================================================================================
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 July 3, 1999
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)
(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 - 12,273,449 shares as of July 29, 1999
================================================================================
<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
July 3, 1999 and December 31, 1998........................ 2
Condensed Consolidated Statements of Income
Three Months Ended July 3, 1999 and June 27, 1998
and Six Months Ended July 3, 1999 and June 27, 1998....... 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended July 3, 1999 and June 27, 1998........... 4
Notes To Condensed Consolidated Financial Statements
July 3, 1999.............................................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Item 3 Qualitative and Quantitative Disclosures about Market Risk.... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........... 13
Item 6. Exhibits and Reports on Form 8-K.............................. 13
SIGNATURES 14
1
<PAGE>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 3, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 14,133 $ 4,256
Accounts receivable, less allowance ................................. 20,403 18,516
Other receivables ................................................... 389 287
Inventories ......................................................... 20,514 22,368
Prepaid expenses and other assets ................................... 1,496 1,299
--------- ---------
Total current assets ..................................................... 56,935 46,726
Investment securities .................................................... -- 16,584
Notes receivable from officers ........................................... 826 826
Property, plant and equipment, net ....................................... 24,847 21,769
Cost in excess of net assets acquired, net ............................... 47,322 49,488
Other assets ............................................................. 4,157 4,293
Deferred income taxes .................................................... 2,262 2,310
--------- ---------
Total assets ............................................................. $ 136,349 $ 141,996
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 5,591 $ 5,325
Accrued expenses .................................................... 7,965 4,923
Accrued payroll and commissions ..................................... 2,771 2,989
Accrued restructuring costs ......................................... 403 955
--------- ---------
Total current liabilities ................................................ 16,730 14,192
Deferred credits ......................................................... 235 500
Long-term debt ........................................................... -- 13,062
Shareholders' equity :
Preferred stock, $1.00 par value, 1,000,000 shares authorized,
-0- shares issued and outstanding ................................. -- --
Common stock, voting, $.01 par value; 30,000,000 shares authorized,..
12,268,199 shares issued and outstanding .......................... 82 81
Retained earnings ................................................... 9,434 3,621
Additional paid-in capital .......................................... 111,597 110,831
Cumulative translation adjustments .................................. (1,616) (122)
Unearned compensation ............................................... (113) (169)
--------- ---------
Total shareholders' equity ............................................... 119,384 114,242
--------- ---------
Total liabilities and shareholders' equity ............................... $ 136,349 $ 141,996
========= =========
</TABLE>
Note: The balance sheet at December 31, 1998 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>
XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales, net................................................. $29,367 $22,868 $56,975 $43,550
Cost of sales............................................... 11,433 8,929 22,213 16,992
------- ------- ------- -------
Gross margin................................................ 17,934 13,939 34,762 26,558
Operating expenses:
Selling, general and administrative.................... 10,818 8,717 21,606 16,802
Research and development............................... 1,312 1,166 2,705 2,336
Amortization of intangibles............................ 697 584 1,382 1,168
Write-off of non-productive assets .................... 286 -- 286 --
------- ------- ------- -------
Total operating expense..................................... 13,113 10,467 25,979 20,306
------- ------- ------- -------
Operating income ........................................... 4,821 3,472 8,783 6,252
Interest and dividend income, net .......................... 52 62 86 92
Other income, net .......................................... 385 28 474 68
------- ------- ------- -------
Income before income tax expense ........................... 5,258 3,562 9,343 6,412
Income tax expense ......................................... 2,001 1,407 3,529 2,532
------- ------- ------- -------
Net income ................................................. $ 3,257 $ 2,155 $ 5,814 $ 3,880
======= ======= ======= =======
Per share:
Net income - basic ......................................... $ 0.27 $ 0.20 $ 0.48 $ 0.35
======= ======= ======= =======
Net income - diluted ....................................... $ 0.25 $ 0.19 $ 0.45 $ 0.34
======= ======= ======= =======
Weighted average common shares outstanding
basic ...................................................... 12,264 11,015 12,211 11,013
======= ======= ======= =======
Weighted average common shares outstanding -
diluted .................................................... 13,131 11,510 13,056 11,480
======= ======= ======= =======
</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>
SIX MONTHS ENDED
-------------------------
JULY 3, JUNE 27,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities ........................ $ 10,201 $ 5,604
INVESTING ACTIVITIES
Purchases of property, plant and equipment ....................... (4,747) (2,377)
Sale of available for sale securities ............................ 16,988 --
-------- --------
Net cash provided by (used in) investing activities .............. 12,241 (2,377)
FINANCING ACTIVITIES
Payments on revolving line of credit ............................. (13,062) --
Exercise of stock options ........................................ 767 100
-------- --------
Net cash provided by (used in) financing activities .............. (12,295) 100
Effect of exchange rate on cash and cash equivalents ............. (270) --
-------- --------
Net increase in cash and cash equivalents ........................ 9,877 3,327
Cash and cash equivalents at beginning of period ................. 4,256 1,712
-------- --------
Cash and cash equivalents at end of period ....................... $ 14,133 $ 5,039
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ..................................................... $ 239 $ 45
======== ========
Income taxes ................................................. $ 1,275 $ 2,320
======== ========
</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, 1998, 1997, and 1996 of
Xomed Surgical Products, Inc. (the "Company") in the Company's 1998 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 July 3, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
NOTE B - INVENTORIES
The components of inventory consist of the following:
JULY 3, DECEMBER 31,
1999 1998
------- ------------
Finished goods............................... $13,238 $12,693
Work in process.............................. 1,932 2,525
Raw materials and packaging.................. 5,344 7,150
------- ----------
$20,514 $22,368
======= ==========
NOTE C - INVESTMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
Investments at December 31, 1998, consist substantially of marketable
preferred stocks that are designated as available for sale. During the three
months and six months ended July 3, 1999, the Company sold its entire investment
portfolio at a gain of $323 and $417, respectively, which was included in other
income.
