRANT: ArthroCare shall grant to Xomed an exclusive, worldwide,
non-transferable, license, without the right of sublicense or right to
manufacture, under the Intellectual Property Rights, with the right to use,
market, sell and distribut ArthroCare's Products (as defined in section 3)
solely for use in the Field ("License Rights"). The Field shall mean the use of
Coblation(TM) technology in Otorhinolaryngology and head and neck procedures,
and ENT surgeons in the AAFPRS that practice facial plastic surgery.
The Intellectual Property Rights shall include all of ArthroCare's patents and
patent applications in the Field and all of ArhtroCare's registered trademarks
and trademark applications in the Field. ArthroCare will have direct access to
Xomed accounts to gain market and clinical feedback.
Under the License Rights, ArthroCare will have the initial right, but not the
obligation, to enforce the Intellectual Property Rights including the right to
sue for patent infringement. In the event ArthroCare chooses not to initiate any
Action involving the License Rights, Xomed shall have the right, but not the
obligation, to enforce these rights.
2. LICENSE CONSIDERATION: In consideration for the exclusive nature of the
license and distribution agreement, Xomed will pay ArthroCare a License Fee of
[*****]. During the period between the execution of the term sheet and the
execution of the definitive agreement, the parties will rely upon and operate in
good faith under this term sheet as outlined in section 4.
The remaining [*****] of the License Fee shall be payable to ArthroCare based
upon the first achievement of each of the following milestones.
[*****]
<PAGE>
In addition to the License Fee, Xomed will pay running royalties on ArthroCare
Disposable Wands sold by Xomed. The running royalties shall be [*****] of the
Net Sales of Disposable Wands, payable on a quarterly basis.
"Net Sales" shall mean revenues on an accrual basis, in accordance with U.S.
generally accepted accounting principles, as follows: the invoice price of
ArthroCare Disposable Wands sold by Xomed to third parties (including sales made
in connection with clinical trials), less, to the extent included in such
invoice price the total of: (a) ordinary and customary trade discounts actually
allowed; (b) credits, rebates and returns (including, but not limited to,
wholesaler and retailer returns); (c) freight, postage, insurance and duties
paid for and separately identified on the invoice or other documentation
maintained in the ordinary course of business, and (d) excise taxes, other
consumption taxes, customs duties and compulsory payments to governmental
authorities actually paid and separately identified on the invoice or other
documentation maintained in the ordinary course of business. Net Sales shall
also include the fair market value of all other consideration received by Xomed
in respect of ArthroCare Disposable Wands, whether such consideration is in
cash, payment in kind, exchange or another form.
3. PRODUCT MANUFACTURE AND SALE: ArthroCare will agree to manufacture and sell
to Xomed, and Xomed will agree to exclusively purchase from ArthroCare, Xomed's
requirements for Products in the Field. Products shall include Controllers,
Conversion Units, Cables (standard cable and handpiece cable) and Disposable
Wands, and ArthroCare will supply Products to Xomed at the following prices:
System 2000 Controllers (incl. 1 standard cable): [*****]
Visage(TM) Conversion Units: [*****]
Disposable Wands: See Section 4
Rep. Cables: [*****]
[*****]
ArthroCare and Xomed recognize that the manufacturing cost of Controllers may
change as volumes increase, and as new models are introduced. Accordingly,
ArthroCare and Xomed agree to meet and discuss new Controller pricing as
ArthroCare introduces new models, and as ArthroCare realizes manufacturing
efficiencies.
4. DISPOSABLE WAND TRANSFER PRICE: ArthroCare will sell the Disposable Wands
identified below at the prices set forth below. ArthroCare may add to this list
from time to time as new products are developed.
