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 AUGUST 1, 1999
[ ] 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)
10300 49TH STREET NORTH, CLEARWATER, FLORIDA 33762
- --------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code................(727) 561-2100
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 September 8, 1999
- ----------------------------- ---------------------------------
COMMON STOCK, $.001 PAR VALUE 14,276,682
MAXXIM MEDICAL, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Condensed Consolidated Balance Sheets as of
August 1, 1999 and November 1, 1998 2
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
August 1, 1999 and August 2, 1998 3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended August 1, 1999 and
August 2, 1998 4
Notes to Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 1, NOVEMBER 1,
1999 1998
--------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,354 $ 4,125
Accounts receivable, net of allowances of $1,608 and $1,840, 101,188 70,429
respectively
Inventory, net 131,512 79,648
Deferred tax assets 16,398 10,325
Prepaid expenses and other 7,717 8,690
--------- ---------
Total current assets 262,169 173,217
Property and equipment 237,493 169,048
Less: accumulated depreciation (53,881) (41,538)
--------- ---------
183,612 127,510
Goodwill, net 272,656 147,016
Other assets, net 36,369 20,308
--------- ---------
Total assets $ 754,806 $ 468,051
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 25,000 $ --
Current maturities of other long-term obligations 1,853 2,544
Accounts payable 42,117 35,834
Accrued liabilities 51,645 25,921
--------- ---------
Total current liabilities 120,615 64,299
Long-term debt, net of current maturities 229,700 13,800
10 1/2% Senior subordinated notes 100,000 100,000
Other long-term obligations, net of current maturities 6,917 5,339
Deferred tax liabilities 13,161 11,704
--------- ---------
Total liabilities 470,393 195,142
Commitments and contingencies
Shareholders' equity
Preferred Stock, $1.00 par, 20,000,000 shares authorized,
none issued or outstanding -- --
Common Stock, $.001 par, 40,000,000 shares authorized, 14,276,682
and 14,238,822 shares issued and outstanding, respectively 14 14
Additional paid-in capital 220,322 219,268
Retained earnings 80,739 64,886
Subscriptions receivable (5,200) (5,200)
Accumulated other comprehensive income (11,462) (6,059)
--------- ---------
Total shareholders' equity 284,413 272,909
--------- ---------
Total liabilities and shareholders' equity $ 754,806 $ 468,051
========= =========
See accompanying notes to condensed consolidated financial statements.
2
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ------------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1999 1998 1999 1998
--------- --------- ---------- ----------
Net sales $ 173,278 $ 128,057 $ 485,367 $ 389,018
Cost of sales 114,446 92,733 324,327 285,891
--------- --------- --------- ---------
Gross profit 58,832 35,324 161,040 103,127
Selling, general and administrative expenses 40,580 23,508 109,947 69,125
Transition expenses -- -- 3,371 --
--------- --------- --------- ---------
Income from operations 18,252 11,816 47,722 34,002
Interest expense, net (7,709) (2,544) (19,940) (10,382)
Other income (expense), net (52) 125 299 514
--------- --------- --------- ---------
Income before income taxes 10,491 9,397 28,081 24,134
Income taxes 4,581 3,953 12,228 10,220
--------- --------- --------- ---------
Net income $ 5,910 $ 5,444 $ 15,853 $ 13,914
========= ========= ========= =========
Basic earnings per share $ 0.41 $ 0.38 $ 1.11 $ 1.15
========= ========= ========= =========
Diluted earnings per share $ 0.41 $ 0.37 $ 1.09 $ 1.11
========= ========= ========= =========
Basic weighted average shares outstanding 14,277 14,209 14,268 12,144
========= ========= ========= =========
Diluted weighted average shares outstanding 14,557 14,621 14,598 12,646
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In thousands)
NINE MONTHS ENDED
-----------------------
AUGUST 1, AUGUST 2,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income $ 15,853 $ 13,914
Adjustment to reconcile net income to net cash provided by
operating activities:
Deferred income tax expense 2,299 5,314
Amortization of financing fees 828 421
Depreciation and amortization 23,079 13,544
Compensation expense for outstanding stock options 595 469
Gain on sale of building (167) --
Change in operating assets and liabilities (5,838) 18,210
--------- ---------
Net cash provided by operations 36,649 51,872
Cash flows from investing activities:
Proceeds from product line sale 1,592 --
Proceeds from building sale 336 1,200
Proceeds from long-term investment sale -- 1,500
Purchase of Circon, net of cash acquired (246,769) --
Purchase of Winfield, net of cash acquired -- (31,267)
Purchase of property and equipment (23,365) (15,519)
--------- ---------
Net cash used in investing activities (268,206) (44,086)
Cash flows from financing activities:
Proceeds from long-term borrowings 206,100 --