NOTE D - 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
---------------------- --------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
-------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares outstanding ............... 12,264 11,015 12,211 11,013
Net effect of dilutive stock options - based on the
treasury stock method .......................... 867 495 845 467
------ ------ ------ ------
Totals ............................................ 13,131 11,510 13,056 11,480
====== ====== ====== ======
</TABLE>
NOTE E - COMPREHENSIVE INCOME
Comprehensive income (loss) is comprised of two components: net income
and other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are recorded as an element of shareholders' equity and are excluded from net
income. The Company's other comprehensive income is comprised of foreign
currency translation adjustments from certain
5
<PAGE>
NOTE E - COMPREHENSIVE INCOME (CONTINUED)
subsidiaries, unrealized gains on investment securities and reclassification
adjustments related to investment securities that have been sold. Comprehensive
income for the six months ended July 3, 1999 is insignificant and therefore is
not disclosed in the balance sheet as a separate component of shareholders'
equity. The components of comprehensive income (loss) are listed below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ...................................... $ 3,257 $ 2,155 $ 5,814 $ 3,880
Foreign currency translation adjustment ......... (35) 36 (1,494) (18)
Unrealized gain on investment securities ........ -- --
143 --
Reclassification adjustment of unrealized gain on
investment securities ........................ (127) -- (127) --
------- ------- ------- -------
Comprehensive income ............................ $ 3,095 $ 2,191 $ 4,336 $ 3,862
======= ======= ======= =======
</TABLE>
The foreign currency translation adjustment for the six months ended July 3,
1999 is related primarily to the weakening of the French Franc subsequent to the
purchase of MicroFrance in December 1998. During the three months ended July 3,
1999 the Company sold its entire investment portfolio resulting in a
reclassification adjustment of the unrealized gain on investment securities to
other income.
NOTE F - ACCRUED RESTRUCTURING COSTS
At December 31, 1998, the Company had accrued restructuring costs of $955
related to: (1) $580 for the transfer of certain production operations from its
Merocel facility in Mystic, Connecticut to its main facility in Jacksonville,
Florida, (2) $261 for the closure of its direct selling site in Paris, France in
conjunction with the acquisition of MicroFrance and (3) $114 for the termination
of two supplier agreements. The accrual was for severance pay, lease termination
fees, asset disposals and other costs related to these activities. For the three
and six months ended July 3, 1999, the Company paid $365 and $552, respectively
toward the accrued restructuring costs as shown in the following table:
<TABLE>
<CAPTION>
PAYMENTS PAYMENTS
BALANCE SIX MONTHS ENDED BALANCE THREE MONTHS ENDED
DECEMBER 31, 1998 JULY 3, 1999 JULY 3, 1999 JULY 3, 1999
----------------- ----------------- ------------- ------------------
<S> <C> <C> <C> <C>
Severance pay ............................... $ 569 $(350) $ 219 $(258)
Lease termination ........................... 104 (42) 62 --
Asset disposals ............................. 146 (63) 83 (63)
Other costs ................................. 136 (97) 39 (44)
----- ----- ----- -----
Totals...................................... $ 955 $(552) $ 403 $(365)
===== ===== ===== =====
</TABLE>
NOTE G - SEGMENT INFORMATION
The Company manufactures and distributes medical devices and supplies
for use by ear, nose and throat, (ENT) physicians. The Company has a dedicated
Vice President of Sales and Vice President of Marketing devoted solely to its
U.S. ENT market. The Company also offers a line of products for ophthalmic
surgeons, which segment is the sole focus of another Vice President. These two
markets represent segments identified for evaluating profitability and asset
allocation. The "other" category is comprised principally of orthopaedic sales.
Sales of ophthalmic products internationally are not as material proportionately
as they are in the U.S. Also, the President of Xomed International, Inc. is
directly responsible for all sales outside the U.S. International is the third
segment identified and measured.
No other segments or operations are material to consolidated sales or assets.
DISCLOSURES FOR PURPOSES OF SEGMENTAL REPORTING. Sales are recorded in
the geographical segment when and where products are delivered to the end user.
Related cost of sales reflects only economic costs (i.e., no intersegment
profit). Segment assets are reported based on specific identification where
possible, or if not, based on an allocation as a percentage of sales. Goodwill
is not allocated among the different segments.
6
<PAGE>
NOTE G - SEGMENT INFORMATION (CONTINUED)
<TABLE>
THREE MONTHS ENDED JULY 3, 1999
------------------------------------------------------------------------
DEPRECIATION SEGMENT SEGMENT CAPITAL
SEGMENT SALES EXPENSE PROFIT ASSETS EXPENDITURES
- ------- -------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Domestic:
ENT.................... $16,745 $ 526 $ 7,055 $ 96,011 $ 1,986
Ophthalmic............. 2,766 26 240 11,047 202
Other.................. 131 6 73 852 10
-------- -------- -------- --------- ---------
Total..................... 19,642 558 7,368 107,910 2,198
International............. 9,725 63 2,090 28,439 103
-------- -------- -------- --------- ---------
Consolidated.............. $ 29,367 $ 621 $ 9,458 $136,349 $ 2,301
======== ======== ======== ========= =========
</TABLE>
<TABLE>
THREE MONTHS ENDED JUNE 27, 1998
------------------------------------------------------------------------
DEPRECIATION SEGMENT SEGMENT CAPITAL
SEGMENT SALES EXPENSE PROFIT ASSETS EXPENDITURES
- ------- -------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Domestic:
ENT.................... $ 13,311 $ 463 $ 5,182 $ 78,158 $ 1,527
Ophthalmic............. 2,266 19 669 9,823 113
Other.................. 473 19 202 1,150 26
-------- -------- -------- --------- --------
Total..................... 16,050 501 6,053 89,131 1,666
International............. 6,818 67 1,447 12,258 71
-------- -------- -------- --------- --------
Consolidated.............. $ 22,868 $ 568 $ 7,500 $ 101,389 $ 1,737
======== ======== ======== ========= ========
</TABLE>
<TABLE>
SIX MONTHS ENDED JULY 3, 1999
------------------------------------------------------------------------
DEPRECIATION SEGMENT SEGMENT CAPITAL
SEGMENT SALES EXPENSE PROFIT ASSETS EXPENDITURES
- ------- -------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Domestic:
ENT................... $ 32,559 $ 1,050 $ 13,156 $ 96,011 $ 4,100
Ophthalmic............ 5,130 54 506 11,047 322
Other................. 438 12 186 852 65
--------- -------- --------- --------- ---------
Total.................... 38,127 1,116 13,848 107,910 4,487