AccESS(TM) wands (9, 12 channel): [*****]
Plasma Scalpel(TM): [*****]
Hummingbird(TM) Tip: [*****]
CollagENT(TM): [*****]
ReFLEX(TM): [*****]
Visage Stylet: [*****]
<PAGE>
5. FORECASTS AND STOCKING ORDER: Xomed will make an initial stocking order of
[*****] upon the signing of the term sheet. [*****] ArthroCare will agree to
relabel these Controllers, at its expense, once the Xomed labels are available,
and the payment terms for these initial [*****] Controllers shall be net 60
days. The mix of wands may be selected by Xomed. During the course of the
Agreement, Xomed shall furnish ArthroCare with a 6-month forecast with estimated
purchase dates and quantities of Products, and shall deliver an updated forecast
on a monthly rolling basis. The first two months of each forecast will be
binding on Xomed. ArthroCare agrees to use its best efforts to support any
demand that is higher than the forecast.
6. PRODUCT DEVELOPMENT: ArthroCare, at its expense and initiative, will continue
to pursue clinical studies and product development efforts in collaboration with
Xomed. If Xomed requests additional product development beyond ArthroCare's
planned efforts, ArthroCare will provide a budget for such product development
based on its direct cost plus [*****] for overhead.
7. MINIMUM ROYALTIES: During each period specified below, in addition to any
payments of the License Fee in section 2, Xomed's minimum running royalty
payments for ENTec and Visage Disposable Wands will total at least the
following:
Q2-Q4 98: [*****]
Q1-Q4 99: [*****]
Q1-Q4 00: [*****]
Q1-Q4 01: [*****]
Q1-Q4 02: [*****]
[*****]
*Xomed is not required to actually sell the Disposable Wands during this
specified period. In this case, the parties can compute the required minimum
purchase based on average ASP during the specified period.
8. CONFLICT OF INTEREST: Xomed agrees that any effort by Xomed itself, or
through its distributors, to sell Electrosurgical products that compete with
ArthroCare's products will constitute a breach of Xomed's obligations to market
ArthroCare's Products and consequently a breach of this term sheet. ArthroCare
recognizes that Xomed already distributes RF products that are not competitive
with ArthroCare's products, and these existing products will be listed in the
definitive agreement and will be deemed non-competitive.
9. VISAGE: [*****]
10. TRADEMARKS: ArthroCare has granted Xomed the right to use all of
ArthroCare's registered and pending trademarks and tradenames during the term of
this Agreement. In return, Xomed agrees to advertise and promote the Products,
where appropriate, under ArthroCare's trademarks and tradenames. Notwithstanding
the above, ArthroCare agrees to label ENTec products sold to Xomed with the
Xomed trademark.
<PAGE>
11. TERM AND TERMINATION: This agreement shall continue in full force and effect
for a period of five years from the effective date of this term sheet, and will
be automatically renewable on a yearly basis thereafter provided that: [*****]
ArthroCare will have the right to terminate this agreement prior to that time if
Xomed fails to [*****]. If ArthroCare terminates this Agreement for either of
these reasons, ArthroCare shall [*****]. In addition, ArthroCare shall [*****].
[*****]
12. CHANGE OF CONTROL: Both parties agree not to acquire greater than 15% of the
other party's stock unless such acquisition is pursuant to a friendly tender
offer endorsed by the other party's board, or unless such acquisition is in
response to an unsolicited Change in Control attempt by a third party. To the
extent not prohibited under applicable law, both parties shall use their best
efforts to give the other party not less than 30 days prior notice of any Change
in Control. All such information will be treated as confidential by the
receiving party. Notwithstanding any such Change in Control, both parties shall
continue to be obligated to perform its obligations under this Agreement.
However, both parties would have the option to terminate this Agreement upon the
Change in Control of either party, and in such event, ArthroCare shall have the
duty to buy back all controllers owned by Xomed according to the formula in
Section 11. In addition, if ArthroCare terminates this agreement because of any
such change of control, ArthroCare shall be required to pay Xomed a termination
fee as described in section 11.
