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 JANUARY 31, 1999
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(_) 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
0-18208
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MAXXIM MEDICAL, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 76-0291634
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State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
10300 49TH STREET NORTH, CLEARWATER, FLORIDA 33762
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code........ (727) 561-2100
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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_________
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at March 11, 1999
- --------------------------------- -------------------------------------
Common Stock, $.001 par value 14,275,742
MAXXIM MEDICAL, INC.
INDEX
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PART I. Financial Information Page No.
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Item 1. Condensed Consolidated Balance Sheets as of
January 31, 1999 and November 1, 1998 2
Condensed Consolidated Statements of Operations
for the Three Months Ended January 31, 1999
and February 1, 1998 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended January 31, 1999 and
February 1, 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
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Item 6. Exhibits and Reports 13
Signatures 15
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, November 1,
1999 1998
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,967 $ 4,125
Accounts receivable, net of allowances of $1,932 and $1,840, respectively 93,678 70,429
Inventory, net 119,774 79,648
Deferred tax assets 17,105 10,325
Prepaid expenses and other 11,113 8,690
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Total current assets 248,637 173,217
Property and equipment 226,723 169,048
Less: accumulated depreciation ( 43,890) ( 41,538)
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182,833 127,510
Goodwill, net 274,819 147,016
Other assets, net 39,234 20,308
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Total assets $ 745,523 $ 468,051
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 20,000 $ -
Current maturities of other long-term obligations 2,618 2,544
Accounts payable 38,446 35,834
Accrued liabilities 70,299 25,921
------------- -------------
Total current liabilities 131,363 64,299
Long-term debt, net of current maturities 219,000 13,800
10 1/2% Senior subordinated notes 100,000 100,000
Other long-term obligations, net of current maturities 7,424 5,339
Deferred tax liabilities 12,405 11,704
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Total liabilities 470,192 195,142
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, 14,264,722
and 14,238,822 shares issued and outstanding, respectively 14 14
Additional paid-in capital 219,406 219,268
Retained earnings 68,762 64,886
Subscriptions receivable (5,200) (5,200)
Accumulated other comprehensive income (7,651) (6,059)
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Total shareholders' equity 275,331 272,909
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Total liabilities and shareholders' equity $ 745,523 $ 468,051
============= =============
See accompanying notes to condensed consolidated financial statements.
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three Months Ended
---------------------------------
January 31, February 1,
1999 1998
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Net sales $ 136,126 $ 128,003
Cost of sales 94,565 94,942
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Gross profit 41,561 33,061
Selling, general and administrative expenses 27,079 22,334
Transition expenses 3,371 -
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Income from operations 11,111 10,727
Interest expense (4,297) (4,330)
Other income, net 5 161
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Income before income taxes 6,819 6,558
Income taxes 2,943 2,807
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Net income $ 3,876 $ 3,751
============= =============
Basic earnings per share $ 0.27 $ 0.38
============= =============
Diluted earnings per share $ 0.26 $ 0.37
============= =============
Basic weighted average shares outstanding 14,252 9,793
============= =============
Diluted weighted average shares outstanding 14,677 10,492
============= =============
See accompanying notes to condensed consolidated financial statements.
3 -
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In thousands)
Three Months Ended
---------------------------------
January 31, February 1,
1999 1998
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Cash flows from operating activities:
Net income $ 3,876 $ 3,751
Adjustment to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in deferred income tax expense (26) 789
Depreciation and amortization 6,053 4,630
Gain on sale of building (167) -
Change in operating assets and liabilities (365) 1,908
---------- ----------
Net cash provided by operations 9,371 11,078
Cash flows from investing activities:
Proceeds from sale of product line 1,180 -
Proceeds from sale of building 331 -
Purchase of Circon, net of cash acquired (218,933) -
Purchase of property and equipment (8,641) (2,324)
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Net cash used in investing activities (226,063) (2,324)
Cash flows from financing activities:
Increase in long-term borrowings 200,000 -
Payments on long-term borrowings - (3,000)
Net borrowings (payments) on revolving line of credit 25,200 (9,530)
Decrease in other obligations (1,649) (1,338)
Payment of debt financing costs (5,584) -
Increase in bank overdraft 1,323 5,513
Other, net 390 (64)
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Net cash provided by (used in) financing activities 219,680 (8,419)
Effect of foreign currency translation adjustment (146) (143)
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Net increase in cash and cash equivalents 2,842 192
Cash and cash equivalents at beginning of period 4,125 3,130
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Cash and cash equivalents at end of period $ 6,967 $ 3,322
========== ==========
Supplemental cash flow disclosures:
Interest paid during the period $ 247 $ 2,026
Income taxes paid during the period 2,487 826
Conversion of 6 3/4% convertible subordinated debentures - 22,278
Noncash investing and financing activities
Note receivable from sale of product line $ 2,000 -
Note receivable from sale of building sale 200 -
Net change in unrealized gain on available for sale securities 791 -
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 first quarter
of fiscal 1999 ended on January 31st compared to the fiscal 1998 first quarter
end date of February 1st.
