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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED NOVEMBER 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 0-18208
MAXXIM MEDICAL, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 76-0291634
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
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10300 49TH STREET NORTH, CLEARWATER, FLORIDA 33762
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 813-561-2100
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<C> <C>
Common Stock, $.001 par value New York Stock Exchange
6 3/4% Convertible Subordinated Debentures
due 2003 New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the registrant's Common Stock, $.001 par
value, held by non-affiliates of the registrant as of December 30, 1997, was
$193,629,231 based on the closing price on that date on the New York Stock
Exchange. As of December 30, 1997, 10,171,625 shares of the registrant's Common
Stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1998 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 are incorporated herein by reference in Part
III, Items 10, 11, 12, and 13.
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ANNUAL REPORT ON FORM 10-K
(FISCAL YEAR ENDED NOVEMBER 2, 1997)
ITEM 1: BUSINESS
OVERVIEW
Maxxim Medical, Inc. (the "Company" or "Maxxim") is a major manufacturer
and developer of a diversified range of specialty medical products and a leading
supplier to hospitals, clinics and outpatient surgery centers of single-use
custom procedure trays. The Company operates three divisions: Case Management,
Argon Medical and Maxxim Medical Europe. The Company's Case Management division
manufactures, assembles and sells custom procedure trays for a wide variety of
operating room and other medical procedures, complete lines of surgical gloves
and medical examination gloves, infection control apparel for operating room
personnel and patient draping systems. The Company believes that it currently
controls a 35% market share in custom procedure trays and a 61% market share in
non-latex medical examination gloves in the U.S. The Argon Medical division
manufactures and markets guidewires, needles, introducers, catheters, manifolds,
transducers, high pressure syringes and certain other single-use medical and
surgical specialty products, which are used in the Company's procedure trays or
are sold separately. This division also assembles and markets procedure trays
for use primarily in cardiology and radiology procedures. The Company's third
division, Maxxim Medical Europe, serves as the Company's European manufacturer
and distributor of Company products.
HISTORY
Since its inception in 1976, the Company has grown through a series of
acquisitions, development of new or modified products, expanded sales of
existing products and distribution agreements with third parties. As a result,
the Company has a diversified product mix, with no single product constituting
more than 5% of net sales in fiscal 1997. The Company's current and historical
acquisition strategy has been to make acquisitions that increase the Company's
vertical integration or customer base or include products that complement or
expand existing product lines.
INDUSTRY TRENDS
Management believes that demand for products manufactured and distributed
by the Company has been favorably impacted by the emphasis on less invasive
surgical products, outpatient care and the continuing pressure to utilize
low-cost, single-use medical products to improve productivity, contain costs and
reduce the transmission of infectious diseases. Demographic trends, such as the
aging of the population, have also had a favorable effect on the demand for the
Company's products since older people generally require more medical care and
undergo more surgical procedures.
The Company believes that there is an increased emphasis on less invasive
procedures because such procedures generally involve reduced patient trauma and
shorter recovery time. Improvements in medical technology and enhanced awareness
on the part of the public and healthcare professionals of the lower costs and
other benefits of less invasive procedures have resulted in significant
increases in such procedures in recent years. Many of the Company's products are
specifically designed for less invasive procedures. Rising healthcare costs,
ease of set-up and decreased turn-around times, and the shortage of nursing and
other healthcare professionals have also created a need for medical products
that improve healthcare professional productivity and have been principal
factors in the trend towards use of single-use medical products and procedure
trays instead of reusable products. Unlike reusable products, single-use
products such as the Company's specialty medical products do not require costly,
labor intensive laundering, disinfecting or reassembling processes. The risks of
transmission of infectious diseases such as AIDS, hepatitis and tuberculosis,
and related concerns about occupational safety of healthcare professionals, have
also contributed to an increased demand for sterile, single-use products.
Management also believes that there has been a growing trend by large
customers to concentrate their purchases of medical products with fewer, larger
suppliers, and that the acquisition of Sterile Concepts
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Holdings, Inc. ("Sterile Concepts") in July 1996 has significantly improved its
ability to capitalize on such a trend. Management believes that this trend will
continue to benefit the Company as it grows and diversifies its product lines.
Although the aggregate number of surgical procedures performed in Europe is
approximately equivalent to the number of surgical procedures performed in the
U.S., the use of single-use products and custom procedure trays in Europe is not
as prevalent as in the U.S. The Company believes that European healthcare
providers will increase their use of disposable products and custom procedure
trays for substantially the same reasons that caused U.S. healthcare providers
to do so. Certain European countries have implemented healthcare price controls
and experienced consolidation of hospitals and shifting of surgical procedures
away from hospitals towards outpatient surgery centers. The Company believes
that these developments will increase the demand among European healthcare
providers for the greater efficiency and productivity associated with the
single-use products of the type it manufactures.
STRATEGIC OBJECTIVES
Since the acquisition of Sterile Concepts, the Company's long-term
strategic objectives have been: (i) improve profitability, (ii) reduce long-term
indebtedness, (iii) emphasize the sale of the entire range of the Company's
products to large buying groups and healthcare provider networks, (iv) expand
international operations, (v) pursue strategic acquisitions that promote a
vertical integration strategy, or complement the existing product offering and
increase market share and (vi) increase productivity by maximizing the
utilization of existing facilities.
Management believes that the Company must continue to focus more of its
sales effort on the emerging integrated healthcare networks. Many hospitals are
forming alliances and are increasingly buying their medical products on a
national accounts basis, which favors suppliers that can bundle multiple
products. The Company will place greater emphasis on leveraging the sales
force's existing relationships to sell all of its product lines. The Company
believes that the acquisition of Sterile Concepts has helped the Company exploit
the current trends described above as it now has a much larger presence in the
custom procedure tray market and additional plants in Virginia and California
which expand the Company's geographical coverage of domestic markets.
Management believes that the international market for single-use medical
products is in the early stage of development. In fiscal 1997, approximately
10.8% of the Company's net sales were derived from international sales and
exports. The Company established a beachhead in Europe in January 1995 through
the acquisition of Medica and then expanded its presence with the glove
acquisition in June 1995. These operations specialize in the manufacture and
sale of single-use medical products for hospital operating rooms and constitute
the Company's Maxxim Medical Europe division.
An important part of the Company's strategy has been to add or expand
product lines through acquisitions, enabling the Company to develop its primary
business of manufacturing and distributing low-cost single-use medical surgical
products, which are sold individually and as components of the Company's
procedure trays. In addition, acquisitions have enabled the Company to implement
its strategy of becoming a leading supplier of procedure trays in order to
maintain direct customer contact while providing a distribution vehicle for the
Company's disposable medical products. The Company intends to continue to
consider acquisitions of other medical products companies and to continue its
internal product development and enhancement efforts in order to increase the
number of products that can be sold directly or included in its procedure trays.
The Company has the capacity to increase its manufacturing and assembly
operations for most of its medical specialty products without incurring
significant capital expenditures. Since most of the Company's facilities
currently operate using one or two shifts per day, the Company can efficiently
manufacture additional product by adding shifts. In the glove plants, capacity
can shift between glove styles with moderate capital expenditures; however,
significant investment would be required to add to total, non-latex glove
capacity. The acquisition of Sterile Concepts provided the Company with a
significant vertical integration opportunity. By
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including more of its products in trays, the Company has been able, and will
continue, to more fully utilize existing capacity and improve gross margins.
OPERATING DIVISIONS
Case Management Division
The Case Management division manufactures, assembles and sells custom
procedure trays, complete lines of surgical gloves and non-latex medical
examination gloves, infection control apparel for operating room personnel and
patient draping systems. The Company formed this division in the third fiscal
quarter of 1995. Case Management products are marketed principally through its
sales force consisting of approximately 105 account managers throughout the
United States and Canada. Division sales were $417,594,000 in fiscal 1997, or
78.8% of the Company's net sales.
Case Management Division Product Lines
Custom Trays -- The Company assembles and markets procedure trays for use
in a variety of medical and surgical procedures. Procedure trays are assembled
with single-use products selected by the operating room personnel performing a
certain medical or surgical procedure. Among the types of single-use medical or
surgical products typically included in the procedure trays are surgical gowns,
surgical drapes, electrosurgical accessories, instruments, needles, gloves,
syringes, tubing, sponges, towels and gauze. The Company's ValuQuote system
allows the account managers to meet customers on-site to design cost-effective
custom procedure tray configurations in accordance with individual customer
specifications, from a selection of over 9,000 component parts, which are
manufactured either by the Company or third party vendors. The computer-aided
design of custom tray prototypes helps to ensure that client product and
sequencing needs are met. Assembly of procedure trays is then performed in
facilities located in Temecula, California, Clearwater, Florida, and Richmond,
Virginia. The Company's Encompass program bundles the customer's choice of
sterile and nonsterile procedure-based products and then converts into an
efficient disposal system after use.
Drapes & Gowns -- The Company manufactures a complete line of single-use,
non-woven infection control apparel for operating room personnel and patient
draping systems. These products offer a wide range of features such as patented
fluid collection pouches to minimize the risk of transmission of infectious
agents or other waste during medical procedures. The drapings are utilized in
various general and specialty surgical procedures, as components of procedure
trays (including those assembled and distributed by the Company), in a sterile
pack, or as a single product. The Company has modified the design of many of its
products and has developed new products to accommodate new medical advances. The
Company manufactures its non-woven products at its facilities located in
Columbus, Mississippi and La Romana in the Dominican Republic.
Gloves -- The Case Management division also manufactures and distributes a
complete line of surgical and non-latex medical examination gloves. The gloves,
which are sold under brand names such as Tru-Touch, SensiCare, Tradition,
Eudermic, Sentura and Neolon, are manufactured from latex, synthetic rubber and
various non-latex materials. The Company's non-latex medical examination gloves
currently hold an estimated 61% share of the U.S. non-latex medical examination
market segment. The Company believes that its non-latex medical examination
gloves provide a viable alternative to traditional latex medical examination
gloves, and the recent concern of healthcare professionals about purported
allergic reactions to latex medical examination gloves has increased demand for
the Company's non-latex medical examination and surgical gloves, particularly
for the Company's SensiCare gloves. The Company continues to research and
develop new compounds to improve its non-latex products. The Case Management
gloves, together with the drape and gown products, allow the Company to provide
healthcare personnel with infection control apparel from head to foot. The
gloves are manufactured at the Company's facilities in Honea Path, South
Carolina, Los Gatos, California, Mississauga, Canada, and Aalst/Erembodegem,
Belgium. The highly mechanized, non-labor intensive facilities in California,
Canada and Belgium are currently producing non-latex medical examination gloves
at full capacity.
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Other Products -- The Company also manufactures a variety of single-use
medical bowls and containers as well as a line of electrosurgery accessory
products which are primarily sold through inclusion in procedure trays.
Argon Medical Division
The Argon Medical division manufactures single-use specialty vascular
access and pressure monitoring products and assembles procedure trays for the
cardiology and interventional radiology markets. The Division's specialty
medical products include single-use guidewires, needles, introducers, catheters,
manifolds, transducers and high pressure syringes. Its products are either
utilized in the Company's procedure trays or are sold separately. The specialty
medical products manufactured by Argon Medical include technologically advanced
products which have been developed by the Division's technical staff. Argon
Medical division products are marketed principally through its sales force of
approximately 40 direct sales persons. The Argon Medical division manufactures
or assembles the medical specialty products and procedure trays at the Company's
plant in Athens, Texas. Division sales for fiscal 1997 amounted to $61,870,000,
or 11.7% of Company net sales.
Maxxim Medical Europe Division
The Company's European acquisitions were combined to form Maxxim Medical
Europe in the third fiscal quarter of 1995. This division serves as the
Company's European distributor of Case Management, Argon and Medica products.
Medica products consist of various self-manufactured and assembled single-use
hospital supply products and custom procedure kits for transfusion, infusion and
patient monitoring. The European market for single-use items and custom
procedure trays is in a very early stage of development. The Company was
provided with a small base of custom procedure tray sales to build upon when the
European operations of Sterile Concepts were acquired and combined with Maxxim
Medical Europe. Maxxim Medical Europe products are marketed principally through
its sales force of approximately 21 direct sales persons in The Netherlands and
Belgium. Dealers and independent sales representatives are utilized throughout
the rest of Europe. The Company manufactures or assembles the Medica products at
the Company's plants in The Netherlands and gloves are manufactured in Belgium.
Division sales for fiscal 1997 amounted to $50,088,000, or 9.5% of the Company's
net sales.