International............ 18,848 144 4,102 28,439 260
--------- -------- --------- --------- ---------
Consolidated............. $ 56,975 $ 1,260 $ 17,950 $ 136,349 $ 4,747
========= ======== ========= ========= =========
</TABLE>
<TABLE>
SIX MONTHS ENDED JUNE 27, 1998
------------------------------------------------------------------------
DEPRECIATION SEGMENT SEGMENT CAPITAL
SEGMENT SALES EXPENSE PROFIT ASSETS EXPENDITURES
- ------- -------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Domestic:
ENT.................. $ 25,501 $ 924 $ 9,443 $ 78,158 $ 2,114
Ophthalmic........... 4,422 39 1,339 9,823 144
Other................ 782 38 322 1,150 29
--------- -------- --------- --------- ---------
Total................... 30,705 1,001 11,104 89,131 2,827
International........... 12,845 160 2,847 12,258 90
--------- -------- --------- --------- ---------
Consolidated............ $ 43,550 $ 1,161 $ 13,951 $ 101,389 $ 2,377
========= ======== ========- ========= =========
</TABLE>
7
<PAGE>
NOTE G - SEGMENT INFORMATION (CONTINUED)
Reconciliation of segment profit to income before tax:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- --------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
------- --------- ------- --------
<S> <C> <C> <C> <C>
Indirect operating expenses:
General and administrative ....... $2,342 $2,278 $4,794 $4,195
Amortization of intangibles ...... 697 584 1,382 1,168
Research and development ......... 1,312 1,166 2,705 2,336
Write-off of non-productive assets 286 -- 286 --
------ ------ ------ ------
Total indirect expenses ............ 4,637 4,028 9,167 7,699
------ ------ ------ ------
Income from operations ............. 4,821 3,472 8,783 6,252
Interest and dividend income, net .. 52 62 86 92
Other income, net .................. 385 28 474 68
------ ------ ------ ------
Income before income taxes ......... $5,258 $3,562 $9,343 $6,412
====== ====== ====== ======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO
PUBLICLY RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
RESULTS OF OPERATIONS
SALES BY MARKET. The Company derives sales from various markets within
the ENT and ophthalmic industries. Sinus and rhinology, head and neck and
otology are the three ENT markets in which the Company operates. In addition to
products for these markets, the Company has orthopaedic and other product
offerings. The following table summarizes the Company's worldwide product line
sales and sales by geographic area during the periods indicated ( in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ---------------------------------
PRODUCT LINE JULY 3, 1999 JUNE 27, 1998 JULY 3, 1999 JUNE 27, 1998
- ------------ ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Sinus & Rhinology .... $13,330 $ 9,818 $25,468 $18,299
Head & Neck .......... 6,289 5,242 12,044 9,794
Otology .............. 4,851 3,962 9,742 8,094
------- ------- ------- -------
Total ENT Business 24,470 19,022 47,254 36,187
Ophthalmic ........... 3,666 3,133 6,907 6,154
Other ................ 1,231 713 2,814 1,209
------- ------- ------- -------
Total Company ..... $29,367 $22,868 $56,975 $43,550
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ---------------------------------
GEOGRAPHIC JULY 3, 1999 JUNE 27, 1998 JULY 3, 1999 JUNE 27, 1998
- ---------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Domestic............. $19,642 $16,050 $38,127 $30,705
International........ 9,725 6,818 18,848 12,845
------- ------- ------- -------
Total Company..... $29,367 $22,868 $56,975 $43,550
======= ======= ======= =======
</TABLE>
NET SALES. Net sales increased 28.4% to $29.4 million in the three
months ended July 3, 1999 from $22.9 million in the comparable period of 1998.
The second quarter of 1999 included $2.1 million in net sales related to
MicroFrance, which was acquired on December 30, 1998. In the ENT business, sales
increased 28.6% over the prior comparable period. With strong contributions from
most major product categories, domestic ENT sales
8
<PAGE>
increased by 25.8% to $16.7 million for the three-months ended July 3, 1999 from
$13.3 million in the comparable period in 1998. During the quarter, the Company
completed the successful domestic launch of its new MeroGel(TM) bioabsorbable
sinus packing product line, which received FDA approval in the first quarter of
1999. MeroGel performs the same functions as traditional sinus packing products,
but the body absorbs it within 14 days, thus eliminating the need for the
surgeon to remove the material postoperatively. The Company's new LandmarX(TM)
image guided surgery system and KeraCel(R) line of disposable LASIK instruments
continued to provide important incremental new product revenues as well. These
new products, combined with continued strength in the Company's flagship XPS
2000 StraightShot(R) power resection system primarily for sinus surgery and its
NIM-2(R) XL nerve integrity monitoring system, used in head and neck surgery,
helped drive the Company's domestic performance.
International net sales increased 42.6% for the quarter compared with the second
quarter of 1998. Excluding sales of $2.1 million related to MicroFrance,
international sales increased 11.6% for the quarter, or 12.7% without the
unfavorable effects of foreign currency comparisons. The Company generated good
growth in most major markets during the quarter with the U.K., Mediterranean
Europe and the Asia/Pacific region producing the strongest results. The Latin
America region reported sales declines versus the prior year due primarily to a
challenging economic environment. Latin America sales represented approximately
1% of Company sales during the quarter.
Xomed's non-ENT sales, which account for 17% of total sales, increased 27.3%
during the quarter due primarily to laparoscopic instrument sales from the
MicroFrance acquisition and strong performance by the Solan Ophthalmology
division, which grew 17.0% when compared to last year's second quarter.
For the six months ended July 3, 1999, net sales increased 30.8% to $57.0
million from $43.6 million in the comparable period of 1998. The first six
months of 1999 included $4.3 million in net sales related to MicroFrance. In the
ENT business, sales increased 30.6% over the prior comparable period and
domestic ENT sales increased by 27.7% to $32.6 million from $25.5 million in the
comparable period in 1998. During the first six months, the Company completed
its full domestic launch of the new LandmarX(TM) image guided surgery system,
which is used primarily in conjunction with endoscopic sinus surgery. This new
product launch, combined with continued strength in the Company's flagship XPS
2000 StraightShot(R) power resection system, its NIM-2(R) XL nerve integrity
monitoring system and other product launches mentioned above helped drive the
Company's domestic performance. In addition, sales in the relatively mature
domestic otology market increased 19.0% to $6.4 million as compared to $5.3
million for the comparable period in 1998. Domestic ophthalmic sales increased
16.0% to $5.1 million from $4.4 million.