"Change in Control" means: (a) the sale, lease, exchange or other transfer,
directly or indirectly, of substantially all of the assets of one of the parties
(in one transaction or in a series of related transactions) to one or more
persons or entities that are not affiliates of that party; (b) the approval by
the shareholders of one of the parties of any plan or proposal for its
liquidation or dissolution; or (c) a merger or consolidation of one of the
parties if the shareholders of that party immediately prior to the effective
date of such merger or consolidation have beneficial ownership, immediately
following the effective date of such merger or consolidation, of securities of
the surviving corporation representing 50% or less of the combined voting power
of the surviving corporation's then outstanding securities ordinarily having the
right to vote at elections of directors.
[*****]
13. CONFIDENTIAL TREATMENT: Other than disclosures that may be required by
securities or other applicable laws, both parties agree to use reasonable
efforts to maintain the confidentiality of the final agreement and any other
confidential information obtained from the other party during the course of the
agreement (e.g., sales forecasts, proprietary information, etc.). In addition,
both parties agree to use reasonable efforts to receive confidential treatment
of the substantive portions of this term sheet and the definitive agreement from
the SEC. Neither party shall issue
<PAGE>
any press release: (1) relating to this term sheet or the definitive agreement;
or (2) referring to the other party, without providing the other party with the
opportunity to review and comment on the press release.
14. EFFECT OF TERM SHEET: This term sheet will be considered a binding contract
on the parties until the definitive agreement is executed.
* The parties shall rely upon and operate in good faith under the
terms of this term sheet, and shall attempt in good faith to negotiate a
definitive agreement reflecting the terms of this term sheet as well as terms
incorporating standard covenants, representations and warranties.
* Once the term sheet is executed by both parties, while the
definitive agreement is being drafted, Xomed shall: (1) pay the [*****] license
payment outlined in section 2 to ArthroCare; (2) shall make the stocking order
in section 5; and (3) will cease all discussions with competitive RF companies.
In exchange, ArthroCare shall: (1) cease all discussions with other potential
ENT distributors; (2) cease the sale of ENT products; (3) cease the execution of
any further agreements with distributors for ENT products, and (4) shall not
hire any direct sales representatives for ENT.
ARTHROCARE CORPORATION XOMED SURGICAL PRODUCTS
By: /s/ MICHAEL A. BAKER By: /s/ JAMES T. TREACE
-------------------------------- -------------------------------
Print Name: MICHAEL A. BAKER Print Name: JAMES T. TREACE
------------------------ -----------------------
Title: PRESIDENT & CEO Title: PRESIDENT & CEO
----------------------------- ----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-27-1998
<CASH> 5,039
<SECURITIES> 0
<RECEIVABLES> 15,811
<ALLOWANCES> 872
<INVENTORY> 17,228
<CURRENT-ASSETS> 39,691
<PP&E> 26,388
<DEPRECIATION> 9,813
<TOTAL-ASSETS> 101,389
<CURRENT-LIABILITIES> 10,192
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 90,454
<TOTAL-LIABILITY-AND-EQUITY> 101,389
<SALES> 43,550
<TOTAL-REVENUES> 43,550
<CGS> 16,992
<TOTAL-COSTS> 16,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,412
<INCOME-TAX> 2,532
<INCOME-CONTINUING> 3,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,880
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-28-1997
<CASH> 501
<SECURITIES> 0
<RECEIVABLES> 12,360
<ALLOWANCES> 549
<INVENTORY> 15,672
<CURRENT-ASSETS> 31,400
<PP&E> 23,365
<DEPRECIATION> 7,961
<TOTAL-ASSETS> 94,741
<CURRENT-LIABILITIES> 9,403
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 82,765
<TOTAL-LIABILITY-AND-EQUITY> 94,741
<SALES> 37,007
<TOTAL-REVENUES> 37,007
<CGS> 14,728
<TOTAL-COSTS> 14,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 149
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> 4,020
<INCOME-TAX> 1,606
<INCOME-CONTINUING> 2,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,414
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</TABLE>