CUSTOMERS
The Company's products are typically purchased pursuant to purchase orders
or supply agreements in which the purchaser specifies whether such products are
to be supplied through a national distributor or directly by the Company. The
Company derives its revenues principally through its supply agreements with
hospitals and outpatient surgery centers. In response to the trend within the
hospital industry toward requiring suppliers to provide reduced order turnaround
time and more frequent deliveries to a greater number of locations within a
hospital, the Company distributes to certain customers pursuant to agreements
with national and regional distributors. Under these agreements, the customers
remain under contract with the Company. The Company records sales upon the
shipment of inventory to the distributor, at which time title passes to the
distributor. Pricing to the end customer under these supply agreements is
usually established for the contract period which will typically be from one to
three years. The Company views, as its ultimate customers, the medical
professionals who use its products, rather than the distributors.
No individual customer or affiliated group of customer accounts accounted
for more than five percent of the Company's net sales in any of the past three
fiscal years. Nevertheless, the Company estimates that in fiscal 1997, 1996 and
1995 a substantial portion of its products are actually sold to Owens & Minor,
Inc. ("Owens & Minor"), a diversified distribution company. Although Owens &
Minor may be deemed in a technical sense to be a major purchaser of the
Company's products. Owens & Minor typically serves as a distributor under a
purchase order or supply agreement between the customer and the Company and does
not purchase for its own account. The Company, therefore, does not believe it is
appropriate to categorize Owens & Minor as an actual customer.
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PRODUCT DEVELOPMENT AND PATENTS
The Company is continually conducting research and developing new products
utilizing a team approach that involves its engineering, manufacturing and
marketing resources. Although the Company has developed a number of its own
products, most of its research and development efforts have historically been
directed towards product improvement and enhancement of previously developed or
acquired products. Company research and development expenses were approximately
$5,158,000, $5,124,000, and $3,777,000 in fiscal 1997, 1996 and 1995,
respectively.
The Company actively pursues a policy of seeking patent protection both in
the U.S. and abroad for its proprietary technology. There can be no assurance
that the Company's patents will not be invalidated or that any issued patent
will provide protection that has commercial significance. Litigation may be
necessary to protect the Company's patent position. Such litigation may be
costly and time consuming, and there can be no assurance that the Company will
be successful in such litigation. Since no single patent covers product sales
that constituted 5% or more of net sales of the Company in fiscal 1997, the
Company does not believe that the invalidation of any patents owned by or
licensed to the Company would have a material adverse effect on it or its
business prospects. While the protection of patents is important to the
Company's business, management does not believe any one patent is essential to
the success of the Company.
The Company also relies on trade secrets and continuing technological
advancement to maintain its competitive position. It is the practice of the
Company to enter into confidentiality agreements with key employees and
consultants. There can be no assurance, however, that these measures will
prevent the unauthorized disclosure or use of the Company's trade secrets and
know-how or that others may not independently develop similar trade secrets or
know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology.
DISTRIBUTION AND MARKETING
Management believes that its approach to marketing supports the desires of
its customers to identify with individual account managers who are supported by
product specialists. The Company believes that maintenance of these product
specialists enables it to provide better customer service and to maintain
specialized expertise in each product line. The Company account managers
typically attempt to establish and maintain direct contact with operating room
personnel or other medical professionals that directly utilize the Company's
procedure trays and specialty products. As medical product purchases are
typically made on a centralized basis by hospital purchasing departments, and
increasingly by healthcare networks, account managers must also maintain
relationships with purchasing department personnel. The Company has
approximately 145 account managers representing its products in Canada and the
United States.
The Company has distribution centers in nineteen states throughout the
country and in Ontario, Canada. Customers may choose to have products delivered
directly from one of these distribution centers or the regional or national
distributor of their choice.
In Europe, the Company utilizes a contract warehousing and logistics
company to deliver products to its customers and distributors. The Company's
products are primarily warehoused at facilities in the Netherlands and Belgium
which are linked to Maxxim Medical Europe's computer system at its headquarters
in s'Hertogenbosch, the Netherlands.
MANUFACTURING AND ENGINEERING
The Company's products are manufactured and/or assembled from a variety of
component parts and materials, all of which are expected to continue to be
readily available at reasonable costs from a variety of manufacturers and
suppliers. Most of the medical and surgical specialty products included in the
Company's procedure trays are purchased from other domestic or foreign
manufacturers. The Company's glove manufacturing facilities are highly
mechanized, unlike most of the Company's other operations which are
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labor intensive. For products other than gloves, the Company's remaining
manufacturing operations currently operate using one or two shifts per day, so
the Company has capacity to produce additional product by adding additional
shifts. The three exam glove manufacturing facilities operate almost
continuously at full capacity.
BACKLOG
It is Company's policy and practice to maintain an inventory of finished
products or component parts and materials sufficient to ship products within a
few days of receipt of a product order. As a result, the Company had no
significant backlog of unshipped orders at November 2, 1997. Management believes
that such policy and practice are typical of industry practice.
COMPETITION
In general, the Company's products compete with the products of numerous
major companies in the business of developing, manufacturing, distributing and
marketing medical specialty products. Some of these competitors have greater
financial or other resources than the Company. The Company believes that the
principal competitive factors in each of its markets are product features and
benefits, customer service and pricing. The Company does not typically provide
the least expensive products available in the markets in which it competes.
Instead, the Company emphasizes overall value through a combination of
competitive pricing, product quality and customer service.
The Company's Argon Medical and Case Management divisions each compete with
numerous major companies, including among others, Allegiance Corporation, Baxter
Healthcare Corp. and Johnson & Johnson and divisions or subsidiaries thereof.
Maxxim Medical Europe's primary competition includes the European divisions of
these same companies as well as locally based competitors such as Schneider
Worldwide and the Molnlycke division of Tamro.
EFFECTS OF HEALTHCARE REFORM
The recent government focus on healthcare reform and on the escalating cost
of medical care has increased pressures on all participants in the healthcare
industry to reduce the costs of products and services. The Company does not
believe that the continuation of these trends will have a significant effect on
the Company's results of operations or financial condition; however the Company
believes that healthcare legislation may have some beneficial effect on its
business by increasing the availability of healthcare, emphasizing less invasive
surgery and increasing the need for efficiency of healthcare personnel.
GOVERNMENT REGULATION
Domestic:
Most of the products being developed, manufactured and sold by the Company
(and products likely to be researched, developed or marketed in the future) are
subject to regulation as medical devices by the Food and Drug Administration
("FDA"). The FDA regulates the development, production, distribution and
promotion of medical devices in the U.S. Various states in which the Company's
products are being sold or may be sold in the future may impose additional
regulatory requirements.
Pursuant to the Food Drug & Cosmetic Act ("FDCA"), a medical device is
ultimately classified as either a Class I, Class II or Class III device. Class I
devices are subject only to general controls that are applicable to all devices.
Such controls include regulations regarding FDA inspections of facilities, "Good
Manufacturing Practices," labeling, maintenance of records and filings with the
FDA. Class II devices must meet general performance standards established by the
FDA. Class III devices require the most stringent pre-market approval by the FDA
before they can be marketed and must adhere to such standards once on the
market. Such pre-market approval can involve extensive testing to prove safety
and efficacy of the devices. Most of the Company's products are Class II
devices. FDA marketing approval of these devices is obtained under Section
510(k) of the FDCA, which provides for FDA approval on an expedited basis for
products that can be shown to be substantially equivalent to devices in commerce
prior to May 1976 (the month and year of
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enactment of the FDCA. Most of the Company's remaining products are Class I
devices. Recent passage of the FDA Modernization Act of 1997 may lessen some of
the burden of reporting and scrutiny on several Class I and certain Class II
devices. The Company is actively involved with the Medical Device Manufacturing
Association ("MDMA"), a Washington, D.C. based industry lobbying group. The MDMA
is currently providing input on the implementation of several aspects of this
new legislation.
At present, most of the Company's products and manufacturing facilities are
subject to pervasive and continuing regulation by the FDA. All phases of the
manufacturing and distribution process are governed by FDA regulation. Products
must be produced in registered establishments and be manufactured in accordance
with "Good Manufacturing Practices," as such term is defined under the FDCA. In
addition, all such devices must be periodically listed with the FDA. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The export of devices is also
subject to regulation in certain instances.
The mandatory Medical Device Reporting ("MDR") regulation obligates the
Company to provide information to the FDA on injuries alleged to have been
associated with the use of a product or in connection with certain product
failures which could cause injury. If as a result of FDA inspections, MDR
reports or other information, the FDA believes that the Company is not in
compliance with the law, the FDA can institute proceedings to detain or seize
products, enjoin future violations, impose product labeling restrictions or
enforce product recalls or withdrawals from the market.
In addition to the foregoing, numerous other federal, state and local
agencies, such as environmental, fire hazard control, working condition and
other similar regulators, have jurisdiction to take actions that could have a
material adverse effect upon the Company's ability to do business. Compliance
with federal, state and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, including in particular the
stringent regulation of the use of ethylene oxide in the sterilization process,
have not had, and are not anticipated to have, any material effect upon the
capital expenditures, earnings or competitive position of the Company or any of
its subsidiaries.
International:
The products manufactured and sold by the Company in Europe are subject to
the European Community regulations for medical devices. The European Community
has a registration process which includes registration of manufacturing
facilities ("ISO certification") and product certification ("CE Mark"). The ISO
certification requires that there be functioning quality systems at each
facility, and following an acceptable certification inspection, the facility
receives an ISO certification number. The CE Mark certification applies to the
products or product types which meet the European requirements for those
products. Following CE Mark certification, the CE symbol is printed on the
product label to show the customer that the product complies with the
requirements of the European market. The European Community has imposed a
deadline of June 1998, after which products without a CE Mark may not be sold in
Europe.
The Company has obtained ISO certification and CE Mark certification for
its facilities and products in Europe. In North America, the Company has begun
the process of European compliance by completing a certification plan with a
Notified Body ( a member of the European Network for Quality System Assessment
and Certification) and contracting ISO certification and CE Mark registration
for those facilities and products which are exported to European markets. All
facilities which produce products for export to European markets have received
ISO certification. The Company anticipates that it will be in material
compliance with the CE Mark certification requirement by the required date.
Similar to the domestic regulatory bodies, Europe has numerous government
and local agencies which have jurisdiction to take actions that could have a
material adverse effect upon the Company's ability to conduct business in
Europe. European governmental and local agencies have enacted or adopted
regulations which concern the discharge of materials into the environment, or
otherwise relating to the protection of the environment, which have not had, and
are not anticipated to have, any material effect upon the capital expenditures,
earnings or competitive position of the Company or any of its subsidiaries.
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ENVIRONMENTAL
The Company is subject to a variety of environmental laws, rules and
regulations, as are other companies in the same or similar business. The Company
believes that it is in substantial compliance with such laws, rules and
regulations; however, these laws, rules and regulations change from time to
time, and such changes may affect the ongoing business and operations of the
Company. From time to time, the Company has received, and in the future may
receive, requests from environmental regulatory authorities to provide
information or to conduct investigative or remediation activities with respect
to its facilities. None of these requests, if made, is expected, by management,
to have a material adverse effect on the Company's business.
EMPLOYEES
At November 2, 1997, the Company had approximately 2,815 full-time domestic
employees and 1,143 foreign employees. None of the Company's U.S. based
employees is represented by a union. Management believes that its relations with
its employees are satisfactory.
ITEM 2: PROPERTIES
The Company's principal executive and administrative offices are located in
Clearwater, Florida. The following table sets forth information with respect to
the Company's principal facilities. Each of the facilities in the table may
include office, product development, manufacturing and/or warehouse space.
Several of the facilities may also serve as a regional distribution center.
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OWNED OR BUILDING AREA
LOCATION PRINCIPAL DIVISION LEASED FACILITY (SQUARE FEET)
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Clearwater, Florida......................... Headquarters Owned 21,000
Athens, Texas............................... Argon Owned 186,700
Decatur, Alabama............................ Case Management Leased 70,000
Los Gatos, California....................... Case Management Owned 79,000
Temecula, California........................ Case Management Leased 178,000
Mississuagua, Ontario, Canada............... Case Management Owned 170,000
La Romana, Dominican Republic............... Case Management Leased 69,000
Clearwater, Florida......................... Case Management Owned 189,500
Columbus, Mississippi....................... Case Management Owned 135,000
Honea Path, South Carolina.................. Case Management Owned 89,000
Sugar Land, Texas........................... Case Management Owned 40,000
Richmond, Virginia.......................... Case Management Leased 205,000
Aalst/Erembodegem, Belgium.................. Maxxim Medical Europe Owned 150,700
Ommen, The Netherlands...................... Maxxim Medical Europe Owned 27,600
s'Hertogenbosch, The Netherlands............ Maxxim Medical Europe Leased 34,000
</TABLE>
The Company has distribution centers in nineteen states throughout the
country and also owns, operates or contracts for the use of various other minor
facilities.