International ENT sales increased by 37.5% to $14.7 million for the six-month
period as compared to $10.7 million for the same period in 1998. Excluding ENT
sales of $2.4 million related to MicroFrance, international ENT sales increased
15.2% for the six month period to $12.3 million. In addition to the sales of
MicroFrance, the Company realized strong growth in most major markets,
especially the Asia/Pacific region and Japan, where sales increased by more than
47% for the first six months of 1999 as compared to the comparable period in
1998. The increase in ENT sales was primarily the result of strong growth in the
Company's XPS product line, where sales grew more than 46% versus the prior
year's first six months.
COST OF SALES AND GROSS MARGIN. Cost of sales increased 28.0% to $11.4
million in the three months ended July 3, 1999 as compared to $8.9 million in
the comparable period of 1998, which is consistent with the increase in net
sales of 28.4% for the period. Gross margin improved slightly to 61.1% in 1999
from 61.0% in 1998. For the six months ended July 3, 1999, cost of sales
increased 30.7% to $22.2 million from $17.0 million in the prior comparable
period. The increase in cost of sales for the period is comparable to the
increase in total net sales of 30.8%. Gross margin for both six-month periods
was 61.0%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 24.1%, or $2.1 million in the three months
ended July 3, 1999 from the comparable period in 1998. For the six-months ended
July 3, 1999, expenses increased $28.6%, or $4.8 million. Expenses for 1999
include the operations of MicroFrance as well as integration expenses related to
the acquisition of MicroFrance. Additionally, the increase in expenses from 1998
to 1999 was partially caused by marketing expenses related to the new
LandmarX(TM) image guided surgery system, transition of some ophthalmic sales
from distributors to an internal sales force and variable expenses related to
sales. As a percent of sales, selling, general and administrative expenses were
36.8% for the three months ended July 3, 1999 as compared to 38.1% for the
comparable period in 1998, and 37.9% for the current six-month period compared
to 38.6% for the prior year six-month period.
9
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses increased
12.5% to $1.3 million in the three months ended July 3, 1999 from $1.2 million
in the comparable period of 1998, and decreased as a percent of sales to 4.5%
from 5.1%. For the comparable six-month periods, research and development
expenses increased 15.8% in 1999 to $2.7 million from $2.3 million in 1998, and
decreased as a percent of sales to 4.7% from 5.4%. The decreases as a percent of
sales for both the three and six-month periods ended July 3, 1999 from the
comparable periods in 1998 are primarily due to increased sales related to
MicroFrance and the LandmarX(TM) image guided surgery system without associated
research and development expenses.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased
19.3% to $697,000 for the three months ended July 3, 1999 from $584,000 in the
comparable period of 1998, and increased 18.3% to $1.4 million for the six
months ended July 3, 1999 from $1.2 million in the comparable period of 1998.
The increase in amortization is primarily related to goodwill of $9.0 million
recognized from the purchase of MicroFrance at December 30, 1998, which is being
amortized over a 25-year period.
WRITE-OFF OF NON-PRODUCTIVE ASSETS. The second quarter of 1999 includes
a write-off of non-productive assets of $286,000. The assets were primarily from
the manufacturing area and relate to the Company's efforts to be more efficient
in the manufacturing process.
INTEREST AND OTHER. Net interest and dividend income in the second
quarter of 1999 was $52,000 as compared to $62,000 in the comparable quarter of
1998, and $86,000 for the first half of 1999 as compared to $92,000 in 1998.
Interest and dividend income has decreased from the level seen in the third and
fourth quarter of 1998 due to the purchase of MicroFrance. Net other income was
$385,000 for the three months ended July 3, 1999 compared to $28,000 for the
comparable period of 1998, and $474,000 for the six-month period in 1999
compared to $68,000 in the prior year. The increase in other income in 1999
relates primarily to the sale of the Company's investment portfolio which
resulted in other income of $323 and $417 for the three-month and six-month
periods ending July 3, 1999, respectively.
INCOME TAXES. The Company's effective tax rate was 38.1% for the three
months ended July 3, 1999 and 39.5% for the prior comparable period, and 37.8%
for the six months in 1999 as compared to 39.5% for the comparable period in
1998. The decrease in the effective tax rate is primarily due to the
dividend-received exclusion on dividend income.
LIQUIDITY AND CAPITAL RESOURCES
The Company entered into an Amended and Restated Credit Agreement with
its bank in May 1997 under which it may borrow through a revolving credit
facility (the "line of credit") up to $25 million to be used for working capital
needs and potential acquisitions. At July 3, 1999, approximately $23 million was
available under the line of credit.
During the six months ended July 3, 1999, operating activities provided
cash of $10.2 million as compared to $5.6 million in the comparable period of
1998. The increase in cash from operations was primarily due to increased net
income, accounts payable and accrued expenses, and lower inventory, which was
partially offset by increases in accounts receivable and other assets. In the
first six months of 1999, cash provided by inventory, accounts payable and
accrued expenses was approximately $5.1 million compared to $1.0 million in the
comparable period of 1998. Inventory decreased due to the implementation of
certain inventory management initiatives undertaken during the period; and
accounts payable and accrued expenses increased due to the addition of
MicroFrance and higher income taxes payable. The increase in accounts receivable
is due to growth in sales.
Cash provided by investing activities was $12.2 million in the first
six months of 1999 as compared to cash used in investing activities of $2.4
million in the prior comparable period. Cash of $17.0 million was provided by
the sale of investment securities which was partially offset by the purchase of
$4.7 million of capital assets, most of which relates to the expansion of the
Company's headquarters facility in Jacksonville, Florida. The Company expects to
spend an additional $3.5 million in 1999 on its headquarters expansion.
10
<PAGE>
Cash used in financing activities was $12.3 million for the six months
ended July 3, 1999 as compared to $100,000 provided in the comparable period of
1998. In 1999, the Company used the proceeds from the sale of investment
securities to pay $13.1 million outstanding under the line of credit. The
exercise of stock options provided $767,000 in 1999 as compared to $100,000 in
1998.
Based on the Company's ability to generate cash flow from operations
and with the availability of borrowing under its line of credit, the Company
believes it will be able to finance its working capital and expansion needs for
at least the next 24 months.
FINANCIAL INSTRUMENTS AND MARKET RISK MANAGEMENT
During 1999, the Company liquidated its entire preferred stock
portfolio which had been hedged by short sales of U.S. Treasury Bond futures in
order to reduce the effect of interest rate risks. The short sales of U.S.
