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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 28, 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
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(Address of principal executive offices) (Zip Code)
(904) 296-9600
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 - 7,342,524 shares as of April 15, 1998
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<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
March 28, 1998 and December 31, 1997 ................. 2
Condensed Consolidated Statements Of Income
Three Months Ended March 28, 1998 and March 29, 1997 .. 3
Condensed Consolidated Statements Of Cash Flows
Three Months Ended March 28, 1998 and March 29, 1997 .. 4
Notes To Condensed Consolidated Financial Statements
March 28, 1998 ....................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 9
Item 6. Exhibits and Reports on Form 8-K .......................... 9
SIGNATURES ............................................................ 10
1
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 28, DECEMBER 31,
1998 1997
----------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ...................... $ 3,889 $ 1,712
Accounts receivable, less allowance ............ 14,337 13,277
Other receivables .............................. 520 620
Inventories .................................... 16,498 16,238
Prepaid expenses and other assets .............. 876 1,083
Deferred income taxes .......................... 1,404 1,404
-------- --------
Total current assets .............................. 37,524 34,334
Notes receivable from officers .................... 826 724
Property, plant and equipment, net ................ 15,433 15,403
Cost in excess of net assets acquired, net ........ 41,901 42,399
Other assets ...................................... 3,089 2,867
Deferred income taxes ............................. -- --
======== ========
Total assets ...................................... $ 98,773 $ 95,727
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 4,774 $ 3,493
Accrued expenses ............................... 3,507 2,403
Accrued payroll and commissions ................ 1,507 2,332
-------- --------
Total current liabilities ......................... 9,788 8,228
Deferred credits .................................. 710 990
Redeemable Preferred Stock - -0- shares issued and
outstanding ....................................... -- --
Shareholders' equity :
Common stock, voting, $.01 par value; 30,000,000
shares authorized, 7,342,524 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 .................................. (1,734) (3,459)
Additional paid-in capital ........................ 90,331 90,264
Cumulative translation adjustments ................ (142) (88)
Unearned compensation ............................. (253) (281)
-------- --------
Total shareholders' equity ........................ 88,275 86,509
-------- --------
Total liabilities and shareholders' equity ........ $ 98,773 $ 95,727
======== ========
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
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XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
---------------------------
MARCH 28, MARCH 29,
1998 1997
------------- ---------
Sales, net...................................... $ 20,682 $ 17,804
Cost of sales................................... 8,063 7,160
--------- ---------
Gross margin.................................... 12,619 10,644
Operating expenses:
Selling, general and administrative.......... 8,085 7,253
Research and development..................... 1,170 1,006
Amortization of intangibles.................. 584 615
--------- -------
Total operating expense......................... 9,839 8,874
--------- -------
Operating income ............................... 2,780 1,770
Interest income (expense) net................... 30 (54)
Other income, net............................... 40 92
--------- -------
Income before income tax expense................ 2,850 1,808
Income tax expense.............................. 1,125 721
--------- -------
Net income...................................... $ 1,725 $ 1,087
========= =======
Per share:
Net income - basic ............................. $ 0.23 $ 0.15
========= =======
Net income - diluted............................ $ 0.23 $ 0.15
========= =======
Weighted average common shares outstanding - basic 7,342 7,289
========= =======
Weighted average common shares outstanding - diluted 7,632 7,438
========= =======
See notes to condensed consolidated financial statements
3
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XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
MARCH 28, MARCH 29,
1998 1997
------------ -----------
OPERATING ACTIVITIES
Net cash provided by (used in ) operating
activities...................................... $ 2,769 $ (80)
INVESTING ACTIVITIES
Purchases of property and equipment............. (659) (448)
Proceeds from certificates of deposit........... -- 140
Purchase of other assets........................ -- --
------ -------
Net cash used in investing activities........... (659) (308)
FINANCING ACTIVITIES
Proceeds from revolving line of credit.......... -- 5,336
Payments on revolving line of credit............ -- (5,509)
Payments on capital lease obligation............ -- (21)
Exercise of stock options....................... 67 638
------- -------
Net cash provided by financing activities....... 67 444
------- -------
Net increase in cash and cash equivalents....... 2,177 56
Cash and cash equivalents at beginning of period 1,712 629
------- -------
Cash and cash equivalents at end of period...... $ 3,889 $ 685
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................... $ 11 $ 52
======= =======
Income taxes............................... $ 437 $ 38
======= =======
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, 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 three-month period ended March 28, 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:
MARCH 28, DECEMBER 31,
1998 1997
-------- ------------
Raw Materials $ 5,765 $ 5,818
Work-In-Process 1,928 1,447
Finished Products 8,805 8,973
------- -------
$16,498 $16,238
======= =======
NOTE C - EARNINGS PER SHARE
The following table sets forth the computation of shares for purposes
of the earnings per share calculation:
MARCH 28, MARCH 29,
1998 1997
--------- ---------
Weighted average shares outstanding .. 7,342 7,289
Net effect of dilutive stock options -
based on the treasury stock method ... 290 149
----- -----
Totals ............................... 7,632 7,438
===== =====
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
5
<PAGE>
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.