Management believes that the Company's facilities, whether leased or owned,
are adequate to meet its current needs and should continue to be adequate for
the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
The Company has been named as a defendant in various lawsuits arising in
the ordinary course of business. Management believes that the ultimate
resolution of such litigation will not have a material adverse impact on the
Company's results of operations or financial position (see Note 5 of Notes to
Consolidated Financial Statements).
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company through the solicitation of proxies or otherwise during the fourth
quarter of the fiscal year ended November 2, 1997.
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PART II
ITEM 5: A: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since December 22, 1993, the Company's Common Stock has traded on the New
York Stock Exchange under the symbol "MAM." The following table sets forth the
high and low sale prices on the New York Stock Exchange for the Common Stock for
the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED NOVEMBER 3, 1996:
First Quarter............................................. $20 1/4 $13 3/8
Second Quarter............................................ 19 3/4 17 3/8
Third Quarter............................................. 19 15
Fourth Quarter............................................ 17 1/2 12 3/4
FISCAL YEAR ENDED NOVEMBER 2, 1997:
First Quarter............................................. 15 1/8 12 1/4
Second Quarter............................................ 16 12 5/8
Third Quarter............................................. 19 5/16 13 1/4
Fourth Quarter............................................ 26 19 1/2
</TABLE>
As of December 30, 1997, there were 251 holders of record of the Company's
Common Stock.
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain earnings to finance the expansion of its business
and, therefore, does not expect to pay any cash dividends in the foreseeable
future. Any determination as to the payment of cash dividends will depend upon
the Company's earnings, general financial condition, capital needs and other
factors deemed pertinent by the Board of Directors, as well as any limitations
imposed by lenders under credit facilities. The Company's present credit
facility prohibits payment of dividends.
B: RECENT SALES OF UNREGISTERED SECURITIES
On October 3, 1997, the Company called for the redemption of $10,000,000,
in principal amount, of its $28,750,000 6 3/4% Convertible Subordinated
Debentures due March 1, 2003, (the "Debentures") effective as of November 4,
1997 (the "First Redemption Date"). On the First Redemption Date, the redemption
price of 104.17% of the principal amount, or $1,041.70 plus accrued interest of
$11.81 per $1,000 face amount of the Debentures was paid to the holders of
Debentures called for redemption who had not exercised their right to convert
their Debentures into common stock. As of November 2, 1997, $5,398,000 of the
debentures had converted into 299,882 shares of the Company's common stock and
debt issuance costs of $166,000 related to these converted debentures were
written off to additional paid-in capital in fiscal 1997 and are reflected in
the accompanying financial statements.
On November 12, 1997, the Company called for the redemption of the
remaining outstanding Debentures effective as of December 12, 1997 (the "Second
Redemption Date"). On the Second Redemption Date, the redemption price of
104.17% of the principal amount, or $1,041.70 plus accrued interest of $18.94
per $1,000 face amount of the Debentures was paid to the holders who had not
exercised their right to convert their Debentures into common stock. Subsequent
to November 2, 1997, $22,983,000 of the Debentures were converted into 1,276,732
shares of the Company's common stock. As of the Second Redemption Date, $217,000
in principal amount remains due and payable. Holders may surrender their
certificates for payment within two years of the respective redemption dates
after which the funds revert back to the Company.
The common stock described above was issued in transactions under the
Securities Act of 1933, exemption from registration pursuant to Sections 3(a)(9)
and Section 4(2).
9
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data is derived
from the financial statements of the Company. The information for the fiscal
years 1997, 1996, and 1995 are derived from the Consolidated Financial
Statements which financial statements have been audited by KPMG Peat Marwick
LLP, independent certified public accountants appearing elsewhere herein. The
information in the table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report and previous Reports.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $529,552 $399,836 $265,726 $191,382 $129,740
Cost of sales............................. 397,691 294,164 186,495 129,569 85,247
-------- -------- -------- -------- --------
Gross profit.............................. 131,861 105,672 79,231 61,813 44,493
Operating expenses........................ 90,101 77,980 60,329 48,390 35,489
Nonrecurring charges...................... -- -- 10,845 -- --
-------- -------- -------- -------- --------
Income from operations.................... 41,760 27,692 8,057 13,423 9,004
Interest expense.......................... (21,620) (13,143) (4,088) (2,059) (1,476)
Other income (expense), net............... 2,226 583 1,014 859 856
-------- -------- -------- -------- --------
Income before income taxes................ 22,366 15,132 4,983 12,223 8,384
Income taxes.............................. 9,485 6,422 2,054 4,538 2,847
Change in accounting for income tax....... -- -- -- 380 --
-------- -------- -------- -------- --------
Net income................................ 12,881 8,710 2,929 8,065 5,537
======== ======== ======== ======== ========
Primary earnings per share(1),(3)......... $ 1.51 $ 1.05 $ 0.36 $ 1.05 $ 0.94
======== ======== ======== ======== ========
Fully diluted earnings per share(1),(3)... $ 1.40 $ 1.01 $ 0.36 $ 1.00 $ 0.91
======== ======== ======== ======== ========
Weighted average shares outstanding(1).... 8,534 8,264 8,159 7,326 5,890
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... 99,815 122,086 73,286 82,886 52,722
Total assets.............................. 424,046 465,347 264,490 165,416 114,040
Long-term liabilities(2):
Bank debt and other.................... 81,850 126,680 67,412 1,181 2,086
Convertible debentures................. 23,352 28,750 28,750 28,750 28,750
Senior notes........................... 100,000 100,000 -- -- --
Shareholders' equity...................... 137,928 123,556 116,351 111,470 68,458
</TABLE>
- ---------------
(1) For information concerning calculation of earnings per share, see Note 1 of
the Notes to Consolidated Financial Statements.
(2) Excludes current maturities of long-term debt.
(3) Fiscal 1994 primary and fully diluted earnings per share exclude a $.05 and
$.04 adjustment respectively, to reflect the change in accounting for income
taxes.
10
<PAGE> 12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Maxxim develops, manufactures and distributes a diversified group of
specialty medical products. The Company has grown significantly during the past
five years. Net sales increased from $129,740,000 in 1993 to $529,552,000 in
1997, a compound annual growth rate of 42%. This growth resulted primarily from
acquisitions of established businesses or product lines. Maxxim Medical, Inc., a
Delaware subsidiary of Maxxim, operates the Company's three divisions: Case
Management, Argon Medical, and Maxxim Medical Europe. Set forth below is a brief
description of the most significant acquisitions made by the Company since 1993.
(See Note 2 of the Notes to Consolidated Financial Statements).
STERILE CONCEPTS. In July 1996, the Company acquired the outstanding
common stock of Sterile Concepts through completion of a tender offer. Sterile
Concepts assembles, packages and distributes sterile custom procedure trays for
hospitals, outpatient surgery centers and medical clinics. As a result of the
acquisition, the Company's Case Management division became the second largest
producer of custom procedure trays in the United States and holds an approximate
35% market share in this product segment.
GLOVE OPERATIONS. In June 1995, the Company acquired the Glove Operations
from Becton Dickinson. The gloves, which are sold under such brand names as
Tru-Touch, SensiCare, Tradition, Eudermic, Dextren and Neolon, include latex and
non-latex surgical and examination versions. Since being acquired, the North
American operations have been included in the Case Management division and the
European operations have been a part of Maxxim Medical Europe. This acquisition
gave the Company a leading worldwide market share in non-latex medical
examination gloves.
MEDICA. In January 1995, the Company purchased Medica B.V., a Netherlands
corporation. Medica's operations included manufacturing, fabricating,
distributing and selling various types of disposable medical supplies in Europe,
principally in The Netherlands and Belgium. Since July 1995, the Medica products
have been sold in Europe through the Maxxim Medical Europe division.
STERILE DESIGN. In July 1993, Maxxim acquired the custom procedure tray
operations of Sterile Design from a division of Johnson & Johnson. As a result
of this acquisition, the Company became the third largest provider of sterile
custom procedure trays in the United States.
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes thereto and other
detailed information appearing elsewhere herein.
RESULTS OF OPERATIONS
The following table presents selected financial information for the periods
indicated as a percentage of net sales and sets forth the percentage dollar
increase (decrease) of such items from period to period.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
FISCAL YEAR ENDED FROM PRIOR PERIOD
----------------------- -----------------------------
1997 1996 1995 1997 VS. 1996 1996 VS. 1995
----- ----- ----- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 32.4% 50.5%
Gross profit.................................. 24.9 26.4 29.8 24.8 33.4
Marketing and selling expenses................ 11.8 13.0 15.6 20.9 25.0
General and administrative expenses........... 5.2 6.5 7.1 5.0 38.6
Nonrecurring charges.......................... -- -- 4.1 n/a -100.0
Income from operations........................ 7.9 6.9 3.0 50.8 243.7
Interest expense.............................. 4.1 3.3 1.5 64.5 221.5
Other income (expense), net................... 0.4 0.2 0.4 281.8 -42.5
Income before income taxes.................... 4.2 3.8 1.9 47.8 203.7
Income taxes.................................. 1.8 1.6 0.8 47.7 212.7
Net income.................................... 2.4 2.2 1.1 47.9 197.4
</TABLE>
11
<PAGE> 13
FISCAL 1997 COMPARED TO 1996
Net Sales -- Net sales for fiscal 1997 were $529,552,000, a 32.4% increase
over the $399,836,000 reported for fiscal 1996. The Case Management division had
sales of $417,594,000 for fiscal 1997 versus sales of $274,611,000 for fiscal
1996. This increase is due to a full year of sales from the Sterile Concepts
acquisition (see Note 2 of the Notes to Consolidated Financial Statements). The
Argon division had sales of $61,870,000 in fiscal 1997, 2.7% lower than the
$63,614,000 recorded in fiscal 1996. This decline is attributable to competitive
factors primarily affecting the patient monitoring product line. Maxxim Medical
Europe's fiscal 1997 sales of $50,088,000 were 5.9% lower than the fiscal 1996
sales of $53,272,000 due to foreign exchange rates. Excluding the impact of
foreign currency translation, Maxxim Medical Europe's fiscal 1997 sales were
6.1% higher than fiscal 1996.
Gross Profit -- The Company's gross profit was $131,861,000 for fiscal
1997, a 24.8% increase over the $105,672,000 reported for fiscal 1996. The gross
profit margin declined to 24.9% in fiscal 1997 from 26.4% in fiscal 1996
primarily due to the acquisition of Sterile Concepts (which had a gross margin
of 19.1% in fiscal 1996). However, gross margins have improved each quarter
since the acquisition from 23.4% in the fourth quarter of fiscal 1996 to 25.6%
in the fourth quarter of fiscal 1997.
Operating Expenses -- Marketing and selling expenses increased from
$51,781,000 in fiscal 1996 to $62,603,000 in fiscal 1997; however, as a
percentage of net sales, these expenses dropped from 13.0% to 11.8% in the same
periods. General and administrative expenses increased from $26,199,000 in
fiscal 1996 to $27,498,000 in fiscal 1997; but once again, as a percentage of
net sales, these expenses dropped from 6.5% to 5.2% for the respective periods.
The Company estimates that operating expenses for fiscal 1996 included
approximately $1,640,000 of one-time expenses as a result of the acquisition of
Sterile Concepts. The reduction of expense rates resulted from the leveraging of
the Sterile Concepts operations with the existing operations of the Company.
Income from Operations -- Income from operations increased 50.8% to
$41,760,000 in fiscal 1997, from $27,692,000 in fiscal 1996. Excluding the
one-time expenses in fiscal 1996 mentioned above, income from operations
increased from $29,332,000, or 7.3% of net sales in fiscal 1996 to $41,760,000,
or 7.9% of net sales in fiscal 1997.
Interest Expense -- The Company's interest expense increased to $21,620,000
in fiscal 1997 from $13,143,000 in fiscal 1996. The increase in interest expense
is the direct result of the increase in outstanding debt incurred to finance the
acquisition of Sterile Concepts.
Income Taxes -- Maxxim's effective income tax rate was 42.4% in both fiscal
1997 and fiscal 1996. The Company's effective tax rate is higher than the
statutory rate as a result of nondeductible amortization expenses resulting from
goodwill recorded in past acquisitions.
Net Income -- As a result of the foregoing, fiscal 1997 net income was
$12,881,000 as compared to fiscal 1996 net income of $8,710,000. Fully diluted
earnings per share were $1.40 and $1.01 for fiscal years 1997 and 1996
respectively.
