Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended MAY 5, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____________ to _______________.
Commision File Number
0-18208
MAXXIM MEDICAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0291634
State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
104 INDUSTRIAL BOULEVARD, SUGAR LAND, TEXAS 77478
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code...............(713) 240-5588
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 and 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at June 12, 1996
COMMON STOCK, $.001 PER VALUE 8,078,927
MAXXIM MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Balance Sheets as of
May 5, 1996 and October 29, 1995 ..................... 2
Condensed Consolidated Statements of Operations
for the Three Months and Six Months
Ended May 5, 1996 and April 30, 1995 ................. 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended May 5, 1996 and
April 30, 1995 ....................................... 4
Notes to Condensed Consolidated Financial
Statements ........................................... 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition ................ 7
PART II. OTHER INFORMATION ......................................... 9
SIGNATURES ......................................................... 11
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIM MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
May 5, October 29,
1996 1995
--------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and Cash Equivalents .......................... $ 5,059 $ 5,074
Accounts Receivable, net of allowances of
$2,760 and $2,054, respectively .................. 48,983 51,276
Inventory .......................................... 58,826 64,649
Prepaid Expenses, Deferred Assets and Other ........ 4,345 4,264
--------- ---------
Total Current Assets ............................. 117,213 125,263
PROPERTY AND EQUIPMENT ............................... 109,236 112,134
Less: Accumulated Depreciation .................. (15,934) (16,580)
--------- ---------
93,302 95,554
GOODWILL AND OTHER INTANGIBLES, Net .................. 38,523 41,536
DEFERRED TAXES AND OTHER ASSETS, Net ................. 8,085 2,137
--------- ---------
Total Assets ...................................... $ 257,123 $ 264,490
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt ............... $ 11,250 $ 11,250
Accounts Payable ................................... 22,762 21,917
Accrued Liabilities ................................ 16,063 18,064
Other Short-Term Obligations ....................... 633 746
--------- ---------
Total Current Liabilities ........................ 50,708 51,977
6 3/4% CONVERTIBLE SUBORDINATED DEBENTURES ........... 28,750 28,750
LONG-TERM DEBT, net of current maturities ........... 57,408 65,737
OTHER LONG-TERM LIABILITIES .......................... 1,180 1,675
--------- ---------
Total Liabilities ................................ 138,046 148,139
--------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par, 10,000,000 shares
authorized, none issued or outstanding ........... -- --
Common Stock, $.001 par value, 40,000,000
shares authorized, 8,120,599, and 8,087,647
shares issued and outstanding, respectively ...... 8 8
Additional Paid-in Capital ......................... 91,753 91,677
Retained Earnings .................................. 29,336 23,659
Cumulative Translation Adjustment .................. (2,020) 1,007
--------- ---------
Total Shareholders' Equity ....................... 119,077 116,351
--------- ---------
Total Liabilities and Shareholders' Equity ........ $ 257,123 $ 264,490
========= =========
See accompanying notes to condensed consolidated financial statements.
2
MAXXIM MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
May 5, April 30, May 5, April 30,
1996 1995 1996 1995
--------- --------- --------- ---------
Net Sales .......................................... $ 90,859 $ 62,511 $ 177,459 $ 116,878
Cost of Sales ...................................... 65,348 43,255 126,714 80,508
--------- --------- --------- ---------
Gross Profit ....................................... 25,511 19,256 50,745 36,370
Operating Expenses:
Marketing and Selling ......................... 14,929 11,490 29,696 22,221
General and Administrative .................... 3,880 3,100 7,857 5,673
--------- --------- --------- ---------
18,809 14,590 37,553 27,894
Income from Operations ............................. 6,702 4,666 13,192 8,476
Interest Expense ................................... (1,800) (522) (3,787) (1,059)
Other Income (Expense), net ........................ (229) (212) (399) (17)
--------- --------- --------- ---------
Income Before Income Taxes ......................... 4,673 3,932 9,006 7,400
Income Taxes ....................................... 1,722 1,406 3,329 2,620
--------- --------- --------- ---------
Net Income ......................................... $ 2,951 $ 2,526 $ 5,677 $ 4,780
========= ========= ========= =========
Primary Earnings Per Share ......................... $ 0.35 $ 0.31 $ 0.68 $ 0.59
========= ========= ========= =========
Fully Diluted Earnings Per Share ................... $ 0.33 $ 0.29 $ 0.64 $ 0.55
========= ========= ========= =========
Weighted Average Shares Outstanding ................ 8,339 8,162 8,318 8,157
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
MAXXIM MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In thousands)
Six Months Ended
------------------------------
May 5, April 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................................................... $ 5,677 $ 4,780