Payments on long-term borrowings (29,900) (81,000)
Net borrowings (payments) on revolving line of credit 64,700 (10,300)
Payments on other obligations (2,921) (1,144)
Payment of debt financing costs (5,584) --
Net proceeds from secondary stock offering -- 91,394
Increase in bank overdraft 453 3,514
Other, net 126 (379)
--------- ---------
Net cash provided by financing activities 232,974 2,085
Effect of foreign currency translation adjustment on cash and cash (188) (104)
equivalents
--------- ---------
Net increase in cash and cash equivalents 1,229 9,767
Cash and cash equivalents at beginning of period 4,125 3,130
--------- ---------
Cash and cash equivalents at end of period $ 5,354 $ 12,897
========= =========
Supplemental cash flow disclosures:
Interest paid during the period $ 16,102 $ 8,254
Income taxes paid during the period 6,145 1,645
Noncash investing and financing activities
Note receivable from sale of product line $ 1,543 $ --
Note receivable from sale of building 196 --
Conversion of 63/4% convertible subordinated debentures -- 22,278
Conversion of long-term note investment into stock investment -- 4,000
Receipt of equity investment in exchange for certain assets and
intangible assets -- 2,706
Unrealized loss on available for sale securities 1,746 --
See accompanying notes to condensed consolidated financial statements.
4
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 November 1,
1998, 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 fiscal 1998 condensed
consolidated financial statements to conform with the fiscal 1999 presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company has 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 1999, the year end date will be October 31st compared to a 1998 year end
date of November 1st. Fiscal 1999 will consist of 52 weeks. The third quarter of
fiscal 1999 ended on August 1st compared to the fiscal 1998 third quarter end
date of August 2nd .
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 in accumulated other
comprehensive income as a separate component of shareholders' equity.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares, including options and
convertible debt. A reconciliation of such earnings per share data is as
follows:
5
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
THREE MONTHS ENDED AUGUST 1, 1999 THREE MONTHS ENDED AUGUST 2, 1998
------------------------------------- ------------------------------------
(UNAUDITED) (UNAUDITED)
PER SHARE PER SHARE
INCOME SHARES AMOUNTS INCOME SHARES AMOUNTS
----------- ---------- ------------ ----------- ----------- ------------
Basic EPS
Net Income $ 5,910 14,277 $ 0.41 $ 5,444 14,209 $ 0.38
============ ============
Effect of dilutive
securities:
Options 280 412
----------- ---------- ----------- -----------
Diluted EPS $ 5,910 14,557 $ 0.41 $ 5,444 14,621 $ 0.37
=========== ========== ============ =========== =========== ============
NINE MONTHS ENDED AUGUST 1, 1999 NINE MONTHS ENDED AUGUST 2, 1998
------------------------------------- ------------------------------------
(UNAUDITED) (UNAUDITED)
PER SHARE PER SHARE
INCOME SHARES AMOUNTS INCOME SHARES AMOUNTS
----------- ---------- ------------ ----------- ----------- ------------
Basic EPS
Net Income $ 15,853 14,268 $ 1.11 $ 13,914 12,144 $ 1.15
============ ============
Effect of dilutive
securities:
Convertible Debt 107 121
Options 330 381
----------- ---------- ----------- -----------
Diluted EPS $ 15,853 14,598 $ 1.09 $ 14,021 12,646 $ 1.11
=========== ========== ============ =========== =========== ============
ESTIMATES INVOLVED IN PREPARING THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
The amount reflected as inventory as of August 1, 1999, 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 August 1, 1999, and November 1, 1998, included the following:
AUGUST 1, NOVEMBER 1,
1999 1998
----------- -----------
(unaudited)
(In thousands)
Raw materials ........... $ 57,643 $ 33,936
Work in progress......... 22,315 8,450
Finished goods .......... 58,144 43,487
Reserve ................. (6,590) (6,225)
--------- ---------
$ 131,512 $ 79,648
========= =========
GOODWILL
The goodwill resulting from the Circon acquisition was approximately
$130,500,000 and is being amortized over 30 years. Goodwill from the Company's
previous acquisitions is approximately $158,000,000 of which approximately
$144,000,000 remains unamortized as of August 1, 1999. Amortization periods for
previous goodwill amounts range from 5 to 40 years. The Company believes that no
impairment of goodwill exists.
6
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
INCOME TAXES
The Company has calculated current and deferred income tax provisions
for the periods ended August 1, 1999, and August 2, 1998, based on its best
estimate of the effective income tax rate expected to be applicable for the full
fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related Information"
(SFAS No. 131), which is effective for the Company's fiscal year ending in 1999.