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
Statement of Financial Accounting Standards No. 128, "Earnings per
Share"(SFAS No. 128), specifies new measurement, presentation and disclosure
requirements for earnings per share and is required to be applied retroactively
upon initial adoption. The Company has adopted SFAS No. 128 effective with the
release of February 1, 1998 earnings data. 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 January 31, 1999
-------------------------------------
(unaudited)
Per Share
Income Shares Amounts
-------- ---------- -------------
Basic EPS
Net Income................................ $3,876 14,252 $ 0.27
======
Effect of dilutive securities:
Options................................. 425
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Diluted EPS............................... $3,876 14,677 $ 0.26
====== ======= ======
Three Months Ended February 1, 1998
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(unaudited)
Per Share
Income Shares Amounts
-------- ---------- -------------
Basic EPS
Net Income................................ $3,751 9,793 $ 0.38
======
Effect of dilutive securities:
Convertible Debt........................ 107 363
Options................................. 336
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Diluted EPS............................... $3,858 10,492 $ 0.37
====== ======= ======
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 January 31, 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 January 31, 1999, and November 1, 1998, included the following:
January 31, November 1,
1999 1998
------------ -------------
(unaudited)
(In thousands)
Raw materials............ $ 30,062 $ 33,936
Work in progress......... 9,913 8,450
Finished goods........... 86,459 43,487
Reserve.................. (6,660) (6,225)
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$ 119,774 $ 79,648
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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 January 31, 1999 and February 1, 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, 1999. The Company will adopt SFAS No.
133 beginning in the first quarter of fiscal 2000. As of January 31, 1999, the
Company had no derivative instruments.
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
earnings for the three months ended January 31, 1999 and February 1, 1998
follow:
1999 1998
---- ----
Net earnings......................................................... $ 3,876 $ 3,751
Foreign currency translation adjustments............................. (489) (1,379)
Net unrealized loss on available for sale securities................. (483) -
-------- --------
Total comprehensive income........................................... $ 2,904 $ 2,372
======== ========
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. At January 31, 1999, the term loan was fully drawn and approximately
$39,000,000 of the revolver was used to finance the Circon acquisition (See Note
5). 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 Ciron 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 FISCAL YEAR
ENDED 11/1/98 ENDED 11/2/97
1998 1997
-------------- ---------------
(In thousands except per share data)
Revenues........................................... $ 674,980 $ 689,321
Net income......................................... 3,967 4,132
Basic earnings per share........................... $ 0.31 0.50
Diluted earnings per share......................... 0.30 0.42
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 additional interest
expense on the debt incurred to make the acquisition, as of the beginning of the
Company's fiscal year, (d) 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
Three Months Ended
January 31, 1999
------------------
(unaudited)
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. At January 31, 1999 accrued expenses
include $850,000 of transition expenses which were paid during the Company's
second fiscal quarter.
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
---------------------------------
January 31, February 1,
1999 1998
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Net sales.......................................... 100.0% 100.0%
Cost of sales...................................... 69.5% 74.2%
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Gross profit....................................... 30.5% 25.8%
Selling, general and administrative expenses....... 19.9% 17.4%
Transition expenses................................ 2.4% 0.0%
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Income from operations............................. 8.2% 8.4%
Interest expense................................... (3.2%) (3.4%)
Other income, net.................................. 0.0% 0.1%
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Income before income taxes......................... 5.0% 5.1%
Income taxes....................................... 2.2% 2.2%
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Net income......................................... 2.8% 2.9%
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Net sales - Net Sales for the first fiscal quarter of 1999 increased 6.3%
---------
to $136,126,000 from $128,003,000 reported for the first quarter of 1998. This
increase is primarily the result of increases in glove sales, containment
products and the Circon acquisition, somewhat offset by a decline in custom
procedure tray sales.
Gross profit - In the first quarter of fiscal 1999, the Company's gross
------------
profit was $41,561,000, compared to $33,061,000 reported in the first quarter of
last year, an increase of 25.7% over the prior fiscal period. The Company's
gross profit rate increased to 30.5% in the first quarter of fiscal 1999 from
25.8% in the first quarter of fiscal 1998. The increase in both dollars and
rate are primarily attributable to the addition of containment products and
endoscopy products from the Winfield and Circon acquisitions as well as improved
gross margin in the Company's custom procedure tray and medical examination
glove product lines.
Selling, general and administrative expenses - Selling, general and
--------------------------------------------
administrative expenses for the first quarter were $27,079,000 or 19.9% of net
sales for fiscal 1999 compared to $22,334,000 or 17.4% of net sales for fiscal
1998. 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 and expense ratio.