FISCAL 1996 COMPARED TO 1995
Net Sales -- Net sales for fiscal 1996 were $399,836,000, a 50.5% increase
over the $265,726,000 reported for fiscal 1995. The Case Management division had
sales of $274,611,000 for fiscal 1996 versus sales of $168,295,000 for fiscal
1995. This increase is primarily due to a full year of sales for the Glove
operations (acquired in June 1995) and three months of sales from the Sterile
Concepts acquisition (see Note 2 of the Notes to Consolidated Financial
Statements). The Argon division had sales of $63,614,000 in fiscal 1996, 15.7%
higher than the $54,991,000 recorded in fiscal 1995. Sales increased in almost
all product lines with the largest increase coming from pressure monitoring
kits, a product line which was expanded in February of 1995. Maxxim Medical
Europe's fiscal 1996 sales of $53,272,000 were 125.3% higher than the
$23,649,000 recorded for fiscal 1995. This increase is attributable to the
European operations of the Glove Operation which was acquired in June 1995. The
Henley Healthcare division was sold in April 1996 and had sales of $8,339,000
for fiscal 1996 versus a full year sales figure of $18,791,000 for fiscal 1995.
12
<PAGE> 14
Gross Profit -- The Company's gross profit was $105,672,000 for fiscal
1996, a 33.4% increase over the $79,231,000 reported for fiscal 1995. The gross
profit margin declined to 26.4% in fiscal 1996 from 29.8% in fiscal 1995
primarily due to the acquisition of Sterile Concepts (which had a gross margin
of 19.1% in fiscal 1996) and continued pricing pressure on procedure trays for
most of the year.
Operating Expenses -- Marketing and selling expenses increased from
$41,430,000 in fiscal 1995 to $51,781,000 in fiscal 1996, however, as a
percentage of net sales these expenses dropped from 15.6% to 13.0% in the same
periods. General and administrative expenses increased from $18,899,000 in
fiscal 1995 to $26,199,000 in fiscal 1996, but once again, as a percentage of
net sales, these expenses dropped from 7.1% to 6.5% for the respective periods.
The Company estimates that operating expenses for fiscal 1996 included
approximately $1,640,000 of one-time expenses as a result of the acquisition of
Sterile Concepts.
Income from Operations -- Income from operations increased to $27,692,000
in fiscal 1996, from $8,057,000 in fiscal 1995. Excluding the nonrecurring
charge in fiscal 1995 and the one-time expenses in fiscal 1996 mentioned above,
income from operations increased from $18,902,000 or 7.1% of net sales in fiscal
1995 to approximately $29,332,000 or 7.3% of net sales in fiscal 1996.
Interest Expense -- The Company's interest expense increased to $13,143,000
in fiscal 1996 from $4,088,000 in fiscal 1995. The increase in interest expense
is the direct result of the new debt facilities created to finance the
acquisition of Sterile Concepts. Interest expense for fiscal 1996 also includes
nonrecurring financing fees of approximately $1,900,000 related to bridge
financing established in connection with the Sterile Concepts acquisition.
Income Taxes -- Maxxim's effective income tax rate was 42.4% in fiscal 1996
and 41.2% in fiscal 1995. The Company's effective tax rate is higher than the
statutory rate as a result of increased nondeductible amortization expenses
resulting from goodwill recorded from past acquisitions.
Net Income -- As a result of the foregoing, fiscal 1996 net income was
$8,710,000 as compared to fiscal 1995 net income of $2,929,000. Fully diluted
earnings per share were $1.01 and $.36 for fiscal years 1996 and 1995
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At November 2, 1997, the Company had cash and cash equivalents of
$3,130,000, working capital of $99,815,000, long-term liabilities of
$211,410,000 and shareholders equity of $137,928,000. Cash flow from operations
was $49,577,000 in fiscal 1997 versus $357,000 in fiscal 1996. Cash flow from
operations was favorably impacted by a reduction in operations working capital
of $16,394,000 primarily resulting from improved management of accounts
receivable and inventory.
In the first quarter of Fiscal 1997, the Company received $3,130,000 from
the sale of its marketable equity securities. A resulting one-time gain of
$1,510,000 was included in other income in fiscal 1997.
During fiscal 1997, the Company repaid $37,290,000 of bank debt resulting
in a term loan balance of $81,000,000 and a revolver balance of $10,300,000 at
fiscal year end. As a result of debt repayments, the Company had $64,700,000 of
available credit under its revolver facility on November 2, 1997, and received a
37.5 basis point reduction in its borrowing rate during the fourth quarter due
to improved financial ratios.
On October 3, 1997, the Company called for redemption $10,000,000 in
principal amount of its $28,750,000 debentures effective as of November 4, 1997.
As of November 2, 1997 $5,398,000 of the debentures had converted into common
stock and debt issuance costs of $166,000 related to these converted debentures
were written off to additional paid-in capital in fiscal 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 (see Note 3
of the Notes to Consolidated Financial Statements).
On May 23, 1997 the Company issued 400,000 shares of common stock pursuant
to a Senior Management Stock Purchase Plan at $13.00 per share, the closing
stock price on April 30, 1997. The stock was issued in exchange for an aggregate
of $5.2 million in notes due May 23, 2000 from the participants.
13
<PAGE> 15
These notes have been recorded as subscriptions receivable and are included in
the equity section of the balance sheet (see Note 11 of the Notes to
Consolidated Financial Statements).
The Company has considered the impact of Year 2000 issues on its computer
systems and applications. However, management believes that all of its current
software is or will be Year 2000 compliant in sufficient time and without
significant impact on the financial results or prospects of the Company.
The Company believes that its present cash balances together with
internally generated cash flows and borrowings under its existing credit
facility will be sufficient to meet its future working capital requirements.
INFLATION
The Company believes inflation has not had a material effect on its results
of operations for the past three years. Historically, the Company believes it
has been able to minimize the effect of inflation by increasing the selling
prices of its products, improving its manufacturing efficiency and increasing
its employee productivity.
FOREIGN CURRENCY
The Company's results of operations and the value of its foreign assets are
affected by fluctuations in foreign currency exchange rates. The impact of
changes in exchange rates on results of operations has been minimal since a
majority of the Company's exports are contracted in the Company's functional
currencies. The Company can not yet determine the impact of the EURO on its
financial statements or operations. Foreign currency transaction gains and
losses are included in the Consolidated Statements of Operations.
FORWARD-LOOKING STATEMENTS
Statements, either written or oral, that are not historical facts and which
express the Company's expectation for the future with respect to financial
performance or operating strategies are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. These statements
are made to provide the public with management's assessment of the Company's
business. Caution must be taken to consider these statements in light of the
following factors: the Company assumes that products in development will be
introduced successfully and on schedule; the Company will make acquisitions
which contribute to profitability; key distributors will make purchases at the
same level as their sales; demand for the Company's products will follow recent
growth trends; competitors will not introduce new products which will
substantially reduce Maxxim's market share in its most significant product
lines; and the Company will continue to manufacture high quality products at
competitive costs and maintain or increase product pricing. In the event any of
the above factors do not occur as management anticipates, actual results could
differ materially from the expectations expressed in the forward-looking
statements. Further information relating to factors that could cause actual
results to differ from those anticipated is included but not limited to
information under the heading "Business" in this Form 10-K report. The Company
disclaims any intention or obligation to update or revise forward-looking
statements, whether as a result of new information, future events or otherwise.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding the impact of new accounting pronouncements on the
results of operations, financial position or cash flows is set forth in Note 1
of the Notes to Consolidated Financial Statements under the caption "New
Accounting Pronouncements."
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to the Company for this annual report on Form 10-K.
14
<PAGE> 16
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 2, 1997 AND NOVEMBER 3, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,130 $ 5,950
Accounts receivable, net of allowances of $3,181 and
$3,901, respectively................................... 77,209 86,207
Inventory, net............................................ 83,184 95,087
Prepaid expenses, deferred taxes and other................ 11,000 15,386
-------- --------
Total current assets.............................. 174,523 202,630
Property and equipment...................................... 122,938 123,077
Less: accumulated depreciation............................ (31,384) (24,562)
-------- --------
91,554 98,515
Goodwill and other intangibles, net of accumulated
amortization of $14,982 and $7,664, respectively.......... 150,234 156,046
Other assets, net........................................... 7,735 8,156
-------- --------
Total assets...................................... $424,046 $465,347
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 12,750 $ 7,500
Accounts payable.......................................... 32,194 39,915
Accrued liabilities....................................... 26,631 28,133
Other short-term obligations.............................. 3,133 4,996
-------- --------
Total current liabilities......................... 74,708 80,544
Long-term debt, net of current maturities................... 78,550 121,090
10 1/2% Senior subordinated notes........................... 100,000 100,000
6 3/4% Convertible subordinated debentures.................. 23,352 28,750
Other long-term obligations, net of current maturities...... 3,300 5,590
Deferred taxes.............................................. 6,208 5,817
-------- --------
Total liabilities................................. 286,118 341,791
Commitments and contingencies
Shareholders' equity
Preferred Stock, $1.00 par, 20,000,000 shares authorized,
none issued or outstanding............................. -- --
Common Stock, $.001 par value, 40,000,000 shares
authorized, 8,871,355 and 8,128,827 shares issued and
outstanding, respectively.............................. 9 8
Additional paid-in capital................................ 103,872 92,445
Unrealized gain on investments -- net of tax.............. -- 259
Retained earnings......................................... 45,250 32,369
Subscriptions receivable.................................. (5,200) --
Cumulative translation adjustment......................... (6,003) (1,525)
-------- --------
Total shareholders' equity........................ 137,928 123,556
-------- --------
Total liabilities and shareholders' equity........ $424,046 $465,347
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
15
<PAGE> 17
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND OCTOBER 29, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales................................................... $529,552 $399,836 $265,726
Cost of sales............................................... 397,691 294,164 186,495
-------- -------- --------
Gross profit................................................ 131,861 105,672 79,231
-------- -------- --------
Operating expenses
Marketing and selling..................................... 62,603 51,781 41,430
General and administrative................................ 27,498 26,199 18,899
Nonrecurring charges...................................... -- -- 10,845
-------- -------- --------
90,101 77,980 71,174
-------- -------- --------
Income from operations...................................... 41,760 27,692 8,057
Interest expense............................................ (21,620) (13,143) (4,088)
Other income (expense), net................................. 2,226 583 1,014
-------- -------- --------
Income before income taxes.................................. 22,366 15,132 4,983
Income taxes................................................ 9,485 6,422 2,054
-------- -------- --------
Net income.................................................. $ 12,881 $ 8,710 $ 2,929
======== ======== ========
Primary earnings per share.................................. $ 1.51 $ 1.05 $ 0.36
======== ======== ========
Fully diluted earnings per share............................ $ 1.40 $ 1.01 $ 0.36
======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
16
<PAGE> 18
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE UNREALIZED
------------------ PAID-IN RETAINED SUBSCRIPTIONS TRANSLATION GAIN ON
SHARES PAR VALUE CAPITAL EARNINGS RECEIVABLE ADJUSTMENTS INVESTMENTS TOTAL
------ --------- ---------- -------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31,
1994..................... 8,022 $8 $ 90,732 $20,730 $ -- $ -- $ -- $111,470
Stock issued in connection
with acquisition (see
note 2).................. 25 -- 360 -- -- -- -- 360
Stock option
compensation............. -- -- 244 -- -- -- -- 244
Stock options exercised,
including federal income
tax benefit of $130...... 41 -- 341 -- -- -- -- 341
Net income................. -- -- -- 2,929 -- -- -- 2,929
Translation adjustment..... -- -- -- -- -- 1,007 -- 1,007
----- -- -------- ------- ------- ------- ----- --------
Balances at October 31,
1995..................... 8,088 8 91,677 23,659 -- 1,007 -- 116,351
Stock option
compensation............. -- -- 311 -- -- -- -- 311
Stock options exercised,
including federal income
tax benefit of $123...... 41 -- 417 -- -- -- -- 417
Payment received on officer
loan..................... -- -- 40 -- -- -- -- 40
Unrealized gain on
investment
securities -- net of tax
(see note 1)............. -- -- -- -- -- -- 259 259
Net income................. -- -- -- 8,710 -- -- -- 8,710
Translation adjustment..... -- -- -- -- -- (2,532) -- (2,532)
----- -- -------- ------- ------- ------- ----- --------
Balances at November 3,
1996..................... 8,129 8 92,445 32,369 -- (1,525) 259 123,556
Senior management stock
purchase (see note 11
)........................ 400 1 5,199 -- (5,200) -- -- --
Officer loan, net of
payment received......... -- -- (11) -- -- -- -- (11)
Stock option
compensation............. -- -- 471 -- -- -- -- 471
Stock options exercised,
including federal income
tax benefit of $122...... 43 -- 536 -- -- -- -- 536
Realized gain on sale of
investment
securities -- net of tax
(see note 1)............. -- -- -- -- -- -- (259) (259)
Conversion of convertible
debentures (see note
3)....................... 299 -- 5,232 -- -- -- -- 5,232
Net income................. -- -- -- 12,881 -- -- -- 12,881
Translation adjustment..... -- -- -- -- -- (4,478) -- (4,478)
----- -- -------- ------- ------- ------- ----- --------
Balances at November 2,
1997..................... 8,871 $9 $103,872 $45,250 $(5,200) $(6,003) $ -- $137,928
===== == ======== ======= ======= ======= ===== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
17
<PAGE> 19
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED NOVEMBER 2, 1997, NOVEMBER 3, 1996, AND OCTOBER 29, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 12,881 $ 8,710 $ 2,929