This statement establishes standards for reporting segment information in annual
and interim financial statements. It also establishes standards for related
disclosure of products and services, geographical areas and major customers.
Under SFAS No. 131, reporting segments are determined consistent with the way
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company does not believe the
adoption of SFAS No. 131 will have a material impact on its consolidated
financial statements.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), was issued by the
Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 beginning in the first
quarter of fiscal 2001.
NOTE 3 - COMPREHENSIVE INCOME
Effective November 2, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive income
includes all changes in a company's equity including, among other things,
foreign currency translation adjustments, and unrealized gains (losses) on
marketable securities classified as available-for-sale. Total comprehensive
income for the three and nine months ended August 1, 1999 and August 2, 1998
follow:
THREE MONTHS ENDED
AUGUST 1, 1999 AUGUST 2, 1998
-------------- --------------
(In thousands)
Net earnings ............................................. $ 5,910 $ 5,444
Foreign currency translation adjustments ................. (622) (1,809)
Net unrealized loss on available for sale securities...... (586) --
------- -------
Total comprehensive income ............................... $ 4,702 $ 3,635
======= =======
NINE MONTHS ENDED
AUGUST 1, 1999 AUGUST 2, 1998
-------------- --------------
(In thousands)
Net earnings.............................................. $ 15,853 $ 13,914
Foreign currency translation adjustments.................. (3,657) (3,497)
Net unrealized loss on available for sale securities...... (1,746) --
-------- --------
Total comprehensive income................................ $ 10,450 $ 10,417
======== ========
7
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 4 - DEBT
In connection with the acquisition of Circon Corporation ("Circon")
(See Note 5), the Company entered into a Third Amended and Restated Credit
Agreement ("Credit Agreement") with several lending institutions. This new
Credit Agreement replaced the Company's previous credit facility. The Credit
Agreement provides for a term loan of $200,000,000 and a $125,000,000 revolving
line of credit. Additionally the Credit Agreement requires a pledge of the
common stock of the Company's subsidiaries. Financing for the Circon acquisiton
required the full use of the term loan and approximately $60,000,000 of the
revolver (See Note 5). At August 1, 1999, the term loan balance was
approximately $190,000,000 and approximately $64,700,000 was drawn on the
revolver. Both loans mature on January 6, 2005, with the term loan requiring
repayment in twenty-four quarterly installments ranging from $5,000,000 to
$10,000,000, commencing April 30, 1999. Both loans bear interest, payable
quarterly on the Interest Period as defined in the Credit Agreement. The
interest rate is prime or, for LIBOR advances, the LIBOR rate, plus a margin
ranging from 1.5% to 2.75%, indexed according to a defined financial ratio. In
connection with the credit agreement, the Company incurred approximately
$5,584,000 in debt financing fees which are being amortized over the life of the
Credit Agreement.
NOTE 5 - ACQUISITION
Effective January 6, 1999, the Company successfully completed a tender
offer for Circon. Upon the completion of the merger of Circon and Maxxim on
January 8, 1999, all of the outstanding stock of Circon was purchased for
approximately $15.00 per share or $260,000,000, including the repayment of
$32,500,000 of Circon debt and certain fees and expenses incurred in connection
with the acquisition. The Company obtained all funds required in connection with
the acquisition through a bank loan, pursuant to the Third Amended and Restated
Credit Agreement, dated as of January 4, 1999 (See Note 4). The assets acquired
in the Circon acquisition consist primarily of accounts receivable, inventory,
furniture and equipment, intangible assets and owned or leased facilities in
Stamford, Connecticut; Norwalk, Ohio; Racine, Wisconsin and Santa Barbara,
California. Circon markets medical devices for diagnosis and minimally invasive
surgery and general surgery. This acquisition was accounted for by the purchase
method of accounting and approximately $144,000,000 of intangible assets were
recorded in connection with the transaction (approximately $13,500,000 related
to patents and $130,500,000 related to goodwill). Patents are being amortized
over 15 years and goodwill is being amortized over 30 years, using the
straight-line method in each case. Transition expenses of $3,371,000 were
recorded in the first quarter of fiscal 1999 (See Note 6).
The following unaudited pro forma summary results of operations assume
the acquisition of Circon occurred on November 4, 1996.