Adjustment to Reconcile Net Income to Net
Cash Used in Operations:
Depreciation and Amortization .............................................. 6,969 3,671
Change in Operating Assets and Liabilities ................................. (2,226) (7,399)
-------- --------
NET CASH PROVIDED BY OPERATIONS ........................................................ 10,420 1,052
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment, Inventory
and Other Assets, Net of Stock Issued Valued at $360 .......................... -- (1,500)
Purchase of Medica ............................................................... -- (11,000)
Proceeds from the Sale of Henley Assets .......................................... 6,000 --
Purchase of Property and Equipment and Other ..................................... (6,164) (14,040)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................................................. (164) (26,540)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Negative Book Cash Balance ................................ (293) 1,292
Payments of Long-Term Borrowings--Net ............................................ (8,330) (2,303)
Other Financing Activities ....................................................... 1,379 62
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............................................. (7,244) (949)
EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT ...................................... (3,027) 444
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................................... (15) (25,993)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................................... 5,074 31,869
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................. $ 5,059 $ 5,876
======== ========
SUPPLEMENTAL DISCLOSURE ON NON-CASH ACTIVITIES
Convertible Note Received from the Sale of Henley Assets ......................... $ 7,000 $ --
======== ========
4
MAXXIM MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of Maxxim Medical, Inc. and its wholly owned subsidiaries
(collectively, the Company). The Company develops, manufactures, distributes and
markets specialty hospital products.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments of a normal recurring nature which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. All significant intercompany balances and transactions have
been eliminated in consolidation.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended October 29,
1995, included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to the 1995 condensed
consolidated financial statements to conform with the 1996 presentation.
Note 2 - Summary of Significant Accounting Policies
Commencing in fiscal year 1994 the Company implemented a fiscal year
which ends on the Sunday nearest to the end of the month of October. Normally
each fiscal year will consist of 52 weeks, but every five or six years, the
fiscal year will consist of 53 weeks. For fiscal 1996 the year end date will be
November 3 compared to a 1995 year end date of October 29. Fiscal 1996 will
consist of 53 weeks. The second quarter of fiscal 1996 ended on May 5 compared
to the fiscal 1995 quarter end date of April 30.
Note 3 - Translation of Foreign Currency Financial Statements
Assets and liabilities of foreign subsidiaries have been translated
into United States dollars at the applicable rates of exchange in effect at the
end of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected as a separate component of
stockholders' equity.
Note 4 - Earnings Per Share
Earnings per share is based on the weighted average number of common
shares and common stock equivalents outstanding for the period. For purposes of
this calculation, outstanding stock options are considered common stock
equivalents using the treasury stock method. On a fully diluted basis, both net
income available to common shareholders and shares outstanding are adjusted to
assume the conversion of the 6 3/4% Convertible Subordinated Debentures from the
date of issue.
5
Note 5 - Estimates Involved in Preparing the Condensed Consolidated Financial
Statements
The Company's interim financial statements are prepared in accordance
with the same accounting policies as those followed at year end. Certain items
in the financial statements can be determined on an interim basis only by making
accounting estimates. The accuracy of such amounts is dependent upon facts that
will exist and procedures that will be accomplished by the Company later in the
year. Certain of the significant accounting estimates related to the
accompanying statements are stated below.
Inventories -
The Company makes a physical count of portions of its inventory at or
near year end. The amount reflected as inventory as of May 5, 1996 and the
related amount for the cost of sales have been determined using the Company's
normal accounting procedures. In management's opinion, no significant adjustment
would have been required had an actual count of the inventory been made.
Inventory as of May 5, 1996 and October 29, 1995 included the following:
May 5, October 29,
1996 1995
------- -------
Raw Materials ..................................... $22,415 $24,335
Work In Progress .................................. 6,765 7,037
Finished goods and goods purchased for resale ..... -
29,646 33,277
------- -------
$58,826 $64,649
------- -------
Income Taxes -
The Company has calculated current and deferred income tax provisions
for the quarters ended May 5, 1996 and April 30, 1995, based on its best
estimate of the effective income tax rate expected to be applicable for the full
fiscal year.