Treasury Bond futures have been closed out, therefore the Company is no longer
at risk for changes in the value of U.S. Treasury Bond futures.
The Company uses short-term forward exchange contracts on its foreign
currency receivables due from its subsidiaries. See Item 3, Qualitative and
Quantitative Disclosures about Market Risk.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133), which is required to be adopted for fiscal years beginning after June
15, 2000, although earlier application is permitted as of the beginning of any
fiscal quarter. This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company is in the process of determining what effect the adoption of SFAS No.
133 will have on the Company's results of operations, cash flows or financial
position.
YEAR 2000
The Company has substantially completed an internal assessment of its
operations, including its information systems, financial systems and its
manufacturing processes, in order to determine the extent to which the Company
may be adversely affected by Year 2000 issues. The Company's focus on this issue
is to avoid any adverse effect on business operations and ensure that
transactions with customers, suppliers, and financial institutions are fully
supported. The Company has performed limited testing of systems, and has not
discovered any significant potential Year 2000 problems. The Company is in the
process of converting the primary business software used in three of its
international offices located in France, the U.K. and Canada to new software
consistent with that used in its headquarters' operation. The purpose of the
upgrades is to enhance operational efficiencies by utilizing business systems at
the Company's foreign sites that are integrated with the Company's U.S.
operations. Although the reason for the upgrades is not related to the Year 2000
issue, the current business systems at these three facilities are not Year 2000
compliant. The Company expects to have all three facilities converted to the new
business system by November 1999. In addition, the Company has contingency plans
in place to upgrade the current systems at the three facilities in the event the
conversion to the new system is not completed as scheduled. While the Company
believes it has adequate resources and time to complete the conversions as
planned, failure to complete the conversions prior to the end of the year,
combined with an unsuccessful upgrade of the existing software, could
significantly impair the Company's ability to carry on normal business functions
at the three facilities involved. These three operations generated approximately
$9.1 million in revenue in the six months ended July 3, 1999. The Company plans
to devote the necessary resources to resolve any significant Year 2000 issues in
a timely manner. Most of the costs incurred to date have been internal time and
costs related to investigating and testing related to the Year 2000 issue. These
costs are immaterial to date. No significant additional costs are expected to be
incurred to address Year 2000 issues.
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<PAGE>
The Company has surveyed its significant suppliers, customers and other
third parties to determine their Year 2000 readiness and, to date, has received
responses from approximately 75% of those surveyed, a majority of whom have
certified they are compliant. The Company has conferred with significant
customers to assure that various systems used for data and information exchanges
between them will be compatible following December 31, 1999. The Company has
also initiated a formal program to advise customers, distributors and suppliers
of the Year 2000 issue; however, the Company believes it has no material
exposure to contingencies related to the Year 2000 issue for the products it has
sold.
Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing or interface with key customers,
or with processing orders and billing. Possible Year 2000 worst case scenarios
include the interruption of significant parts of the Company's business as a
result of critical information systems failure or the failure of suppliers,
distributors or customers. Any such interruption may have a material adverse
impact on future results. Since their possibility cannot be eliminated, the
Company is incorporating Year 2000 concerns into its contingency plans for
dealing with catastrophic events. Although the Company expects its remediation
efforts will be completed on a timely basis, failure to do so could have a
material adverse effect on the Company's systems and results of operations which
could lead to an inability to process customer orders, ship products, bill
customers and collect payments. While the Company has taken the steps outlined
above, there can be no certainty that the systems and products of other
companies on which the Company relies will not have a material adverse effect on
the Company's operations.
In addition, if certain third party service providers, such as those
supplying electricity, water or telephone service, experience difficulties
resulting in disruption of service to the Company, a shutdown of the Company's
facilities could occur for the duration of the disruption. The Company has begun
to develop contingency plans and intends to fully develop such plans in fiscal
year 1999. Based on existing information, the Company believes the anticipated
spending to become Year 2000 compliant will not have a material adverse effect
on the Company's financial condition, cash flows or results of operations.
Nevertheless, there can be no assurance that Year 2000 issues will not have a
material adverse effect on the Company's business, results of operation and
financial condition.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
A portion of the Company's operations consists of sales and
manufacturing activities in foreign markets. The Company manufactures its
products in the United States and sells them outside the U.S. through a
combination of international distributors and five wholly-owned subsidiaries.
The Company also manufactures hand held instruments at its subsidiary,
MicroFrance. Sales from the U.S. operations to the third party distributors are
in U.S. dollars and sales to the wholly-owned subsidiaries are in their local
currencies.
The Company uses short-term forward exchange contracts on its foreign
currency receivables due from its subsidiaries. Hypothetically, if exchange
rates were to change by 10% as compared to the U.S. Dollar, the effect on the
Company's receivables from its foreign subsidiaries would be materially offset
by the Company's hedge. The Company also translates the earnings and balance
sheets of its foreign subsidiaries from their functional-local currency into
U.S. dollars at the end of each month. As of the beginning of 1999, the result
of a uniform 10% strengthening in the value of the U.S. Dollar relative to the
currencies in which the Company's foreign subsidiaries operate would have
affected income from operations by approximately $100,000 for the six month
period ending July 3, 1999. This calculation assumes that each exchange rate
would change in the same direction relative to the U.S. Dollar. In addition, the
Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not consider a potential change in sales levels or local
currency prices. The effect of translation of the balance sheets of the foreign
subsidiaries does not affect income, but is recorded as a component of
shareholders' equity. The cumulative translation adjustment recorded in
shareholders equity increased from $122 thousand at December 31, 1998 to $1.6
million at July 3, 1999 due to the weakening of the Euro and the increased
significance in assets held in France due to the Company's acquisition of
MicroFrance on December 30, 1998.