FISCAL YEAR ENDED
NOVEMBER 1, 1998 NOVEMBER 2, 1997
---------------- ----------------
(In thousands, except per share data)
Revenues................................. $ 674,980 $ 689,321
Net income............................... 4,059 4,132
Basic earnings per share................. $ 0.32 $ 0.50
Diluted earnings per share............... 0.31 0.48
The pro forma adjustments to the historical accounts include (a) the
elimination of intercompany sales, (b) the additional amortization expense
associated with goodwill and intangibles acquired, (c) the elimination of
expenses incurred by Circon related to the merger, (d) the additional interest
expense on the debt incurred to make the acquisition as of the beginning of the
Company's fiscal year as well as the additional amortization expense associated
with debt financing costs and (e) the federal income tax impact of the previous
adjustments.
8
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The pro forma information does not purport to be indicative of results
of operations or financial position which would have occurred had the
acquisition been consummated on the date indicated, or which may be expected to
occur in the future by reason of such acquisition.
NOTE 6 -TRANSITION EXPENSES
Transition expenses for 1999 represent expenses incurred in connection
with the Company's sales force restructuring and the acquisition and integration
of Circon with the Company as follows:
NINE MONTHS ENDED
AUGUST 1, 1999
-----------------
(unaudited)
(In thousands)
Severance................................. $ 1,243
Training.................................. 950
Other transition expenses................. 1,178
----------
$ 3,371
==========
Other transition expenses include bonuses and professional fees
incurred as a result of the acquisition of Circon.
NOTE 7 - PROPOSED RECAPITALIZATION
On June 14, 1999 the Company announced that a management group, with
equity financing provided by investment funds managed by Fox Paine & Company,
LLC ("Fox Paine"), has entered into a definitive merger agreement to acquire the
Company in a recapitalization transaction. Under the terms of the merger
agreement, holders of all of the outstanding shares of Maxxim, except senior
executive officers and certain other current shareholders of Maxxim, will
receive $26.00 per share in cash. In connection with the merger, the existing
debt of the Company will be refinanced, with the Company making a consent
solicitation and tender offer for all of its outstanding 10 1/2% Senior
Subordinated Notes, due 2006.
The proposed transaction is subject to certain conditions, including
shareholder approval, the availability of funding under the existing equity and
debt financing commitments and other customary closing conditions. The merger
has a total value in excess of $800,000,000, including equity and debt. The
transactions will be funded by equity and debt commitments from Fox Paine and a
debt commitment from The Chase Manhattan Corporation, which are subject to
customary closing conditions.
9
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 NINE MONTHS ENDED
---------------------- ------------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 66.0% 72.4% 66.8% 73.5%
----- ----- ----- -----
Gross profit ............................... 34.0% 27.6% 33.2% 26.5%
Selling, general and administrative expenses 23.4% 18.4% 22.7% 17.8%
Transition expenses ........................ -- -- 0.7% --
----- ----- ----- -----
Income from operations ..................... 10.6% 9.2% 9.8% 8.7%
Interest expense ........................... (4.5%) (2.0%) (4.1%) (2.6%)
Other income, net .......................... -- 0.1% 0.1% 0.1%
----- ----- ----- -----
Income before income taxes ................. 6.1% 7.3% 5.8% 6.2%
Income taxes ............................... 2.7% 3.1% 2.5% 2.6%
----- ----- ----- -----
Net income ................................. 3.4% 4.2% 3.3% 3.6%
===== ===== ===== =====
NET SALES - Net sales for the third fiscal quarter of 1999 increased
35.3% to $173,278,000 from $128,057,000 reported for the third quarter of 1998.
Net sales for the first nine months of fiscal 1999 were $485,367,000, a 24.8%
increase from the $389,018,000 reported for the comparable period in the prior
fiscal year. This increase is primarily due to the acquisition of Circon during
the first fiscal quarter of 1999. Circon contributed $41,663,000 and $94,457,000
to net sales for the three and nine months ended August 1, 1999, respectively.
GROSS PROFIT - In the third quarter of fiscal 1999, the Company's gross
profit increased to $58,832,000, compared to $35,324,000 reported in the third
quarter of last year. The Company's gross profit rate increased to 34.0% in the
third quarter of fiscal 1999 from 27.6% in the third quarter of fiscal 1998. For
the nine months ended August 1, 1999, and the nine months ended August 2, 1998,
gross profit was $161,040,000 and $103,127,000, or 33.2% and 26.5% of net sales,
respectively. The increase in both dollars and rate is primarily attributable to
the Circon acquisition which had a gross margin rate of 54.8% for the
year-to-date period ended August 1, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the third quarter in fiscal 1999 were $40,580,000 or
23.4% of net sales compared to $23,508,000 or 18.4% of net sales for the same
period in fiscal 1998. For the first nine months of fiscal 1999 and 1998
selling, general and administrative expenses were $109,947,000 and $69,125,000,
or 22.7% and 17.8% of net sales, respectively. The increase in selling, general
and administrative spending and the percentage to net sales is primarily
attributable to the higher sales and marketing costs of Circon products in
relation to the Company's historical sales and marketing costs.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
TRANSITION EXPENSES - In the first quarter of fiscal 1999, the Company
recorded transition expenses of $3,371,000 related to the restructuring of its
sales force and the acquisition of Circon. (See Note 6 to the Condensed
Consolidated Financial Statements)
INCOME FROM OPERATIONS - Income from operations increased to
$18,252,000, or 10.6% of net sales, in the third quarter of fiscal 1999 from
$11,816,000, or 9.2% of net sales, in the comparable period of the prior fiscal
year. This is an increase of 54.5% over the prior fiscal period. For the first
nine months of fiscal 1999 and 1998 income from operations was $47,722,000 and
$34,002,000, or 9.8% and 8.7% of net sales, respectively.