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income tax expense (benefit)................... 3,846 3,352 (1,251)
Depreciation and amortization........................... 17,495 14,968 9,233
Compensation expense for outstanding stock options...... 471 311 244
Gain on sale of investment in equity securities......... (1,510) -- --
Nonrecurring write off of intangibles and estimated
restructuring reserve.................................. -- -- 9,380
Changes in current assets and liabilities, net of
effects of asset acquisitions and dispositions and
business combinations:
Decrease (increase) in accounts receivable, net......... 8,694 (8,793) (14,618)
Decrease (increase) in inventory, net................... 11,073 (9,447) (7,288)
Increase in prepaid expenses and other.................. (619) (2,248) (291)
Increase in accounts payable............................ 23 10,299 3,030
(Decrease) increase in accrued liabilities.............. (2,777) (16,795) 2,934
-------- --------- ---------
Net cash provided by operating activities................... 49,577 357 4,302
-------- --------- ---------
Cash flows from investing activities:
Proceeds from building sale............................... 500 -- --
Proceeds from (investment in) available-for-sale
securities.............................................. 3,130 (1,620) --
Proceeds from the sale of Henley assets................... -- 6,000 --
Purchase of Sterile Concepts, net of cash acquired........ -- (118,676) --
Purchase of Medica........................................ -- -- (11,000)
Purchase of Bovie electrosurgery product line............. -- -- (2,600)
Purchase of Property and equipment, Inventory and Other
Assets, Net of Stock Issued Valued at $360.............. -- -- (1,500)
Purchase of Glove Operations.............................. -- -- (70,605)
Purchase of property, equipment and other assets, net of
asset acquisitions and business combinations............ (6,829) (10,625) (21,174)
-------- --------- ---------
Net cash used in investing activities....................... (3,199) (124,921) (106,879)
-------- --------- ---------
Cash flows from financing activities:
Payments on long-term borrowings.......................... (37,290) (180,629) (20,852)
Increase in long-term borrowing........................... -- 228,647 94,206
(Decrease) increase in other obligations.................. (4,153) 8,165 894
Net proceeds from the issuance of 10 1/2% Notes........... -- 97,000 --
Payments on Sterile Concepts debt......................... -- (34,247) --
(Decrease) increase in negative book cash balance......... (7,893) 6,091 1,163
Other, net................................................ 529 457 371
-------- --------- ---------
Net cash (used in) provided by financing activities......... (48,807) 125,484 75,782
-------- --------- ---------
Effect of foreign currency translation adjustment........... (391) (44) --
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (2,820) 876 (26,795)
Cash and cash equivalents at beginning of year.............. 5,950 5,074 31,869
-------- --------- ---------
Cash and cash equivalents at end of year.................... $ 3,130 $ 5,950 $ 5,074
======== ========= =========
Supplemental cash flow disclosure:
Interest paid during the year............................. $ 21,643 $ 9,090 $ 3,161
Income taxes paid during the year......................... 6,147 5,336 3,100
Noncash investing and financing activities
Conversion of 6 3/4% Convertible Subordinated
Debentures............................................. $ 5,232 $ -- $ --
Subscriptions receivable from senior management for
stock purchase......................................... 5,200 -- --
Note received on building sale.......................... 300 -- --
Convertible note received from sale of Henley assets.... -- 7,000 --
Unrealized gain on investment........................... -- 259 --
</TABLE>
See accompanying notes to Consolidated Financial Statements
18
<PAGE> 20
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Maxxim Medical, Inc., ("Maxxim" ), a Texas corporation, and its
subsidiaries (collectively, "the Company") develops, manufactures, and markets
specialty medical products.
BASIS OF PRESENTATION
Certain reclassifications have been made to the fiscal 1996 and fiscal 1995
consolidated financial statements to conform with the fiscal 1997 presentation.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Maxxim and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
Cash equivalents consist of highly liquid investments purchased with
original maturities of three months or less.
MARKETABLE SECURITIES
The Company considered its marketable securities available-for-sale as
defined in Statement of Financial Accounting Standards No. 115. In adjusting the
Company's investments to fair value, an unrealized gain of $259,000, net of tax,
was recognized at November 3, 1996. This unrealized gain is presented in the
equity section of the Consolidated Balance Sheet. In the first quarter of fiscal
1997, the Company recorded a realized gain from the sale of these marketable
equity securities in the amount of $1,510,000 which is reflected in other income
in the Consolidated Statements of Operations.
CONCENTRATION OF CREDIT RISK
Trade receivables have a concentration of credit risk in the hospital and
healthcare sectors. The Company performs continuing credit evaluations of its
customers and generally does not require collateral; however, in certain
circumstances, the Company may require letters of credit from its customers.
Historically, the Company has not experienced significant losses related to
receivables from individual customers or groups of customers in any geographic
area.
INVENTORY
Inventory is priced at the lower of cost or market. In determining market
value, allowances for excess and obsolete items are provided. Cost is determined
using the average cost method.
Inventory as of November 2, 1997 and November 3, 1996, included the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $36,613 $40,718
Work in Progress............................................ 7,227 8,744
Finished Goods.............................................. 43,393 50,231
Reserve..................................................... (4,049) (4,606)
------- -------
$83,184 $95,087
======= =======
</TABLE>
19
<PAGE> 21
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
The costs of ordinary maintenance and repairs are expensed, while renewals
and betterments are capitalized. Depreciation on property and equipment is
computed for financial reporting purposes using the straight-line method over
the estimated useful lives of the assets. As of November 2, 1997 and November 3,
1996, property and equipment included the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1997 1996
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.................................................. $ 15,610 $ 9,490
Buildings and improvements............................ 5-25 years 40,240 45,522
Machinery and equipment............................... 2-10 years 64,370 64,699
Furniture and fixtures................................ 3-5 years 2,718 3,366
Accumulated depreciation.............................. (31,384) (24,562)
-------- --------
$ 91,554 $ 98,515
======== ========
</TABLE>
In fiscal 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of" (SFAS 121). SFAS
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future net cash flows (undiscounted and without interest charges)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The adoption
of SFAS 121 did not have a material impact on the Company's consolidated
financial statements.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
GOODWILL AND INTANGIBLES
Goodwill represents the excess of the aggregate price paid by the Company
in business combinations accounted for as purchases over the fair market value
of the tangible and identifiable intangible net assets acquired. Goodwill is
being amortized on a straight-line basis from 10 to 40 years. Other intangible
assets are being amortized on a straight-line basis for periods ranging from 3
to 15 years. The Company assesses the recoverability of intangible assets by
determining whether 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.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment to customers, pursuant to
customer orders. The Company grants rebates to certain of its customers. These
sales and related receivables are recorded net of the expected rebate.
20
<PAGE> 22
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
The Company is continually conducting research and developing new products
utilizing a team approach that involves its engineering, manufacturing and
marketing resources. Although the Company has developed a number of its own
products, most of its research and development efforts have historically been
directed towards product improvement and enhancement of previously developed or
acquired products. Company research and development expenses were approximately
$5,158,000, $5,124,000, and $3,777,000 in fiscal 1997, 1996 and 1995,
respectively.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common shares
and common stock equivalents outstanding for each year. For purposes of this
calculation, outstanding stock options are considered common stock equivalents
using the treasury stock method. The weighted average number of shares utilized
in the primary earnings per share calculation was 8,534,000, 8,264,000, and
8,159,000 for fiscal 1997, 1996, and 1995, respectively. On a fully diluted
basis, both net income and shares outstanding are adjusted to assume the
conversion of the convertible subordinated debentures from the date of issue.
The weighted average number of shares utilized in the fully diluted earnings per
share calculation was 9,947,000, 9,861,000 and 8,159,000 for fiscal 1997, 1996
and 1995, respectively, and interest savings, net of tax, was $1,024,000 in
fiscal 1997 and $1,261,000 in both fiscal 1996 and 1995. Assuming the
convertible debentures were converted at the beginning of fiscal 1997, primary
earnings per share would have approximated fully diluted earnings per share.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 allows a company to adopt a new fair value
based method of accounting for its stock based compensation plans, or to
continue to follow the intrinsic method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock to Employees."
The Company has elected to continue to follow APB Opinion No. 25. If the
Company had adopted SFAS 123 the Company's net income and earnings per share for
years ended November 2, 1997 and November 3, 1996 would have been impacted as
discussed in Note 9.
USE OF ESTIMATES IN THE PREPARATION OF 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.
52 WEEK FISCAL YEAR
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.
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.
21
<PAGE> 23
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Translation adjustments are reflected as a separate component of shareholders
equity. Any transaction gains and losses are included in net income.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). This statement established standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS and fully diluted EPS with a presentation of basic EPS and diluted
EPS. In accordance with SFAS 128, basic EPS excludes the effect of potentially
dilutive securities, such as options and convertible securities, while diluted
EPS reflects the potential dilution that would have occurred if securities or
other contracts to issue common stock had been exercised, converted, or resulted
in the issuance of common stock. SFAS 128 is effective for financial statements
issued for both interim and annual periods ending after December 15, 1997, and
earlier application is not permitted. When adopted in the Company's first
quarter of fiscal 1998, the Company will be required to restate its EPS data for
all prior periods presented. The Company has not completed its implementation
study, but believes that under SFAS 128, diluted EPS will approximate currently
presented fully diluted EPS, and that basic EPS will be different from primary
EPS because no dilutive effects will be included in the computation of basic
EPS.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related Information"
(SFAS 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 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 has not determined
the impact of adoption of SFAS 131 on its consolidated financial statements.
(2) BUSINESS COMBINATIONS, SIGNIFICANT ASSET ACQUISITIONS AND DISPOSITIONS
ASSET ACQUISITIONS
On June 30, 1995, the Company entered into various agreements of Purchase
and Sale of Assets with Becton Dickinson and Company and affiliates to purchase,
for approximately $70,600,000 in cash, after various post-closing adjustments,
assets pertaining to the worldwide glove business of Becton Dickinson ("Glove
Operation"). The assets acquired consist primarily of inventory, equipment,
manufacturing facilities in Honea Path, South Carolina, Los Gatos, California,
Mississauga, Ontario, Canada and Erembodegem, Belgium, and certain intangible
assets. The Company financed the purchase price and ancillary working capital
with borrowings from its principal bank lender under an amended credit facility.
The transaction was accounted for as an asset purchase with the purchase price
and direct acquisition costs allocated based on the fair value of assets
acquired and liabilities assumed. No goodwill was recorded in connection with
this transaction.
On June 1, 1995, the Company acquired the Bovie line of electrosurgical
products from MDT Corporation. The purchase price was approximately $2,600,000,
subject to certain inventory and other adjustments. The Bovie product lines
include electrosurgical generators and related disposable products and supplies.
The transaction was accounted for as an asset purchase with the purchase price
and direct acquisition costs allocated based on the fair value of assets
acquired and liabilities assumed. Goodwill of approximately $1,300,000 was
recorded in connection with this transaction. The Company used funds on hand to
finance the purchase.
22
<PAGE> 24
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS COMBINATIONS
On July 30, 1996, the Company successfully completed a tender offer (the
"Tender Offer") for Sterile Concepts. As of completion of a merger of Sterile
Concepts and Maxxim in September of 1996, all of the outstanding stock of
Sterile Concepts was purchased for approximately $110,500,000, excluding
acquisition costs of approximately $8,600,000 paid in fiscal 1996 and $465,000
of cash acquired with the acquisition. The Company also refinanced existing
Maxxim debt of approximately $72,700,000 contemporaneously with and repaid
approximately $34,200,000 of Sterile Concepts debt shortly after the
consummation of the Tender Offer. Funding to complete the acquisition and debt
repayment was derived from approximately $121,000,000 of borrowings under a
$165,000,000 amended credit facility with its primary lender and the net
proceeds of $97,000,000 from the offering of $100,000,000 of 10 1/2% Senior
Subordinated Notes (See Note 3). The assets acquired in the Sterile Concepts
acquisition consist primarily of accounts receivable, inventory, furniture and
equipment and leased assembly and other facilities in Richmond, Virginia,
Temecula, California and Minnetonka, Minnesota. Sterile Concepts assembles,
packages and sterilizes custom procedure trays for hospitals, outpatient surgery
centers and medical clinics. In the fourth quarter of fiscal 1996, Sterile
Concepts was integrated into the already existing custom procedure tray assembly
and packaging operations of the Case Management division. The acquisition was
accounted for by the purchase method of accounting and approximately
$116,000,000 of goodwill was recorded with the transaction. One time costs of
$3,500,000 relating to the acquisition were recorded in the fourth fiscal
quarter of fiscal 1996.