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<PAGE>
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 1998 annual meeting of stockholders on May
13, 1999. 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:
<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES FOR WITHHELD
------------------------------- -------------------------------------- -----------------------------
<S> <C> <C>
James T. Treace 9,493,543 2,928
Richard B. Emmitt 9,493,318 3,153
William R. Miller 9,493,543 2,928
James E. Thomas 9,493,242 3,229
Elizabeth H. Weatherman 9,492,052 4,419
</TABLE>
The appointment of Ernst & Young LLP as the Company's independent
auditors for fiscal 1999 was ratified. The vote on such appointment was as
follows: 9,494,135 shares "for," 103 shares "against" and 2,233 shares
"abstain."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
EXHIBIT NO. DESCRIPTION
----------- -----------
10.20 Employment Agreement dated as of March 22, 1999
between the Company and Mark J. Fletcher
27 Financial Data Schedule
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<PAGE>
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 August 13, 1999
--------------------- ---------------------------------------
James T. Treace, Chairman, President
and Chief Executive Officer (duly
authorized officer)
Date August 13, 1999
--------------------- ---------------------------------------
Thomas E. Timbie, Vice President and
Chief Financial Officer (principal
financial officer)
14
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of March 22, 1999, is made between Xomed
Surgical Products, Inc., a Delaware corporation (the "Company"), and Mr. Mark J.
Fletcher (the "Employee").
1. EMPLOYMENT. The Company hereby employs the Employee and the Employee
hereby accepts employment all upon the terms and conditions herein set forth.
2. DUTIES. The Employee is engaged as Vice President, Ophthalmic and
President, Solan Division of the Company and hereby promises to perform and
discharge well and faithfully the duties which may be assigned to him from time
to time by the Company in connection with the conduct of the Company's
businesses.
3. EXTENT OF SERVICES. The Employee shall devote his entire time,
attention and energies to the business of the Company and shall not, during the
term of this Agreement, be engaged in any other business activity, regardless of
whether such business activity is pursued for gain, profit or other pecuniary
advantage; but this shall not be construed as preventing the Employee from
investing his personal assets in businesses which do not compete with the
Company in such form or manner as will not require any services on the part of
the Employee in the operation of the affairs of the companies in which such
investments are made and in which his participation is solely that of an
investor, and except that the Employee may purchase securities in any
corporation whose securities are regularly traded provided that such purchase
shall not result in his collectively owning beneficially at any time one percent
(1%) or more of the equity securities of any corporation engaged in a business
competitive to that of the Company.
4. COMPENSATION.
(a) For services rendered under this Agreement, the Company
shall pay the Employee an aggregate salary of $173,500 per annum (the "Base
Salary"), payable (after deduction of applicable payroll taxes) in equal
installments on every other Friday of each month or on the preceding business
day if such day is a holiday.
(b) In addition to salary payments under paragraph 4(a) above,
the Employee shall be eligible for and participate in the Key Executive Bonus
Program adopted by the Company, which program provides for a bonus in an amount
up to 40% of the Employee's salary upon attainment of the bonus criteria. The
Employee shall also be eligible for and participate in such fringe benefits as
shall be generally provided to executives of the Company, including medical
insurance and retirement programs which may be adopted from time to time during
the term hereof by the Company. The Employee shall be responsible for making any
generally applicable employee contributions required under such fringe benefit
programs.
(c) During the term of this Agreement, the Employee shall be
eligible for participation in the Company's 1996 Stock Option Plan, which plan
is administered by the Company's Compensation Committee.
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<PAGE>
(d) The Compensation Committee of the Company shall review the
Employee's compensation at least once per year and award such bonuses or make
such increases to the Base Salary as the Compensation Committee, in its sole
discretion, determines are merited, based upon the Employee's performance and
consistent with compensation policies of the Company.
5. SICK LEAVE AND VACATION. During the term of this Agreement, the
Employee shall be entitled to annual vacation of at least three (3) weeks in
length each year, or such greater time period if permitted by Company policy.
The Employee shall also be entitled to sick leave consistent with Company
policy.
6. EXPENSES. During the term of this Agreement, the Company shall
reimburse the Employee for all reasonable out-of-pocket expenses incurred by the
Employee in connection with the business of the Company and in performance of
his duties under this Agreement upon the Employee's presentation to the Company
of an itemized accounting of such expenses with reasonable supporting data.
7. TERM.
(a) The Employee's employment under this Agreement shall
commence on the date first set forth above and shall expire on the first
anniversary of such date. Notwithstanding the foregoing, the parties hereto may,
subject to paragraph 7(b) below, terminate the Employee's employment under this
Agreement as follows:
(i) by the Company upon 30 days' notice if the
Employee becomes physically or mentally incapacitated or is injured so that he
is unable to perform the services required of him hereunder and such inability
to perform continues for a period in excess of six months and is continuing at
the time of such notice; or
(ii) by the Company for "Cause" upon notice of such
termination to the Employee. For purposes of this Agreement, the Company shall
have "Cause" to terminate its obligations hereunder upon (A) the determination
by the Board of Directors of the Company (the "Board") that the Employee has
ceased to perform his duties hereunder (other than as a result of his incapacity
due to physical or mental illness or injury), which failure amounts to an
intentional and extended neglect of his duties hereunder, (B) the Employee's
death, (C) the Board's determination that the Employee has engaged or is about
to engage in conduct materially injurious to the Company, (D) the Employee's
having been convicted of a felony, or (E) the Employee's participation in
activities proscribed by the provisions of paragraphs 9 or 10 hereof or material
breach of any of the other covenants herein; or
(iii) (A) by the Company without Cause upon 30 days'
notice of such termination to the Employee (other than in connection with a
Solan Change of Control (as defined below)) or (B) by the Employee for "Good
Reason" (as defined below) within twelve (12) months following a Change of
Control (as defined below) upon 30 days' notice of such termination to the
Company. For purposes of this Agreement, "Good Reason" shall mean (a) the
assignment to the Employee by the Company of duties inconsistent with the
Employee's position, authority, duties,
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<PAGE>
responsibilities or status with the Company as in effect immediately after the
date of execution of this Agreement, including, but not limited to, any
reduction whatsoever in such position, authority, duties, responsibilities or
status, or a change in the Employee's titles or offices, as then in effect, or
any removal of the Employee from, or any failure to reelect the Employee to, any
of such positions, except in connection with the termination of his employment
on account of his death, disability, or for Cause, (b) the failure by the
Company to pay to the Employee the Base Salary and bonus, if any, in accordance
with paragraphs 4(a) and 4(b) hereof, (c) the failure by the Company to allow
the Employee to participate in the Company's employee benefit plans generally
available from time to time to senior executives of the Company or (d) the
failure of the Company to have any successor to the Company assume this
Agreement. For purposes of this Agreement, "Change of Control" shall mean the
occurrence of any of the following events:
(x) The approval by the stockholders of the Company of
a merger or consolidation of the Company with any
other corporation, other than a merger or
consolidation which would result in the voting
securities of the Company outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into
voting securities of the surviving entity) more
than fifty percent (50%) of the total voting power
represented by the voting securities of the Company
or such surviving entity outstanding immediately
after such merger or consolidation;
(y) Any approval by the stockholders of the Company of
a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the
Company of all or substantially all of the
Company's assets; or
(z) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of
1934), other than Warburg, Pincus Investors, L.P.,
becoming the "beneficial owner" (as defined in Rule
13d-3 under said Act), directly or indirectly, of
securities of the Company representing 50% or more
of the total voting power represented by the
Company's then outstanding voting securities.