INTEREST EXPENSE - The Company's interest expense increased to
$7,709,000 in the third quarter of fiscal 1999 from $2,544,000 in the third
quarter of fiscal 1998. For the nine months ended August 1, 1999, and August 2,
1998, interest expense was $19,940,000 and $10,382,000, respectively. The
increase in interest expense is due to the debt incurred to finance the Circon
acquisition.
INCOME TAXES - The Company's effective tax rate for the nine months
ended August 1, 1999, and August 2, 1998, was 43.5% and 42.3%, respectively, and
is higher than the statutory rate primarily due to non-deductible goodwill from
acquisitions.
NET INCOME - As a result of the foregoing, net income for the third
quarter of fiscal 1999 was $5,910,000 versus $5,444,000 for the same period in
fiscal 1998. Diluted earnings per share was $0.41 compared to $0.37 for the same
period last year. For the first nine months of fiscal 1999 and 1998, net income
was $15,853,000 and $13,914,000, respectively. Diluted earnings per share were
$1.09 compared to $1.11 for the same period last year. Excluding the transition
expenses, diluted earnings per share would have been $1.23 versus $1.11 for the
same period last year.
LIQUIDITY AND CAPITAL RESOURCES
At August 1, 1999, the Company had cash and cash equivalents of
$5,354,000, working capital of $141,554,000, long-term liabilities of
$349,778,000 and shareholders' equity of $284,413,000. Working capital increased
by $33,311,000 and $37,187,000 for accounts receivable and inventory,
respectively, acquired in the Circon acquisition and was offset by increases of
$8,790,000 and $15,643,000 in acquired accounts payable and accrued liabilities,
respectively. For the nine months ended August 1, 1999, cash flow from
operations, exclusive of the impact of the Circon acquistion noted above, was
negatively impacted by a decline in operations working capital of $5,838,000
primarily resulting from an increase in glove inventory levels.
On January 4, 1999, the Company entered into a Third Amended and
Restated Credit Agreement ("Credit Agreement") with several lending institutions
in connection with the acquisition of Circon ("the Transaction"). This new
Credit Agreement replaced the Company's previous credit facility. The Credit
Agreement provides for a term loan of $200,000,000 and a $125,000,000 revolving
line of credit. The whole term loan and approximately $60,000,000 of the
revolver were used to finance the Circon acquisition, transaction expenses and
repayment of $32,500,000 of outstanding Circon debt. (See Note 4 to the
Condensed Consolidated Financial Statements). Both loans mature on January 6,
2005, with the term loan requiring repayment in twenty-four quarterly
installments ranging from $5,000,000 to $10,000,000, commencing April 30, 1999.
At August 1, 1999, the term loan balance was approximately $190,000,000 and
approximately $64,700,000 was drawn on the revolver. In connection with the
credit agreement, the Company incurred approximately $5,584,000 in debt
financing fees which are being amortized over the life of the Credit Agreement.
In March 1998, the Company completed an offering of 4,025,000 shares of
its common stock at a price to the public of $24.00 per share, including 525,000
shares pursuant to the underwriters' exercise of the overallotment option. After
deducting offering costs and commissions, the Company received net proceeds of
approximately $91,418,000. The Company used the proceeds to repay amounts due
under the primary credit facility.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
On October 3, 1997, the Company called for redemption of $10,000,000 in
principal amount of its $28,750,000 6 3/4% Debentures due March 1, 2003,
effective as of November 4, 1997. On November 12, 1997, the Company called for
the redemption of the remaining outstanding principal amount of the Debentures
effective as of December 12, 1997. In fiscal 1998, $22,983,000 of the Debentures
converted into 1,276,732 shares of common stock and debt issuance costs of
$705,000 related to these converted Debentures were written off to additional
paid-in capital. The Company paid $369,000 to debenture holders who did not
exercise their right to convert upon surrender of their certificates in fiscal
1998.