Note 6 - Sale of Assets of Henley Healthcare Division ("Henley")
Effective May 1, 1996, the Company sold certain assets related to the
Henley operations to Lasermedics, Inc. of Missouri City, Texas for $13 million
which consisted of approximately $6 million in cash and a $7 million convertible
note. The assets, which were sold at net book value, consisted primarily of
receivables, inventory, furniture and equipment, two manufacturing facilities
located in Sugar Land and Belton, Texas, and intangible assets related to the
Henley product lines. The assets were used by Henley to manufacture and sell
various types of products for the physical medicine, rehabilitation and pain
management markets. No gain or loss was recorded on this transaction.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and related Notes appearing
elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which selected items in the Condensed Consolidated Statements of
Operations bear to net sales:
Percentage of Net Sales
------------------------------------------
Three Months Ended Six Months Ended
------------------ ------------------
May 5, April 30, May 5, April 30,
1996 1995 1996 1995
------ ------ ------ ------
Net Sales ................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales ............... 71.9% 69.2% 71.4% 68.9%
------ ------ ------ ------
Gross Profit ................ 28.1% 30.8% 28.6% 31.1%
Operating Expenses .......... 20.7% 23.3% 21.2% 23.9%
------ ------ ------ ------
Income from Operations ...... 7.4% 7.5% 7.4% 7.3%
Interest Expense ............ (2.0%) (0.8%) (2.1%) (0.9%)
Other Income, Net ........... (0.3%) (0.3%) (0.2%) (0.0%)
------ ------ ------ ------
Income Before IncomeTaxes ... 5.1% 6.3% 5.1% 6.3%
Income Taxes ................ 1.9% 2.2% 1.9% 2.2%
------ ------ ------ ------
Net Income .................. 3.2% 4.0% 3.2% 4.1%
====== ====== ====== ======
Net Sales for the second quarter of fiscal 1996 were $90.9 million, an
increase of 45.4% over the $62.5 million reported for the second quarter of
fiscal 1995. Net sales for the first six months of fiscal 1996 were $177.5
million, a 51.8% increase over the $116.9 million reported for the previous
year. The Company's gross profit increased to $25.5 million in the second
quarter of fiscal 1996 compared to $19.3 million for the same quarter last year.
For the six months ended May 5, 1996, gross profit was $50.7 million versus the
$36.4 million reported for the same period last year. The increase in sales and
gross profit was primarily due to the world-wide glove operation acquisition
completed in the third quarter of fiscal 1995. The glove product lines have
lower gross margins than the Company's previously reported gross margins and as
a result the Company's gross profit rate declined from 30.8% to 28.1 % for the
second quarter and from 31.1% to 28.6% for the first six month period of each
respective fiscal year.
7
Operating expenses for the second quarter were $18.8 million or 20.7%
of net sales for fiscal 1996 compared to $14.6 million or 23.3% of net sales for
fiscal 1995. For the first six months of fiscal 1996 and 1995 operating expenses
were $37.6 million and $27.9 million, or 21.2% and 23.9% of net sales,
respectively. The increase in operating expenditures was directly attributable
to the glove operations acquisition and the decrease in the operating expense
rate to sales was attributable to cost savings that resulted from combining the
sales and distribution functions of the glove operations with the existing
operations of the Company.
Interest expense was $1,800,000 or 2.0% of net sales for the second
quarter of fiscal 1996 and $522,000 or .8% of net sales for the second quarter
of 1995. For the six months ended May 5, 1996 and the six months ended April 30,
1995 interest expense was $3,787,000 and $1,059,000, or 2.1% and .9% of net
sales respectively. The increase in interest expense is directly related to the
credit facility established to finance the glove operation acquisition. The
Company's effective tax rate for the quarter and six months ended May 5, 1996
was 36.9% and 37.0% of net income respectively.
As a result of the foregoing, net income for the second fiscal quarter
of 1996 was $2,951,000 or $.35 a share, primary, versus $2,526,000 or $.31 a
share, primary, for fiscal 1995. For the first six months of fiscal 1996 and
1995, net income was $5,677,000 or $.68 a share, primary versus $4,780,000 or
$.59 a share, primary, respectively.
Since the Henley operations were sold just prior to the end of the
second quarter there was no material impact on the results of the Company's
operations for all periods reported.
LIQUIDITY AND CAPITAL RESOURCES
At May 5, 1996 the Company had cash and cash equivalents of
approximately $5.1 million, working capital of approximately $66.5 million,
long-term liabilities of $87.3 million and shareholders' equity of $119.1
million.
During the second quarter of fiscal 1996 the Company received
approximately $6 million in cash from the sale of certain assets of the Henley
Healthcare division (see Note 6). In accordance with the terms of the Company's
credit facility $5.6 million was used to retire a portion of the term loan.
On June 10, 1996 the Company entered into an Agreement and Plan of
Merger with Sterile Concepts (see Part II Item 6). If the merger is successfully
completed, additional financing of approximately $147 million would be required.
However, if the merger with Sterile Concepts is not consummated, the Company
believes that internally generated cash flows and borrowings under its existing
credit facility will be sufficient to meet its future working capital
requirements.