(iv) Within three months from the date of a "Solan Change
of Control" by the Company or by
the Employee in each case upon thirty days notice of such termination to the
other party. For purposes of this Agreement, "Solan Change of Control" shall
mean the occurrence of any of the following events:
(i) The Company divests, dissolves, discontinues,
disposes of, exchanges or transfers to a third party
all or a portion of its Solan Division product line
(the "Solan Division"), and such transaction results
in the Solan Division having revenues after giving
pro forma effect to such transaction as if it
occurred during the four full fiscal quarters
immediately preceding the date of such transaction
that are less than fifty percent (50%) of its actual
revenues for such period (in making such pro forma
calculation, the Company will treat such transaction
as having occurred on the
17
<PAGE>
first day of such Period); provided, however, no
Solan Change of Control shall have occurred if, in
connection with any such transaction:
(a) The third party transferee in
such transaction offers the Employee a
comparable position which includes duties
reasonably consistent with the Employee's
position, authority, duties,
responsibilities or status with the Company
as in effect immediately prior to the date
of any such transaction; or
(b) The Company offers Employee a
comparable position with the Company which
includes duties reasonably consistent with
the Employee's position, authority, duties,
responsibilities or status with the Company
as in effect immediately prior to the date
of such transaction; or
Notwithstanding anything herein to the contrary, in no event
shall the occurrence of a Change of Control constitute a Solan Change of
Control. In the event a Change of Control occurs, the terms of this Agreement
relating to Change of Control shall expressly govern if they conflict in any way
with definitions of a Solan Change of Control.
(b) (i) If this Agreement is terminated pursuant to paragraph
7(a)(i) above, the Employee shall receive salary continuation pay from the date
of such termination until the first anniversary of the date hereof at the rate
of 75% of the Base Salary, reduced by applicable payroll taxes and further
reduced by the amount received by the Employee during such period under any
Company-maintained disability insurance policy or plan or under Social Security
or similar laws. Such salary continuation payments shall be paid periodically to
the Employee as provided in paragraph 4(a) for the payment of the Base Salary.
(ii) If this Agreement is terminated pursuant to
paragraph 7(a)(ii) above, the Employee shall receive no salary continuation pay
or severance pay.
(iii) If this Agreement is terminated pursuant to paragraph
7(a)(iii) above, the Employee shall (A) receive salary continuation pay for a
period equal to the greater of (1) six (6) months or (2) the applicable period
under the Company's then-current severance policy from and after the date of
such termination (the "Salary Continuation Period") at a rate equal to the Base
Salary and (B) during the Salary Continuation Period remain eligible for other
benefits normally available to executives of the Company, including, but not
limited to, health insurance and the monthly car allowance payable to the
Employee hereunder. Such payments (less applicable payroll taxes) shall be paid
periodically to the Employee as provided in paragraph 4(a) for the payment of
the Base Salary.
(iv) If this Agreement is terminated pursuant to paragraph
7(a)(iv) above, the Employee shall (A) receive salary continuation pay for a
period equal to twelve (12) months (the "Solan Salary Continuation Period") at a
rate equal to the Base Salary and (B) during the Solan Salary Continuation
Period remain eligible for other benefits normally available to executives of
the Company, including, but not limited to, health insurance and the monthly car
18
<PAGE>
allowance payable to the Employee hereunder. Such payments (less applicable
payroll taxes) shall be paid periodically to the Employee as provided in
paragraph 4(a) for the payment of the Base Salary; so long as the Employee:
(w) uses his best efforts to assist
the Company in all activities and actions
associated with the Solan Change in Control
(if requested to do so by the Company); and
(x) for the duration of the Solan
Salary Continuation Period, does not
interfere with, disrupt or attempt to
disrupt the relationship, contractual or
otherwise, between the Company and any
customer, supplier, lessor, lessee or
employee of the Company.
(c) During the Salary Continuation Period or the Solan Salary
Continuation Period, as applicable, the Employee shall be under no obligation to
mitigate the costs to the Company of the payments under paragraph 7(b)(iii) or
7(b)(iv) above.
(d) Not later than ninety (90) days prior to the expiration of
the stated term of the Agreement, the parties shall begin to negotiate in good
faith the terms of any extension of this Agreement, provided that no party shall
be under any obligation to enter into such an extension.
8. REPRESENTATIONS. The Employee hereby represents to the Company that
(a) he is legally entitled to enter into this Agreement and to perform the
services contemplated herein, and (b) he has the full right, power and
authority, subject to no rights of third parties, to grant to the Company the
rights contemplated by paragraph 10 hereof.
9. DISCLOSURE OF INFORMATION. The Employee recognizes and acknowledges
that the Company's and its predecessors' trade secrets, know-how and proprietary
processes as they may exist from time to time are valuable, special and unique
assets of the Company's businesses, access to and knowledge of which are
essential to the performance of the Employee's duties hereunder. The Employee
will not, during or after the term of his employment by any of the Company, in
whole or in part, disclose such secrets, know-how or processes to any person,
firm, corporation, association or other entity for any reason or purpose
whatsoever, nor shall the Employee make use of any such property for his own
purposes or for the benefit of any person, firm, corporation or other entity
(except the Company) under any circumstances during or after the term of his
employment, provided that after the term of his employment these restrictions
shall not apply to such secrets, know-how and processes which are then in the
public domain (provided further that the Employee was not responsible, directly
or indirectly, for such secrets, know-how or processes entering the public
domain without the Company's consent).