If the recapitalization transaction is not consummated, the Company
believes that its present cash balances, together with internally generated cash
flows and borrowings under the Credit Agreement, will be sufficient to meet its
future working capital requirements.
At August 1, 1999, the Company's balance sheet includes goodwill of
$272,656,000. The majority of this balance represents goodwill from the
Company's three most recent acquisitions. In January 1999, the Company acquired
Circon Corporation. As of August 1, 1999 unamortized goodwill from the Circon
acquisition totaled $128,133,000 or 47% of total goodwill. In June 1998, the
Company acquired Winfield Medical. Unamortized goodwill from the Winfield
Medical acquisition totaled $22,905,000 at August 1, 1999, which represents 8%
of total goodwill. In July 1996, the Company acquired Sterile Concepts, Inc.
Unamortized goodwill from the Sterile Concepts acquisition totaled $108,596,000
at August 1, 1999, and represents 40% of total goodwill on the balance sheet.
The remaining $13,022,000 of unamortized goodwill at August 1, 1999, relates to
various other acquisitions made by the Company between 1992 and 1999. All
components of goodwill are being amortized on a straight line basis over the
applicable useful life. Useful lives have been estimated at 30 years for both
Circon and Winfield, 40 years for Sterile Concepts and 5 to 20 years for the
remaining goodwill components. Total amortization expense for the three and nine
months ended August 1, 1999 was $2,411,000 and $6,190,000, respectively. The
Company believes that there is no persuasive evidence that any material portion
of this intangible asset will dissipate over a period shorter than the
determined useful life.
YEAR 2000
Maxxim Medical relies on electronic information systems technology
("IS") to operate its business. The Company continuously seeks to improve these
systems in order to provide better service to its customers and to support the
Company's growth objectives. The Company has established a three-phased approach
to address year 2000 issues, including embedded technology ("ET") utilized in
the Company's facilities and equipment. The three phases included in the
Company's approach are (1) identification, (2) compliance, and (3) validation.
Internally, the Company has substantially completed, with the aid of outside
consultants, the identification and compliance phases and will continue
completing the validation phase as appropriate. The validation phase consists
primarily of monitoring and testing of new software and all other components and
interfaces that were implemented or upgraded as part of the software
installation or as a result of other identified year 2000 deficiencies. The
Company has completed most phases of the year 2000 project. The Company is not
currently aware of any significant exposure that would prevent it from being
year 2000 compliant on a timely basis.
Externally, the Company is formally communicating with its significant
suppliers, customers and other third parties to assess their year 2000
readiness. The Company is also currently determining its potential exposure if
any of these external parties fail to correct their year 2000 issues in a timely
manner. The Company is currently in the compliance and validation phases with
all of its significant external parties which includes the monitoring and
testing of significant interfaces with those external parties among other
things. There can be no guarantee that such external parties will achieve year
2000 compliance on a timely basis and failure by such significant external
parties to achieve compliance could have a material adverse effect on the
Company.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
The Company has not yet obtained information sufficient to quantify the
potential effects of possible internal and external year 2000 non-compliance, to
determine the likely worst case scenarios or to develop contingency plans to
deal with such scenarios. Having completed the bulk of its year 2000 project,
the appropriate contingency plans are now being developed. While the Company has
proceeded over the past two years in what it believes to be a reasonably prudent
manner to identify and remediate year 2000 issues, there can be no assurances
that the Company's internal and external contingency plans, once developed, will
substantially reduce the risk of year 2000 non-compliance. A significant
interruption in the Company's business due to a year 2000 non-compliance issue
could have a material adverse effect on the Company's financial position,
operations and liquidity.
The total incremental direct and indirect costs of the Company's year
2000 project are estimated to be approximately $1.5 million, including costs
totaling approximately $750,000 incurred through August 1, 1999. The estimated
costs of the year 2000 project are not expected to have a material impact on the
Company's business, operations or financial condition in the future periods. The
anticipated impact and the total costs of the year 2000 project are based on
management's best estimates and information currently available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks. Market risk is the potential
loss arising from adverse changes in market prices and rates. The Company does
not enter into derivative or other financial instruments for trading or
speculative purposes. The Company's market risk could arise from changes in
interest rates and foreign exchange rates.