Effective January 1, 1995, the Company purchased all of the issued and
outstanding common stock of Medica B.V., a Netherlands corporation and certain
assets of S.A. DPC N.V., a Belgian corporation (collectively, "Medica"). The
assets acquired in the Medica acquisition consist primarily of receivables,
inventory, furniture and equipment, the disposable medical supplies
manufacturing facility situated on a tract of land located in Ommen, the
Netherlands, and certain intangible assets. Such assets were used by Medica in
connection with its business of manufacturing, fabricating, distributing and
selling various types of disposable medical supplies, principally in the
Netherlands and Belgium. The purchase price of Medica and the execution of a
non-competition agreement by the seller, Internatio-Meuller N.V., a Netherlands
corporation, consisted of $11,000,000 in cash. The acquisition has been
accounted for as a purchase with the purchase price and direct acquisition costs
allocated based on fair value of assets acquired and liabilities assumed.
Goodwill of approximately $5,600,000 was recorded in connection with this
transaction.
ASSET DISPOSITIONS
Effective May 1, 1996, the Company sold certain assets related to the
Henley Healthcare division operations to Lasermedics, Inc. of Missouri City,
Texas for approximately $13,000,000, which consisted of approximately $6,000,000
in cash and a $7,000,000 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 the Henley division to manufacture and sell various types of products for the
physical medicine, rehabilitation and pain management markets.
SUMMARY PRO FORMA RESULTS
The following unaudited pro forma summary results of operations assume the
acquisition of Sterile Concepts occurred on October 31, 1994. The summary
results of operations also give effect to the acquisition by the Company of the
Glove Operations, the divestiture by the Company of the Henley Healthcare
division and the acquisitions by Sterile Concepts of Associated Medical Products
and Medical Design Concepts, as if
23
<PAGE> 25
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the acquisitions and the divestiture occurred on October 31, 1994. The following
results of operations are presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Revenues.................................................... $534,635 $502,349
Net income.................................................. 5,865 1,480
Primary earnings per share.................................. $ .71 $ .18
</TABLE>
The adjustments to the accounts include (a) the additional amortization
expense associated with debt financing costs, (b) the additional amortization
expense associated with goodwill acquired, (c) a federal income tax adjustment,
(d) the additional interest expense incurred to make the acquisitions, at the
beginning of the Company's fiscal year and (e) the elimination of salaries,
benefits and related costs of redundant personnel in the combined operations.
The pro forma information does not purport to be indicative of results of
operations or financial position which would have occurred had the acquisitions
or divestiture been consummated on the date indicated, or which may be expected
to occur in the future by reason of such acquisition or divestiture.
(3) DEBT AND OTHER LONG-TERM OBLIGATIONS
LONG-TERM DEBT
The following summarizes the Company's long-term debt at November 2, 1997
and November 3, 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit.................................... $ 10,300 $ 40,090
Term loan................................................... 81,000 88,500
Less -- Current maturities.................................. (12,750) (7,500)
-------- --------
$ 78,550 $121,090
======== ========
</TABLE>
CREDIT FACILITY
On July 30, 1996, the Company entered into a Second 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 provided for a term loan of $90,000,000 and a $75,000,000 revolving
line of credit. At closing, the term loan was fully drawn and approximately
$31,000,000 of the revolver was used in conjunction with proceeds from the
10 1/2% Senior Subordinated Notes to finance the Sterile Concepts acquisition
(See Note 2). Both loans mature on July 30, 2002, with the term loan requiring
repayment in twenty four quarterly installments ranging from $1,500,000 to
$5,500,000, commencing October 31, 1996. 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 1.0% to 2.0%, indexed according to a defined financial ratio. For
fiscal 1997, the weighted average rate of interest on the revolver and term loan
was 7.47%. At November 2, 1997, the unused portion of the revolver was
approximately $64,700,000. The credit facilities are unsecured and require the
Company to maintain certain customary financial and operating ratios. The
Company's present credit facility prohibits payment of dividends.
10 1/2% SENIOR SUBORDINATED NOTES
In July 1996, the Company issued $100,000,000 of 10 1/2% Senior
Subordinated Notes ("Notes"). The Notes mature on August 1, 2006, unless
previously redeemed by the Company. Interest on the Notes is payable
semi-annually on February 1 and August 1, commencing on February 1, 1997.
24
<PAGE> 26
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notes will not be redeemable at the Company's option prior to August 1,
2001. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on August
1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
August 1, 2001.............................................. 105.25%
August 1, 2002.............................................. 103.50%
August 1, 2003.............................................. 101.75%
August 1, 2004 and thereafter............................... 100.00%
</TABLE>
Net proceeds from the offering of approximately $97,000,000 were used in
conjunction with proceeds from the new credit facility to finance the Sterile
Concepts acquisition (See Note 2).
6 3/4% CONVERTIBLE SUBORDINATED DEBENTURES
In March 1993, the Company issued $28,750,000 of 6 3/4% Convertible
Subordinated Debentures (the "Debentures") due March 1, 2003. The Debentures are
convertible at the option of the holder into Common Stock at a conversion price
of $18 per share and pay interest every six months commencing September 1, 1993,
through maturity on March 1, 2003.
On October 3, 1997, the Company called for the redemption of $10,000,000,
in principal amount, of the Debentures effective as of November 4, 1997 (the
"First Redemption Date"). On the First Redemption Date, the redemption price of
104.17% of the principal amount, or $1,041.70 plus accrued interest of $11.81
per $1,000 face amount of the Debentures was paid to the holders of Debentures
called for redemption who had not exercised their right to convert their
Debentures into common stock. As of November 2, 1997, $5,398,000 of the
debentures had converted into 299,882 shares of the Company's common stock and
debt issuance costs of $166,000 related to these converted debentures were
written off to additional paid-in capital in fiscal 1997 and are reflected in
the accompanying financial statements.
On November 12, 1997, the Company called for the redemption of the
remaining outstanding Debentures effective as of December 12, 1997 (the "Second
Redemption Date"). On the Second Redemption Date, the redemption price of
104.17% of the principal amount, or $1,041.70 plus accrued interest of $18.94
per $1,000 face amount of the Debentures was paid to the holders who had not
exercised their right to convert their Debentures into common stock. Subsequent
to November 2, 1997, $22,983,000 of the Debentures were converted into 1,276,732
shares of the Company's common stock. As of the Second Redemption Date, $217,000
in principal amount remains due and payable. Holders may surrender their
certificates for payment within two years of the respective redemption dates
after which the funds revert back to the Company.
OTHER DEBT OBLIGATIONS
The following summarizes the Company's other debt obligations at November
2, 1997 and November 3, 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Other debt obligations...................................... $ 6,433 $10,586
Less -- Current maturities.................................. (3,133) (4,996)
------- -------
$ 3,300 $ 5,590
======= =======
</TABLE>
25
<PAGE> 27
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other debt obligations consist primarily of capital leases and other
contractual obligations of the Company.
FUTURE MINIMUM PRINCIPAL PAYMENTS
Future minimum principal payments on long-term debt and other obligations
(adjusted for the $22,983,000 of Debentures converted subsequent to November 2,
1997) are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
- ------------ (IN THOUSANDS)
<S> <C>
1998........................................................ $ 15,883
1999........................................................ 18,329
2000........................................................ 18,191
2001........................................................ 18,802
2002........................................................ 26,800
Thereafter.................................................. 100,097
--------
$198,102
========
</TABLE>
(4) FINANCIAL INSTRUMENTS
During the first quarter of fiscal 1996, the Company entered into an
interest rate swap agreement with its primary lender in order to reduce the
impact of changes in variable interest rates on consolidated results of
operations and future cash outflows for interest. The agreement converts a
portion of the non-indexed part of the interest rate of the Credit Agreement
facilities to a fixed rate of 5.4%. At November 2, 1997, the notional amount of
the swap was $43,125,000 and expires on March 31, 2000. In fiscal 1997, the
Company's financial position and results of operations were not materially
impacted by the swap agreement.
The Company uses an interest rate swap to manage the interest risk
associated with its borrowings and to manage the Company's allocation of fixed
and variable rate debt. The Company accounts for its interest rate swap on the
accrual method, whereby the net receivable or payable is recognized on a
periodic basis and included as a component of interest expense. The Company does
not trade in derivative securities.
The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable, short-term debt and commercial paper borrowings approximate
their carrying amount. The estimated fair values and carrying amounts of
long-term debt borrowings (excluding commercial paper) were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------- ---------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Swap agreement, receiving fixed.... $ -- $ (310) $ -- $ (488)
Long-term debt..................... 126,652 136,126 134,340 138,778
</TABLE>
Substantially all of these fair values were determined from quoted market
prices.
26
<PAGE> 28
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under various operating leases. Rent expense under
these operating leases for fiscal years 1997, 1996 and 1995 were approximately
$3,519,000, $1,215,000 and $1,164,000, respectively. Minimum future rental
payments are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
- ------------ (IN THOUSANDS)
<S> <C>
1998........................................................ $ 2,765
1999........................................................ 2,517
2000........................................................ 1,203
2001........................................................ 1,214
2002........................................................ 1,026
Thereafter.................................................. 3,444
-------
$12,169
=======
</TABLE>
CLAIMS AND LITIGATION
On May 9, 1994, an out of court settlement was reached between the Company
and Futurmed Intervention, Inc., a Texas corporation, ("Futurmed"), Angiomed
Aktengesellschaft, a German corporation ("Angiomed") and a number of individual
defendants. Pursuant to the terms of the agreement, Futurmed will pay the
Company $4,150,000, which is guaranteed by Angiomed. The defendants also agreed
to certain covenants regarding supply of certain products, non-competition and
other matters. Of the settlement amount, $1,150,000, was paid to the Company by
Futurmed at the time of the settlement with $3,000,000 to be paid in five equal
annual installments of $600,000 which began June 1, 1995 and will continue
through June 1, 1999. The remaining $1,200,000 of future payments are secured by
an irrevocable letter of credit in favor of the Company. The proceeds received
at settlement were used to offset legal expenses incurred and to establish a
reserve for defective, excess and obsolete inventory previously purchased from
Angiomed. Installment proceeds are being recorded as non-operating income.
Since March 1996, the Company has been served with various lawsuits
alleging various adverse reactions to the latex used in certain of the medical
gloves alleged to have been manufactured by the Company or the prior owner of
the assets relating to the Company's Glove Operations acquired in June 1995. The
Company believes that most of such claims relate to gloves produced and sold
prior to June 1995, and that such prior obligation has been assumed by the prior
owner. The Company is aware that there have been an increasing number of
lawsuits brought against latex glove manufacturers with respect to such allergic
reactions. The Company, like its competitors, has continued to manufacture and
sell latex gloves and, therefore, may be subject to further claims surrounding
the manufacture of these latex gloves.
In the ordinary course of business, the Company has been named in various
other lawsuits. While the final resolution of any matter may have an impact on
the Company's consolidated financial results for a particular reporting period,
management believes, based on consultation with counsel, that the ultimate
resolution of these matters and the matters specifically discussed above will
not have a material adverse impact on the Company's financial position or
results of operations.
PRODUCT LIABILITY
The Company currently has product liability insurance which it believes to
be adequate for its business. The Company's existing policy expires October 31,
1998.