MARCH 28, MARCH 29,
1998 1997
---------- ----------
Net Income $1,725 $1,087
Foreign currency translation
adjustments (54) --
---------- ----------
Comprehensive income $1,671 $1,087
========== ==========
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 RISKS 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 and sales by geographic area during the periods
indicated.
THREE MONTHS ENDED
-------------------------
MARCH 28, MARCH 29,
PRODUCT LINE 1998 1997
- ------------ --------- ---------
Sinus & Rhinology....... $8,481 $6,270
Head & Neck............. 4,552 3,619
Otology................. 4,132 3,862
--------- ---------
Total Core ENT Business 17,165 13,751
Ophthalmic & Other...... 3,517 4,053
--------- ---------
Total Company........ $20,682 $17,804
========= =========
THREE MONTHS ENDED
------------------------
MARCH 28, MARCH 29,
GEOGRAPHIC 1998 1997
- ---------- --------- ----------
Domestic .................. $14,655 $12,311
International ............. 6,027 5,493
--------- ----------
Total .................. $20,682 $17,804
========= ==========
NET SALES. Net sales increased 16.2% to $20.7 million in the first three
months of 1998 from $17.8 million in the comparable period in 1997. In the core
business of sinus and rhinology, head and neck and otology, sales increased
24.8% over the prior comparable period. The increase in core business sales was
primarily the result of sales generated from several new products introduced
principally over the last 15 months, including within sinus and rhinology, the
XPS tissue removal system and within head and neck, the NIM XL2 nerve monitoring
system
6
<PAGE>
and the Company's Powerforma surgical drill system. Sinus and rhinology and head
and neck sales were up 35.3% and 25.8%, respectively, in the first quarter of
1998 over the prior comparable period. Sales in the ophthalmic and other
category decreased 13.2% primarily due to an approximate $500,000 decrease in
sales of orthopaedic instruments in the first quarter of 1998 over the prior
comparable period 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. Domestic core sales increased 27.6% and
international core sales increased 18.5% in the first three months of 1998 over
the prior comparable period. Total international sales increased 10% for the
quarter or 14% excluding the unfavorable effects of foreign currency
comparisons. The Company experienced soft sales during the quarter in the
Asia/Pacific region where sales were down 21% from the prior year's first
quarter primarily due to adverse economic conditions. Strong product sales,
however, were reported in several European countries including the U.K. and
Germany where sales were up 45% and 70%, respectively, for the quarter.
International sales represented 29.1% of total sales for the first three months
of 1998 compared to 30.9% in the comparable period of 1997.