INTEREST RATE RISK. The Company is subject to market risk exposure
related to changes in interest rates on its Amended Credit Facility. Interest on
borrowings under the Amended Credit Facility is at a fixed percentage point
spread from either the prime interest rate or LIBOR. The spread amount is
determined quarterly based upon the Company's financial results compared to a
financial covenant ratio matrix. The Company may, at its option, fix the
interest rate for LIBOR for periods ranging from 30 days to 6 months. At August
1, 1999, the Company had $254,700,000 outstanding under its Amended Credit
Facility. On February 12, 1999, the Company entered into a six year swap
agreement with three banks whereby the Company pays fixed LIBOR of 5.03% and
receives a variable interest payment. If LIBOR exceeds 6.75% on any payment
date, the respective amounts due from the parties shall be discharged for that
period. Total notional value of the swap agreement was $125,000,000. On August
1, 1999, the variable market rate exceeded the swap fixed rate. Because of the
swap agreement, only $129,700,000, or 50.9% of the current amount outstanding on
the Credit Agreement is subject to fluctuations in interest rate. Based upon
this balance and current market LIBOR, an immediate change of ten percent in the
interest rate would cause either an increase or decrease in interest expense of
approximately $672,000 on an annual basis.
FOREIGN CURRENCY EXCHANGE RATE RISK. The Company conducts business in
several foreign currencies. Predominately all of its foreign transactions are
denominated in U.S. dollars. Other than some limited trade payables, the Company
does not currently have financial instruments that are sensitive to foreign
currency exchange rates.
INTANGIBLE ASSET RISK. The Company's balance sheet includes intangible
assets. The Company assesses the recoverability of intangible assets by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of asset impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The Company believes that no
impairment of goodwill exists.
13
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
A complaint was filed on June 15, 1999 in state court in Harris County,
Texas, and another was filed on June 25, 1999 in state court in Pinellas County,
Florida, each naming the Company, its directors and Fox Paine & Company as
defendants. Each complaint is brought on behalf of a purported class of public
shareholders of the Company and alleges that the consideration being offered in
the proposed merger between Fox Paine Medic Acquisition Corporation and the
Company (see Note 7 to the Condensed Consolidated Financial Statements) is
unfair and inadequate, and that the directors of the Company breached their
fiduciary duties by failing to obtain the best price for the Company. As relief,
each complaint seeks, among other things, an injunction against completion of
the merger, and damages in an unspecified amount. The defendants believe the
allegations of each complaint are without merit. The cases are titled Steiner v.
Maxxim Medical, Inc., et al. No. l999-30682 (281st Judl. Dist., Harris Cty.,
Tex) and Burnetti v. Maxxim Medical, Inc., et al. No. 99-4347-CI-15 (6th Judl.
Circ., Pinellas Cty., Fla). The Company believes that the ultimate resolution of
such litigation will not have a material adverse impact on its results of
operations or financial position.
Circon is involved in the following legal proceedings:
On May 28, 1996, two purported stockholders of Circon, Bart Milano and
Elizabeth Heaven, commenced an action in the Superior Court of the State of
California for the County of Santa Barbara, Case No. 213476, purportedly on
behalf of themselves and all others who purchased Circon's common stock between
May 2, 1995 and February 1, 1996, against Circon, Richard A. Auhll, Rudolf R.
Schulte, Harold R. Frank, John F. Blokker, Paul W. Hartloff, Jr., R. Bruce
Thompson, Jon D. St. Clair, Frederick A. Miller, David P. Zielinski, Winton L.
Berci, Jurgen Zobel, Trevor Murdoch and Warren G. Wood. That complaint alleged
that defendants violated Sections 11 and 15 of the Securities Act of 1933
Sections 25400-02 and 25500-02 of the California Corporations Code, and Sections
1709-10 of the California Civil Code, by disseminating allegedly false and
misleading statements relating to Circon's acquisition of Cabot Medical Corp. by
merger and to the combined companies' future financial performance. In general
the complaint alleged that defendants knew that synergies from the merger would
not be achieved, but misrepresented to the public that they would be achieved,
in order to obtain approval for the merger so they would be executives of a much
larger corporation. This alleged conduct allegedly had the effect of inflating
the price of Circon's common stock. On July 29, 1996, defendants filed demurrers
to the complaint on the ground that plaintiffs' allegations fail to state facts
sufficient to constitute a cause of action. On or about August 6, 1996,
plaintiffs served their response to defendants' demurrers, stating their
intention to file an amended complaint prior to the hearing on defendants'
demurrers. On September 20, 1996, plaintiffs voluntarily dismissed Rudolf R.