8
PART II. OTHER INFORMATION
Items 1, 2, and 3 for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1996 Annual Meeting of Shareholders on March 15,
1996 for the purpose of voting on the following:
(1) As set forth in the table below the following directors were elected to
serve until the next annual meeting of shareholders or until their respective
successors are elected and qualified:
NAME FOR WITHHELD
Kenneth W. Davidson 7,178,784 69,077
Ernest J. Henley, Ph.D. 7,178,884 68,977
Donald R. DePriest 7,178,884 68,977
Peter G. Dorflinger 7,178,884 68,977
Richard O. Martin, Ph.D. 7,178,884 68,977
Henk R. Wafelman, Ing. 7,178,884 68,977
Martin Grabois, M.D. 7,178,884 68,977
(2) The shareholders approved the 1996 Non-Employee Directors' Stock Option Plan
("Directors' Plan") providing for the reservation of up to 30,000 shares in
connection with the grant of options to purchase such shares to non-employee
directors, and approved the grant of options to purchase 18,000 shares to
current non-employee directors, with 6,687,481 shares voting for the Directors'
Plan and grant, 470,346 shares voting against the Directors' Plan and grant,
63,934 shares abstaining, and 26,100 shares not voting.
(3) The shareholders voted to approve an amendment to the Company's Restated
Articles of Incorporation to increase the number of authorized shares of common
Stock, par value $.001, from 20,000,000 to 40,000,000. 7,004,497 shares voted
for the amendment, 215,776 shares voted against the amendment, and 27,588 shares
abstained.
All of the foregoing are discussed in further detail in the Company's definitive
Proxy Statement and related documents filed with the Securities and Exchange
Commission in connection with the 1996 Annual Meeting of Shareholders.
9
Item 5. OTHER INFORMATION
On June 10, 1996 the Company announced that it signed an Agreement of
Merger with Sterile Concepts Holdings, Inc. ("Sterile Concepts"). Under this
Agreement, the Company commenced a ("Tender Offer") to the Shareholders of
Sterile Concepts on June 14, 1996, whereunder the Company offered to purchase
all outstanding shares of common stock of Sterile Concepts for $20 per share.
Completion of the tender offer will be contingent on, among other conditions,
receipt of appropriate regulatory approvals and the valid tender of more than
two-thirds of the outstanding shares of common stock (determined on a fully
diluted basis). Upon completion of the Tender Offer, the Company is required to
merge Sterile Concepts with a subsidiary of the Company. The transaction cost is
estimated to be approximately $147 million, including the assumption of existing
Sterile Concepts debt and will be financed through the Company's current lender
and various affiliates. On June 14, 1996 the Company filed with the Securities &
Exchange Commission a Schedule 14D-1 with respect to the Tender Offer, which is
filed as Exhibit 2.1 hereto and describes the Tender Offer and the Merger in
detail. In addition, Exhibit 2.2 hereto is the Merger Agreement and Exhibits
2.3(a) and 2.3(b) hereto consist of Commitment letters from Nationsbank of
Texas, N.A. and NationsBanc Capital Markets, Inc. ("NCMI") and NationsBridge,
LLC and NCMI with respect to certain proposed financing for the Tender Offer and
the Merger.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
2.1 Schedule 14D-1 of Maxxim Medical, Inc., a Texas corporation
("Parent"), Maxxim Medical, Inc., a Delaware corporation ("Maxxim"), and Maxxim
Acquisition Co., a Virginia corporation ("Purchaser"). (Filed with the
Commission on June 14, 1996 and incorporated herein by reference).
2.2 Agreement and Plan of Merger dated as of June 10, 1996 by and among
Purchaser , Maxxim and Sterile Concepts Holding, Inc., a Virginia corporation
("SCI") (Filed as Exhibit (d) to the Schedule 14D-1 of Parent, Maxxim and
Purchaser with the Commission on June 14, 1996, and incorporated herein by
reference).
2.3(a) Commitment Letter dated as of June 8, 1996, addressed to Maxxim,
executed by NationsBanc of Texas, N.A., as Agent for a syndicate of lenders and
NationsBanc Capital Markers, Inc., as Arranger and Syndication Agent, with
respect to a $165,000,000 Senior Credit Facility (Filed as Exhibit (b)(1) to the
Schedule 14D-1 of Parent, Maxxim and Purchaser with the Commission on June 14,
1996 , and incorporated herein by reference).
2.3(b) Commitment Letter dated as of June 8, 1996, addressed to Maxxim,
executed by NationsBridge, LLC and NationsBank Capital Markets, Inc., with
respect to a $75,000,000 bridge facility (Filed as Exhibit (b) (2) to the
Schedule 14D-1 of Parent, Maxxim and Purchaser with the Commission on June 14,
1996, and incorporated herein by reference).
3.1 Articles of Amendment to Articles of Incorporation filed with the
Secretary of State of Texas increasing the authorized Common Stock, $.001 par
value to 40,000,000 shares.
(b) Reports on Form 8-K
None
10
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.
MAXXIM MEDICAL, INC.
Date:6/17/96 By: /S/ KENNETH W. DAVIDSON
Kenneth W. Davidson
Chairman of the Board, President &
Chief Executive Officer
Date:6/17/96 By: /S/ PETER M. GRAHAM
Peter M. Graham
Treasurer and Chief Operating Officer
(Principal Financial Officer)