COST OF SALES AND GROSS MARGIN. Cost of sales increased 12.6% to $8.1
million, or 39.0% of sales in the first three months of 1998 from $7.2 million,
or 40.2% of sales in the first three months of 1997. The decrease in cost of
goods sold as a percent of sales is primarily due to the decrease in sales of
lower margin products, the orthopaedic instrument line, and partially to lower
per unit cost due to manufacturing cost spread over a higher volume of
production. Gross margin as a percent of sales increased to 61.0% in the first
three months of 1998 from 59.8% in the prior comparable period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 11.5% or $832,000 in the first three months of
1998 from the comparable period in 1997. The increase in total selling, general
and administrative expenses is primarily due to variable selling and marketing
costs, which comprised approximately $700,000 of the increase, noted above. As a
percent of sales selling, general and administrative expenses decreased to 39.1%
of sales for the first three months of 1998 from 40.7% in the comparable period
of 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
16.3% to $1.2 million in the first three months of 1998 from $1.0 million in the
comparable period of 1997, and increased slightly as a percent of sales to 5.7%
from 5.6% during the same respective periods.
INTEREST AND OTHER. Interest income (expense) in the first quarter of 1998
reflected income of $30,000 as compared to expense of $54,000 in the comparable
quarter of 1997 due to having an average invested amount of approximately $3.0
million in the first quarter of 1998 as compared to borrowing levels of
approximately $3.0 million in the first quarter of 1997. Other income was
$40,000 for the first three months of 1998 compared to $92,000 for the
comparable period of 1997. Prior year other income included income received from
a third party related to a non-compete agreement violation.
INCOME TAXES. The Company's effective tax rate was 39.5% for the first
three months of 1998 and 40% for 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.
During the three months ended March 28, 1998, the Company generated cash
of $2.8 million in operating activities as compared with a use of $80,000 from
operating activities in the comparable period of 1997. In the first three months
of 1998, cash generated from inventory, accounts receivable and accounts payable
was approximately $100,000 compared to a use of $2.1 within these accounts in
the comparable period of 1997. Increases in inventory
7
<PAGE>
and accounts receivable due to growth in sales were offset by increases in
accounts payable and accrued expenses due to the timing of payments. The Company
expects that in the future, the growth in these operating assets will outpace
the growth in current liabilities and will create a demand on cash within these
accounts.
Cash used in investing activities was $0.7 million in the first three
months of 1998 as compared to cash used in investing activities of $0.3 million
in the prior comparable period. Capital expenditures were $659,000 and $448,000
in the first three months of 1997 and 1996, respectively. Cash used to purchase
capital assets is expected to increase as the Company expects to spend in 1998
approximately $4.0 million on its headquarters expansion in Jacksonville,
Florida coupled with normal recurring capital equipment requirements.
Cash provided by financing activities was $67,000 in the first three
months of 1998 as compared with $444,000 in the comparable period of 1997. These
amounts relate principally to the exercise of stock options.
Based on the Company's ability to generate cash flow 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 and expansion needs for at least the
next 24 months.
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 exhibit is included herein:
27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended March 28, 1998.
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 7, 1998 /s/ JAMES T. TREACE
-------------------
James T. Treace, Chairman,
President and Chief Executive
Officer (duly authorized officer)
Date MAY 7, 1998 /s/ THOMAS E. TIMBIE
--------------------
Thomas E. Timbie, Vice
President and Chief Financial
Officer (principal financial officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-28-1998
<CASH> 3,889
<SECURITIES> 0
<RECEIVABLES> 15,122
<ALLOWANCES> 785
<INVENTORY> 16,498
<CURRENT-ASSETS> 37,524
<PP&E> 15,433
<DEPRECIATION> 612
<TOTAL-ASSETS> 98,773
<CURRENT-LIABILITIES> 9,788
<BONDS> 0
<COMMON> 73
0
0
<OTHER-SE> 88,202
<TOTAL-LIABILITY-AND-EQUITY> 98,773
<SALES> 20,682
<TOTAL-REVENUES> 20,682
<CGS> 8,063
<TOTAL-COSTS> 8,063
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,850
<INCOME-TAX> 1,125
<INCOME-CONTINUING> 1,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,725
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