Schulte, Harold R. Frank, John F. Blokker and Paul W. Hartloff, Jr. from the
action, without prejudice. On September 30, 1996, plaintiffs, joined by a third
purported stockholder of Circon, Adam Zetter, filed a first amended complaint
against the remaining defendants. Plaintiffs' amended complaint is substantially
similar to the original complaint, but adds a new purported cause of action
under the unfair business practices provisions of the California Business &
Professions Code, Sections 17200, et seq. and 17500, et seq. Like the original
complaint, the amended complaint seeks compensatory and/or punitive damages,
attorneys' fees and costs, and any other relief (including injunctive relief)
deemed proper. On December 2, 1996, defendants filed demurrers to the amended
complaint again on the grounds that plaintiffs' allegations fail to state facts
sufficient to constitute a cause of action. On April 17, 1997, a hearing was
held regarding the defendants' demurrers to the first amended complaint. By
order dated May 28, 1997, the Superior Court overruled the defendants' demurrers
to the amended complaint. The parties are now engaged in discovery proceedings.
Circon believes plaintiffs' allegations to be without merit and intends to
vigorously defend the lawsuit. The Company believes that the ultimate resolution
of such litigation will not have a material adverse impact on its results of
operations or financial position.
14
PART II. OTHER INFORMATION - (Continued)
On August 15, 1996, an action captioned Steiner v. Auhll, et al., No.
15165 was filed in the Court of Chancery of the State of Delaware and shortly
thereafter, three substantially similar actions were filed by three other
shareholders of Circon. All four of these actions purported to be brought as
class actions on behalf of all Circon shareholders. On August 16, 1996, a
separate action captioned Krim v. Circon Corp., et al., No. 153767, was filed in
the Superior Court of California in Santa Barbara. The plaintiff in that action
also claimed to be a Circon stockholder and purported to bring his claim as a
class action. On September 27, 1996, that action was stayed by the Court in
favor of the actions pending in Delaware; the Court also encouraged the
plaintiff to refile his action in Delaware. By order dated September 18, 1996,
the four Delaware actions were consolidated under the caption In re Circon
Corporation Shareholders Litigation, Consol. C.A. No. 15165. The plaintiffs
allege certain wrongdoing on the part of the defendants in connection with the
hostile tender offer by U.S. Surgical Corporation announced on August 2, 1996.
Plaintiffs allege, among other things, that the defendants (i) breached their
fiduciary duties to the Circon stockholders by summarily rejecting the U.S.
Surgical offer and by failing to negotiate a friendly merger with U.S. Surgical;
(ii) engaged in actions which were not reasonable responses to the U.S. Surgical
offer, including the adoption on August 13, 1996, of a stockholders' rights plan
and retention plans designed to provide for cash payments to Circon employees in
the event of a change of control; (iii) were subject to conflicts of interest
and motivated by their own self-interests and objectives designed to protect
their positions in the Company; (iv) manipulated the corporate machinery and
impaired the corporate democratic process by adopting the stockholders rights
plan and the retention plans; and (v) breached their duty of disclosure. On July
27, 1999, the parties filed a stipulation of settlement. In the stipulation, the
parties agreed that (i) as a result, in part, of the pendency and prosecution of
the case, defendants decided to explore strategic alternatives for the Company
and ultimately to approve the acquisition of Circon by Maxxim and (ii) the
consideration received by the Circon stockholders in connection with the
transaction with Maxxim represented the best price reasonably available. In
connection with the settlement, defendants have agreed that they will not oppose
plaintiffs' counsel's request for an award of attorneys' fees and expenses in an
aggregate amount not to exceed $800,000. The settlement and fee award are
subject to court approval. A hearing on the settlement is scheduled to take
place on October 20, 1999. The payment of such amount would be covered by
Circon's insurance.
Items 2, 3, 4 and 5 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 6. EXHIBITS AND REPORTS
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
Report on Form 8-K dated June 13, 1999, was filed reporting
under Item 5 the merger with Fox Paine Medic Acquisition
Corporation.
Report on Form 8-K dated June 16, 1999, was filed amending the
Item 7 disclosure of pro forma financial information for the
Circon Corporation acquisition.
15
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: 9/15/99 By: /s/ KENNETH W. DAVIDSON
---------------------------- -------------------------------------
Kenneth W. Davidson
Chairman of the Board, President &
Chief Executive Officer
(principal executive officer)
Date: 9/15/99 By: /s/ PETER M. GRAHAM
---------------------------- -------------------------------------
Peter M. Graham
Senior Executive Vice President,
Chief Operating Officer & Secretary
(principal financial officer)
Date: 9/15/99 By: /s/ ALAN S. BLAZEI
---------------------------- -------------------------------------
Alan S. Blazei
Treasurer, Executive Vice President,
& Corporate Controller
(principal accounting officer)
16
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- ------------
27 Financial Data Schedule (for SEC use only)