10. INVENTIONS. The Employee hereby sells, transfers and assigns to the
Company or to any person, or entity designated by the Company all of the entire
right, title and interest of the Employee in and to all inventions, ideas,
disclosures and improvements, whether patented or unpatented, and copyrightable
material, made or conceived by the Employee, solely or jointly, during the term
hereof which relate to methods, apparatus, designs, products, processes or
devices, sold, leased, used or under consideration or development by the Company
or any of its
19
<PAGE>
predecessors, or which otherwise relate to or pertain to the business, functions
or operations of the Company or any of its predecessors or which arise from the
efforts of the Employee during the course of his employment for the Company or
any of its predecessors. The Employee shall communicate promptly and disclose to
the Company, in such form as the Company requests, all information, details and
data pertaining to the aforementioned inventions, ideas, disclosures and
improvements; and the Employee shall execute and deliver to the Company such
formal transfers and assignments and such other papers and documents as may be
necessary or required of the Employee to permit the Company or any person or
entity designated by the Company to file and prosecute the patent applications
and, as to copyrightable material, to obtain copyright thereof. Any invention
relating to the business of the Company and disclosed by the Employee within one
year following the termination of this Agreement shall be deemed to fall within
the provisions of this paragraph unless proved to have been first conceived and
made following such termination.
11. COVENANTS NOT TO COMPETE OR INTERFERE. For a period ending six (6)
months from and after the termination of the Employee's employment hereunder
other than in connection with a Solan Change of Control or twelve (12) months in
the event of termination due to a Solan Change of Control, the Employee shall
not (whether as an officer, director, owner, employee, partner or other direct
or indirect participant) engage in any Competitive Business. "Competitive
Business" shall mean the manufacturing, supplying, producing, selling,
distributing or providing for sale of (A) any product, device or instrument
manufactured from or using polyvinal acetal (PVAc) material or technology or (B)
any eye, ear, nose or throat product, device or instrument (x) of a type
manufactured or sold by the Company or its subsidiaries or (y) in clinical
development sponsored by the Company or its subsidiaries, in each case, as of
the date of termination of the Employee's employment. For such period, the
Employee shall also not interfere with, disrupt or attempt to disrupt the
relationship, contractual or otherwise, between the Company or its subsidiaries
and any customer, supplier, lessor, lessee or employee of the Company or its
subsidiaries. It is the intent of the parties that the agreement set forth in
this paragraph 11 apply in all parts of the world.
Employee agrees that a monetary remedy for a breach of the
agreement set forth in this paragraph 11 will be inadequate and impracticable
and further agrees that such a breach would cause the Company irreparable harm,
and that the Company shall be entitled to temporary and permanent injunctive
relief without the necessity of proving actual damages. In the event of such a
breach, Employee agrees that the Company shall be entitled to such injunctive
relief, including temporary restraining orders, preliminary injunctions and
permanent injunctions as a court of competent jurisdiction shall determine.
It is the desire and intent of the parties that the provisions
of this paragraph 11 shall be enforced to the fullest extent permissible under
the laws and public policies applied in each jurisdiction in which enforcement
is sought. Accordingly, if any particular portion of this paragraph 11 shall be
adjudicated to be invalid or unenforceable, this paragraph 11 shall be deemed
curtailed, whether as to time or location, to the minimum extent required for
its validity under the applicable law and shall be binding and enforceable with
respect to the Employee as so curtailed, such curtailment to apply only with
respect to the operation of this paragraph in the particular jurisdiction in
which such adjudication is made. If a court in any jurisdiction, in
20
<PAGE>
adjudicating the validity of this paragraph 11, imposes any additional terms or
restrictions with respect to the agreement set forth in this paragraph 11, this
paragraph 11 shall be deemed amended to incorporate such additional terms or
restrictions.
12. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of paragraphs 9, 10 or 11 of this Agreement, the Company shall be
entitled to an injunction restraining the Employee from such breach. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies for such breach or threatened breach.
13. CAR ALLOWANCE. The Employee shall be entitled to a monthly
allowance of $650.00, which the Employee may utilize to cover expenses relating
to the use of his personal automobile. The Employee shall be responsible for all
expenses related to the ownership and operation of such automobile, including,
but not limited to, insurance, repairs, registration fees and maintenance costs.
The Company shall not be responsible for any costs, expenses or other
obligations related to such automobile other than the monthly allowance payable
hereunder.
14. INSURANCE. The Company may, at its election and for its benefit,
insure the Employee against accidental loss or death, and the Employee shall
submit to such physical examination and supply such information as may be
required in connection therewith.
15. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
Mark J. Fletcher, 3810 Brampton Island Court, Jacksonville, Florida 32224, in
the case of the Employee, or to Xomed Surgical Products, Inc., 6743 Southpoint
Drive North, Jacksonville, Florida 32216, in the case of the Company, or to such
other officer or address as the Company shall notify the Employee.
16. WAIVER OF BREACH. A waiver by the Company or Employee of a breach
of any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the other party.
17. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Florida.
18. ASSIGNMENT. This Agreement may be assigned, without the consent of
the Employee, by the Company to any person, partnership, corporation, or other
entity which has purchased substantially all the assets of such Company,
provided such assignee assumes all the liabilities of such Company hereunder.
19. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties and supersedes any and all agreements, letters of intent or
understandings between the Employee and the Company, its subsidiaries or any of
the Company's principal shareholders including, but not limited to, the Letter
Agreement dated November 4, 1996 between the Company and the Employee. It may be
changed only by an agreement in writing signed by a party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought.
21
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first hereinabove written.
XOMED SURGICAL PRODUCTS, INC.
By: /s/ JAMES T. TREACE
-------------------------------------
Name: James T. Treace
Title: President, CEO
EMPLOYEE
/s/ MARK J. FLETCHER
----------------------------------------
Mark J. Fletcher
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUL-03-1999
<CASH> 14,133
<SECURITIES> 0
<RECEIVABLES> 21,502
<ALLOWANCES> 1,099
<INVENTORY> 20,514
<CURRENT-ASSETS> 56,935
<PP&E> 36,974
<DEPRECIATION> 12,127
<TOTAL-ASSETS> 136,349
<CURRENT-LIABILITIES> 16,730
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 119,302
<TOTAL-LIABILITY-AND-EQUITY> 136,349
<SALES> 56,975
<TOTAL-REVENUES> 56,975
<CGS> 22,213
<TOTAL-COSTS> 22,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239
<INCOME-PRETAX> 9,343
<INCOME-TAX> 3,529
<INCOME-CONTINUING> 5,814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,814
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.45
</TABLE>