27
<PAGE> 29
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current domestic............................................ $3,784 $1,050 $ 1,882
Current foreign............................................. 1,855 2,020 1,423
------ ------ -------
$5,639 $3,070 $ 3,305
------ ------ -------
Deferred domestic........................................... $3,724 $2,693 $(1,251)
Deferred foreign............................................ 122 659 --
------ ------ -------
$3,846 $3,352 $(1,251)
------ ------ -------
Total............................................. $9,485 $6,422 $ 2,054
====== ====== =======
</TABLE>
Income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.............................................. 35% 35% 35%
Amortization of goodwill.................................... 4 4 6
State taxes, net of federal benefit......................... 2 2 2
Tax-exempt interest income.................................. -- -- (1)
Surtax exemption............................................ -- -- (1)
Other, net.................................................. 1 1 --
-- -- --
Effective rate.............................................. 42% 42% 41%
== == ==
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at November 2,
1997 and November 3, 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current deferred:
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts...................................... $ 1,257 $ 2,125
Inventory, principally due to reserve for obsolescence and
costs inventoried for tax purposes..................... 3,369 4,603
Net operating loss carryforwards.......................... 84 2,390
Accruals and provisions not currently deductible.......... 4,160 4,315
------- -------
8,870 13,433
Deferred tax liabilities:
Tax over book depreciation................................ (179) (792)
Other..................................................... -- (495)
------- -------
Net current deferred tax asset............................ $ 8,691 $12,146
======= =======
</TABLE>
28
<PAGE> 30
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent deferred:
Deferred tax assets:
Net operating loss carryforwards.......................... $ 506 $ 534
Deferred tax liabilities:
Book over tax amortization................................ (5,933) (3,798)
Differences between book and tax basis of property and
equipment.............................................. (781) (2,553)
------- -------
Net noncurrent deferred tax liability..................... $(6,208) $(5,817)
======= =======
</TABLE>
There is no valuation allowance as of the fiscal year ended November 2,
1997. It is the opinion of management that future operations will more likely
than not generate taxable income to realize the deferred tax assets.
At November 2, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1,573,000 which are available to
offset future federal taxable income, if any, through 2009.
(7) ACCRUED LIABILITIES
Accrued liabilities as of November 2, 1997 and November 3, 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Health insurance and benefit accrual........................ $ 8,471 $ 5,554
Accrued taxes payable....................................... 3,831 4,951
Fees payable to hospital buying groups...................... 1,941 502
Accrued payroll and commissions............................. 2,751 4,760
Accrued interest payable.................................... 3,349 3,627
Other....................................................... 6,288 8,739
------- -------
$26,631 $28,133
======= =======
</TABLE>
(8) GOODWILL AND INTANGIBLES
Goodwill and intangibles, net of accumulated amortization, as of November
2, 1997 and November 3, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $128,782 $131,161
Patents..................................................... 13,336 14,787
Debt offering costs......................................... 3,381 4,006
Non-compete agreements...................................... 3,048 3,985
Other intangibles........................................... 1,687 2,107
-------- --------
$150,234 $156,046
======== ========
</TABLE>
29
<PAGE> 31
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK OPTION AGREEMENTS
Commencing with November 1, 1989, it has been the practice of the board of
directors on or around November 1 of each year to grant stock options to certain
employees of the Company. The Company has also granted options to its
non-employee directors from time to time. The shares purchasable by employees
under such stock option agreements (subject to continued employment with the
Company) vest over five years. The shares purchasable by non-employee directors
under such stock option agreements (subject to continued director service to the
Company) vest over a period of one to three years. Set forth below is certain
information regarding such issuances, exercises and cancellations of options in
each of the indicated fiscal years:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Balance at October 30, 1994............................... 205,000 $11.11
Fiscal 1995:
Granted................................................. 426,000 10.73
Exercised............................................... (41,000) 6.64
Cancelled............................................... (8,700) 12.81
---------
Balance at October 29, 1995............................... 581,300 11.22
Fiscal 1996:
Granted................................................. 275,000 11.48
Exercised............................................... (41,180) 7.06
Cancelled............................................... (21,420) 12.06
---------
Balance at November 3, 1996............................... 793,700 11.40
Fiscal 1997:
Granted................................................. 294,800 11.48
Exercised............................................... (43,000) 12.99
Cancelled............................................... (28,780) 11.68
---------
Balance at November 2, 1997............................... 1,016,720 11.40
=========
</TABLE>
The 1,016,720 options outstanding as of November 2, 1997 had exercise
prices ranging between $10.73 and $15.40, a weighted average exercise price of
$11.40 and a weighted average remaining contract life of 3.64 years. At November
2, 1997, options to purchase 501,020 shares, were exercisable with exercise
prices ranging between $10.73 and 15.40, and a weighted average exercise price
of $11.49.
The Company has elected to continue to follow APB Opinion No. 25; however,
if the Company adopted SFAS 123, the Company's net income and earnings per share
for the years ended November 2, 1997, and November 3, 1996 would have been
reduced as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA
----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income................................. $12,881 $12,638 $8,710 $8,663
Primary earnings per share................. 1.51 1.48 1.05 1.05
Fully diluted earnings per share........... 1.40 1.37 1.01 1.01
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 was
$6.59 and $7.10, respectively. The fair value of each option was determined
using the Black-Scholes option valuation model. The key input variables used in
valuing the options were as follows: average risk-free interest rate based on
5-year Treasury bonds, stock price volatility of 36% and estimated option term
ranging from 4 to 6 years. The Company has no
30
<PAGE> 32
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
present plans to pay dividends on its Common Stock. The effects of applying SFAS
123 as calculated above may not be representative of the effects on reported net
income for future years.
(10) SAVINGS PLAN
The Company has a 401(k) savings plan which permits participants to
contribute up to 15 percent of their base compensation (as defined) each year.
The Company will match at least 25 percent of a participant's contribution up to
a maximum of 6 percent of gross pay. The Company's matching percentage may be
adjusted as Company profitability dictates. Employer contributions were
$801,000, $606,000 and $559,000 for the 1997, 1996 and 1995 plan years,
respectively.
(11) MANAGEMENT STOCK PURCHASE PLAN
On May 23, 1997, the Company issued 400,000 shares of common stock pursuant
to a Senior Management Stock Purchase Plan at $13.00 per share, the closing
stock price on April 30, 1997. The stock was issued in exchange for an aggregate
of $5,200,000 in non-interest bearing, full recourse promissory notes due May
23, 2000 from the participating managers. These notes have been recorded as
subscriptions receivable and are included in the shareholders' equity section of
the Consolidated Balance Sheet. Payment of these notes also is secured by the
pledge of the 400,000 shares of common stock. Net compensation costs associated
with these shares is not significant.
(12) SHAREHOLDER RIGHTS PLAN
On July 10, 1997, the Board of Directors of the Company declared a dividend
of one right to purchase preferred stock ("Right") for each outstanding share of
the Company's Common Stock, par value $0.001 per share ("Common Stock"), to
stockholders of record at the close of business on September 15, 1997 (the
"Record Date"). Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A Participating Preferred Stock,
par value $1.00 per share (the "Preferred Shares"), at an exercise price of $85
per one one-thousandth of a Preferred Share, subject to adjustment (the
"Exercise Price"). The description and terms of the Rights are set forth in a
Rights Agreement dated as of July 10, 1997, as it may from time to time be
supplemented or amended (the "Rights Agreement"), between the Company and Harris
Trust and Savings Bank, as Rights Agent.
The Rights will have certain anti-takeover effects. The Rights are designed
to protect and maximize the value of the outstanding equity interests in the
Company in the event of an unsolicited attempt by an acquiror to take over the
Company in a manner or on terms not approved by the Board of Directors. The
Rights will cause substantial dilution to any person or group that attempts to
acquire the Company without the approval of the Company's Board of Directors. As
a result, the overall effect of the Rights may be to render more difficult or
discourage any attempt to acquire the Company, even if such acquisition may be
favorable to the interests of the Company's stockholders. Because the Board of
Directors can redeem the Rights or approve a Permitted Offer, the Rights should
not interfere with a merger or other business combination approved by the Board
of Directors of the Company.
(13) NONRECURRING CHARGES
In the third quarter of fiscal 1995, the Company made a decision to form
its Case Management division by combining the Boundary and Sterile Design
divisions with the newly acquired Glove Operations and Bovie product line. As a
result of this decision, the Company incurred approximately $10,800,000
(pre-tax) nonrecurring charges comprised primarily of restructuring expenses
(approximately $1,300,000), facility consolidation expenses (approximately
$2,200,000) and non-cash asset write-downs (approximately $7,300,000).
31
<PAGE> 33
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 2, 1997
Net Sales......................................... $133,401 $136,042 $128,654 $131,455
Gross Profit...................................... 32,236 33,439 32,489 33,697
Net Income........................................ 3,459 2,717 3,192 3,513
Primary earnings per share........................ 0.42 0.33 0.37 0.39
Fully diluted earnings per share.................. 0.38 0.31 0.34 0.37
YEAR ENDED NOVEMBER 3, 1996
Net Sales......................................... $ 86,600 $ 90,859 $ 84,128 $138,249
Gross Profit...................................... 25,285 25,592 22,397 32,398
Net Income........................................ 2,726 2,951 2,952 81
Primary earnings per share........................ 0.33 0.35 0.36 0.01
Fully diluted earnings per share.................. 0.31 0.33 0.33 0.01
</TABLE>
32
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Maxxim Medical, Inc.:
We have audited the consolidated financial statements of Maxxim Medical,
Inc. and subsidiaries as listed in Item 14 a) 1. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in 14 a) 2. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Maxxim
Medical, Inc. and subsidiaries as of November 2, 1997, and November 3, 1996, and
the results of their operations and their cash flows for the years ended
November 2, 1997, November 3, 1996 and October 29, 1995, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Houston, Texas
December 23, 1997
33
<PAGE> 35
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information is furnished under the captions "Directors and executive
officers of the registrant" and "Compliance with Section 16(a) of the Exchange
Act" in the Company's definitive proxy statement for its 1998 Annual
Shareholders Meeting, which is incorporated herein by reference.
The following table sets forth certain information with respect to
executive officers of the Company. Executive officers are elected by the Board
of Directors to hold office until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
- ---- --- ------------------------
<S> <C> <C>
Kenneth W. Davidson........................ 50 Chairman of the Board, President and Chief
Executive Officer
Peter M. Graham............................ 51 Executive Vice President, Chief Operating
Officer and Secretary
David L. Lamont............................ 51 Vice President, Group Vice President
Alan S. Blazei............................. 42 Vice President, Controller and Treasurer
Joseph D. Dailey........................... 49 Vice President -- Information Services
Henry T. DeHart............................ 51 Vice President, Executive Vice President
Operations, Case Management
Jack F. Cahill............................. 48 Vice President, Executive Vice President
Sales and Marketing, Case Management
Suzanne R. Garon........................... 45 Vice President, Human Resources
Rob W. Beek................................ 53 Vice President, Managing Director, Maxxim
Medical Europe
</TABLE>
ITEM 11: EXECUTIVE COMPENSATION
Information concerning management remuneration will be furnished under the
caption "Election of Directors -- Executive Compensation and Other Information,"
"-- Director Compensation" and "Approval of 1998 Non-Employee Directors' Stock
Option Plan" in the Company's definitive proxy statement for its 1998 Annual
Shareholders Meeting, which is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership" contained in
Registrant's definitive proxy statement for its 1998 Annual Shareholders Meeting
is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information under the caption "Election Of Directors -- Certain
Transactions" and "Employment Contracts" contained in Registrant's definitive
proxy statement for its 1998 Annual Shareholders Meeting is incorporated herein
by reference.
34
<PAGE> 36
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets of the Company as of November 2,
1997 and November 3, 1996................................. 15
Consolidated Statements of Operations of the Company for the
years ended November 2, 1997, November 3, 1996 and October
29, 1995.................................................. 16
Consolidated Statements of Shareholders' Equity of the
Company for the years ended November 2, 1997, November 3,
1996 and October 29, 1995................................. 17
Consolidated Statements of Cash Flows of the Company for the
years ended November 2, 1997, November 3, 1996 and October
29, 1995.................................................. 18
Notes to Consolidated Statements of the Company............. 19
Independent Auditors Report on Consolidated Financial
Statements and Financial Statement Schedule of the
Company................................................... 33
</TABLE>
(2) The following consolidated financial statement schedule of Maxxim
Medical, Inc. is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts and Allowances
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or information
required is included in the consolidated financial statements and, therefore,
have been omitted.
(b) Reports on Form 8-K
None.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
3.1(a) -- Restated Articles of Incorporation of the Company -- Exhibit
No. 3.1 to the Registration Statement on Form S-1 of
Registrant, Registration No. 33-32630, filed with the
Commission on December 19, 1989 and incorporated herein by
reference.
3.1(b) -- Articles of Amendment to Articles of
Incorporation -- Exhibit No. 3.1 (b) to the Registration
Statement on Form S-1 of Registrant, Registration No.
33-57800, filed with the Commission on February 2, 1993 and
incorporated herein by reference.
3.2 -- Bylaws of the Registrant -- Exhibit No. 3.2 to the
Registration Statement on Form S-1 of Registrant,
Registration No. 33-32630, filed with the Commission on
December 19, 1989 and incorporated herein by reference.
3.3 -- Certificate and Agreement of Merger and Articles of Merger
with attached Plan and Agreement of Merger of the Registrant
and Henley Holding Company -- Exhibit No. 3.3 to the
Registration Statement on Form S-1 of Registrant,
Registration No. 33-32630, filed with the Commission on
December 19, 1989 and incorporated herein by reference.