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)
10 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
Income from operations - Income from operations was $11,111,000, or 8.2% of
----------------------
net sales, in the first quarter of fiscal 1999 versus $10,727,000, or 8.4% of
net sales, in the comparable period of the prior fiscal year. Excluding the
transition expenses, fiscal 1999 first quarter income from operations was
$14,482,000 or 10.6% of net sales, versus $10,727,000, or 8.4% of net sales, in
the comparable period of the prior fiscal year.
Interest expense - The Company's interest expense was comparable for the
----------------
three months ended January 31, 1999 and February 1, 1998; however, the fiscal
1999 first quarter expense only includes one month of interest from the new
credit facility established to acquire Circon.
Income taxes - The Company's effective tax rate for the three months ended
------------
January 31, 1999 and February 1, 1998 was 43.2% and 42.8%, respectively which 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 first quarter
----------
of fiscal 1999 was $3,876,000 versus $3,751,000 for fiscal 1998. Excluding the
transition expenses net income would have increased by 58.1%. Diluted earnings
per share was $0.26 for the three months ended January 31, 1999 compared to
$0.37 for the same period last year. Excluding the transition expenses diluted
earnings per share would have been $0.40 versus $0.37 for the same period last
year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At January 31, 1999, the Company had cash and cash equivalents of
$6,967,000, working capital of $117,274,000, long-term liabilities of
$338,829,000 and shareholders' equity of $275,331,000. Cash flow from operating
activities was $9,371,000 in fiscal 1999 versus $11,078,000 in fiscal 1998.
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. At January 31, 1999, the term loan was fully drawn and approximately
$39,000,000 of the revolver was used to finance the Circon acquisition (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.
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.
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.
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.
11 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
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. The Company intends
to pursue strategic acquisitions which promote its growth strategy or complement
its present product offerings and increase market share. The Company anticipates
using bank or other commercial financing, seller financing and additional sale
of debt or equity securities to finance any such possible acquisitions.
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 is currently completing the
validation phase. 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 expects to complete all
phases of the year 2000 project during the first half of 1999. 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
most 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.
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. However, as the Company completes its year 2000
project during the first half of 1999, the appropriate contingency plans will be
developed and the implementation will begin. While the Company has proceeded
over the past two years in what it believes to be a reasonable and 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 $275,000 incurred through January 31, 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.
12 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 January 31, 1999, the
Company had $239,000,000 outstanding under its Amended Credit Facility. Based
upon this balance, an immediate change of one percent in the interest rate would
cause an increase or decrease in interest expense of approximately $2,390,000 on
an annual basis. The Company's objective in maintaining these variable rate
borrowings is the flexibility obtained regarding early repayment without
penalties and lower overall costs as compared with fixed-rate borrowings.
Foreign Currency Exchange Rate Risk. The Company conducts business in several
foreign currencies. Predominately all of its foreign operations 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.
PART II. OTHER INFORMATION
Items 1, 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
10.28* - Merrill Lynch Special Nonqualified Deferred Compensation
Plan.
10.29* - Merrill Lynch Special Nonqualified Deferred Compensation
Plan Adoption Agreement effective July 1, 1998.
10.30* - Executive Continuity Agreement between Registrant and
Kenneth W. Davidson effective August 31, 1998.
10.31* - Executive Continuity Agreement between Registrant and
Peter M. Graham effective August 31, 1998.
10.32* - Executive Continuity Agreement between Registrant and
Alan S. Blazei effective August 31, 1998.
10.33* - Executive Continuity Agreement between Registrant and
David L. Lamont effective August 31, 1998.
10.34* - Executive Continuity Agreement between Registrant and
Joseph D. Dailey effective August 31, 1998.
10.35* - Executive Continuity Agreement between Registrant and
Henry T. DeHart effective August 31, 1998.
10.36* - Executive Continuity Agreement between Registrant and
Jack F. Cahill effective August 31, 1998.
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PART II. OTHER INFORMATION (Continued)
10.37* - Executive Continuity Agreement between Registrant and
Suzanne R. Garon effective August 31, 1998.
10.38* - Amendment No. 1 to Employment Agreement. 1 between
Registrant and Kenneth W. Davidson effective October 15, 1998.
10.39* - Form of 1999 Non-Employee Directors' Stock Option Plan.
10.40* - Form of 1999 Employee Stock Option Plan
__________
* Compensatory plan or agreement.
(b) Reports on Form 8-K
Report on Form 8-K dated January 19, 1999, was filed reporting
under Item 2 the acquisition of Circon Corporation.
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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: 3/17/99 By: /s/ Kenneth W. Davidson
--------- ----------------------------
Kenneth W. Davidson
Chairman of the Board, President &
Chief Executive Officer
(principal executive officer)
Date: 3/17/99 By: /s/ Peter M. Graham
--------- ----------------------------
Peter M. Graham
Senior Executive Vice President,
Chief Operating Officer & Secretary
(principal financial officer)
Date: 3/17/99 By: /s/ Alan S. Blazei
--------- ----------------------------
Alan S. Blazei
Treasurer, Executive Vice President,
& Corporate Controller
(principal accounting officer)
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