4.1 -- Specimen Common Stock Certificate -- Exhibit No. 4.1 to the
Registration Statement on Form S-1 of Registrant,
Registration No. 33-57800, filed with the Commission on
February 2, 1993 and incorporated herein by reference.
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
4.2 -- Indenture dated March 18, 1993 between the Registrant and
Trustee, for 6 3/4% Convertible Subordinated Debentures due
2003 -- Exhibit No. 4.2 to the Registration Statement on
Form S-1 of Registrant, Registration No. 33-57800, filed
with the Commission on February 2, 1993 and incorporated
herein by reference.
4.3 -- Specimen Debenture -- Exhibit No. 4.3 to the Registration
Statement on Form S-1 of Registrant, Registration No.
33-57800, filed with the Commission on February 2, 1993 and
incorporated herein by reference.
4.4 -- Indenture dated July 30, 1996, by and among Maxxim, as
Issuer, Maxxim-Delaware, Purchaser, Fabritek La Romana,
Inc., Maxxim Medical Canada Limited, Medica B.V. and Medica
Inc., Maxxim Medical Canada Limited, Medica B.V. and Medica
Hospital Supplies, N.V., as Guarantors and First Union
National Bank of North Carolina, as Trustee -- Exhibit No. 4
to the Form 8-K of Registrant, filed with the Commission on
August 14, 1996 and incorporated herein by reference.
4.5 -- Rights Agreement dated as of July 10, 1997 between Maxxim
Medical, Inc. and Harris Trust and Savings Bank, as Rights
Agent -- Exhibit 1 to the Form 8-A of the Registrant filed
with the Commission on July 11, 1997 and incorporated herein
by reference.
10.1* -- Consulting Agreement dated November 1, 1989, between the
Registrant and Ernest J. Henley -- Exhibit No. 10.13 to the
Registration Statement on Form S-1 of Registrant,
Registration No. 33-32630, filed with the Commission on
December 19, 1989 and incorporated herein by reference.
10.2* -- Employment Agreement dated November 1, 1989, between Kenneth
W. Davidson and the Registrant -- Exhibit No. 10.2 to the
Annual Report of Form 10-K of Registrant, for the fiscal
year end October 30, 1994, filed with the Commission on
January 26, 1995 and incorporated herein by reference.
10.3* -- Form of Amended and Restated Stock Option Agreement dated
November 1, 1990, between the Registrant and various
officers of the Registrant -- Exhibit No. 10.12 to the
Registration Statement on Form S-1 of Registrant,
Registration No. 33-44536, filed with the Commission on
December 16, 1991 and incorporated herein by reference.
10.4* -- Form of Stock Option Agreement dated effective November 1,
1990, between the Registrant and various officers of the
Registrant -- Exhibit No. 10.11 to the Registration
Statement on Form S-1 of Registrant, Registration No.
33-44536, filed with the Commission on December 16, 1991 and
incorporated herein by reference.
10.5* -- From of Non-Employee Director Stock Option Agreement dated
effective February 28, 1991, between the Registrant and the
non-employee directors of the Registrant -- Exhibit No.
10.14 to the Registration Statement on Form S-1 of
Registrant, Registration No. 33-44536, filed with the
Commission on December 16, 1991 and incorporated herein by
reference.
10.6* -- Form of Stock Option Agreement dated effective November 1,
1991, between the Registrant and various officers of the
Registrant -- Exhibit No. 10.15 to the Registration
Statement on Form S-1 of Registrant, Registration No.
33-44536, filed with the Commission on December 16, 1991 and
incorporated herein by reference.
10.7* -- 1992 Employee Stock Option Plan -- Exhibit No. 10.13 to the
Annual Report of Form 10-K of Registrant, for fiscal year
ended October 31, 1992 filed with the Commission on January
29, 1993 and incorporated herein by reference.
10.8* -- 1993 Non-Employee Director Stock Option Plan -- Exhibit No.
10.14 to the Registration Statement on Form S-1 of
Registrant, Registration No. 33-57800, filed with the
Commission on February 2, 1993 and incorporated herein by
reference.
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.9* -- 1994 Non-Employee Director Stock Option Plan -- Exhibit No.
10.11 to the Annual Report of Form 10-K of Registrant, for
the fiscal year ended October 31, 1993 filed with the
Commission on January 28, 1994 and incorporated herein by
reference.
10.10* -- Form of 1995 Employee Stock Option Plan -- Exhibit No. 10.10
to the Annual Report of Form 10-K of Registrant, for the
fiscal year ended October 30, 1994, filed with the
Commission on January 26, 1995 and incorporated herein by
reference.
10.11* -- Form of 1995 Non-Employee Directors' Stock Option
Plan -- Exhibit No. 10.11 to the Annual Report of Form 10-K
of Registrant, for the fiscal year ended October 30, 1994,
filed with the Commission on January 26, 1995 and
incorporated herein by reference.
10.12* -- Form of 1996 Non-Employee Directors' Stock Option
Plan -- Exhibit No. 10.12 to the Annual Report of Form 10-K
of Registrant, for the fiscal year ended November 3, 1996,
filed with the Commission on January 22, 1996 and
incorporated herein by reference.
10.13* -- Form of 1997 Non-Employee Director's Stock Option
Plan -- Exhibit No. 4.5 to the Registration Statement on
Form S-8 of Registrant filed with the Commission on May 22,
1997 and incorporated herein by reference.
10.14* -- Form of 1997 Employee Stock Option Plan -- Exhibit No. 4.2
to the Registration Statement on Form S-8 of Registrant
filed with the Commission on May 22, 1997 and incorporated
herein by reference.
10.15* -- Senior Management Stock Purchase Plan -- Exhibit No. 4.6 to
the Registration Statement on Form S-8 of Registrant filed
with the Commission on May 22, 1997 and incorporated herein
by reference.
10.16 -- Agreement of Purchase and Sale of Assets, dated June 30,
1995, by and among Purchaser and Becton, Dickinson and
Company and Becton Dickinson Vascular Access Inc -- Exhibit
No 2.1 to the Current Report of Form 8-K of Registrant,
dated June 30, 1995, filed with the Commission on July 14,
1995 and incorporated herein by reference.
10.17 -- Agreement of Purchase and Sale of Assets, dated June 30,
1995, by and among Maxxim Medical Canada Limited and Becton
Dickinson Canada Inc -- Exhibit No 2.2 to the Current Report
of Form 8-K of Registrant, dated June 30, 1995, filed with
the Commission on July 14, 1995 and incorporated herein by
reference.
10.18 -- Agreement of Purchase and Sale of Assets, dated June 30,
1995, by and among N.V. Medica Hospital Supplies and N.V.
Becton Dickinson Benelux S.A. -- Exhibit No 2.3 to the
Current Report of Form 8-K of Registrant, dated June 30,
1995, filed with the Commission on July 14, 1995 and
incorporated herein by reference.
10.19 -- Purchase Agreement dated July 18, 1996 between Maxxim and
Initial Purchasers relating to the Old Notes -- Exhibit No.
3 to the Form 8-K of Registrant, filed with the Commission
on August 14, 1996 and incorporated herein by reference.
10.20 -- Agreement and Plan of Merger dated as of June 10, 1996, by
and among Maxxim-Delaware, Maxxim Acquisition and Sterile
Concepts -- Exhibit (d) to Schedule 14D-1 of Registrant,
Maxxim-Delaware, and Purchaser, filed with the Commission on
June 14, 1996 and incorporated herein by reference.
10.21 -- Second Amended and Restated Credit Agreement, dated July 30,
1996, by and among Maxxim, NationsBank of Texas, N.A. and
the banks named therein -- Exhibit No. 2 to the Form 8-K of
Registrant, filed with the Commission on August 14, 1996 and
incorporated herein by reference.
10.22* -- Termination Agreement between Registrant and Kenneth W.
Davidson -- Exhibit No. 4.4 to the Quarterly Report of Form
10-Q of Registrant for the quarterly period ended May 4,
1997, filed with the Commission on June 13, 1997 and
incorporated herein by reference.
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
21 -- Subsidiaries of the Registrant
23 -- Consent of KPMG Peat Marwick LLP
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Compensatory plan or agreement.
38
<PAGE> 40
(d) Schedules
SCHEDULE II
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
FISCAL YEARS ENDED 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING OPERATING AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ----------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1997: Allowance for uncollectible accounts receivable.... $3,901 $1,800 $(2,520) $3,181
1996: Allowance for uncollectible accounts receivable.... $2,054 $3,075 $(1,228) $3,901
1995: Allowance for uncollectible accounts receivable.... $1,629 $2,566 $(2,141) $2,054
1997: Reserve for excess and obsolete inventory.......... $4,606 $1,585 $(2,142) $4,049
1996: Reserve for excess and obsolete inventory.......... $5,149 $2,133 $(2,676) $4,606
1995: Reserve for excess and obsolete inventory.......... $2,584 $4,129 $(1,564) $5,149
</TABLE>
The notes to the consolidated financial statements
of Maxxim Medical, Inc., and subsidiaries
are an integral part of this schedule.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ KENNETH W. DAVIDSON
------------------------------------
Kenneth W. Davidson
Chairman of the Board,
President and Chief Executive
Officer
Date: January 22, 1998
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following persons in the capacities indicated
on January 22, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ KENNETH W. DAVIDSON Chairman of the Board, President and Chief
- ----------------------------------------------------- Executive Officer (principal executive
(Kenneth W. Davidson) officer)
/s/ PETER M. GRAHAM Executive Vice President, Secretary and Chief
- ----------------------------------------------------- Operating Officer (principal financial
(Peter M. Graham) officer)
/s/ ALAN S. BALZEI Vice President -- Controller and Treasurer
- ----------------------------------------------------- (principal accounting officer)
(Alan S. Balzei)
/s/ ERNEST J. HENLEY, PH.D. Director
- -----------------------------------------------------
(Ernest J. Henley, Ph.D.)
/s/ PETER G. DORFLINGER Director
- -----------------------------------------------------
(Peter G. Dorflinger)
/s/ MARTIN GRABOIS, M.D. Director
- -----------------------------------------------------
(Martin Grabois, M.D.)
/s/ RICHARD O. MARTIN, PH.D. Director
- -----------------------------------------------------
(Richard O. Martin, Ph.D.)
/s/ HENK R. WAFELMAN, ING. Director
- -----------------------------------------------------
(Henk R. Wafelman, Ing.)
/s/ DONALD R. DEPRIEST Director
- -----------------------------------------------------
(Donald R. DePriest)
</TABLE>
40
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Maxxim Medical, Inc. -- Delaware Corp.
Fabritek La Romana, Inc.
Maxxim Medical Canada Limited
Maxxim Medical Belgium, N.V. (Belgium)
Maxxim Medical Europe, B.V. (Netherlands)
<PAGE> 1
Exhibit 23
The Board of Directors
Maxxim Medical, Inc. and subsidiaries
We consent to incorporation by reference in the registration statement (No.
333-27609) on Form S-8 of Maxxim Medical, Inc. and subsidiaries of our report
dated December 23, 1997, relating to the consolidated balance sheets of Maxxim
Medical, Inc. and Subsidiaries as of November 2, 1997 and November 3, 1996, and
the related consolidated statements of earnings, retaining earnings, and cash
flows for each of the years in the three-year period ended November 2, 1997,
and all related schedules, which report appears in the November 2, 1997, annual
report on Form 10-K of Maxxim Medical, Inc. and subsidiaries.
KPMG PEAT MARWICK LLP
Houston, Texas
January 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MAXXIM MEDICAL FOR THE YEAR ENDED NOVEMBER 2, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-02-1997
<PERIOD-START> NOV-04-1996
<PERIOD-END> NOV-02-1997
<EXCHANGE-RATE> 1
<CASH> 3,130
<SECURITIES> 0
<RECEIVABLES> 77,209
<ALLOWANCES> 0<F1>
<INVENTORY> 83,184
<CURRENT-ASSETS> 174,523
<PP&E> 122,938
<DEPRECIATION> 31,384
<TOTAL-ASSETS> 424,046
<CURRENT-LIABILITIES> 74,708
<BONDS> 205,202
0
0
<COMMON> 9
<OTHER-SE> 137,919
<TOTAL-LIABILITY-AND-EQUITY> 424,046
<SALES> 529,552
<TOTAL-REVENUES> 529,552
<CGS> 397,691
<TOTAL-COSTS> 397,691
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,620
<INCOME-PRETAX> 22,366
<INCOME-TAX> 9,485
<INCOME-CONTINUING> 12,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,881
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.40
<FN>
<F1>Net of allowance of 3,181
</FN>
</TABLE>
