SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended November 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ........... to ............
Commission File Number 0-18208
MAXXIM MEDICAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0291634
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
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:
Title of each class Name of each exchange on which registered
Common Stock, $.001 par value New York Stock Exchange
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 January 15, 1999, was
$398,411,581 based on the closing price on that date on the New York Stock
Exchange. As of January 15, 1999, 14,260,562 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 1999 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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<PAGE>
ANNUAL REPORT ON FORM 10-K
Item 1: Business
Overview
Maxxim Medical is a major, diversified developer, manufacturer, distributor
and marketer of disposable specialty medical products such as custom procedure
trays, medical gloves, cardiology and interventional radiology products,
containment products, infection control products, and electrosurgical systems
primarily for use in the operating room at hospitals or surgery centers. The
Company is the second largest provider of sterilized custom procedure trays in
the United States and believes that it currently controls approximately 29% of
that market, as well as approximately 58% of the rapidly growing acute care
market for non-latex examination gloves. Subsequent to year end, the Company
entered the endoscopy market through the acquisition of Circon Corporation
("Circon").
See "Recent Developments."
The Company sells over 23,000 products to approximately 7,000 accounts in
North America and Europe. Products are distributed through four primary
distribution channels: North American Surgical sales, North American Medical
sales, European sales, and Original Equipment Manufacturing (OEM)/Export sales.
Products included in the Surgical distribution channel are custom procedure
trays, drapes and gowns, imaging products, and electrosurgery devices. Products
included in the Medical distribution channel are non-latex medical examination
and surgical gloves, critical care products, containment products, and IV safety
devices. The Company's European operation distributes all of the Company's
products through a direct sales force in the Benelux region and utilizes
distributors throughout the remainder of Europe. The European operation also
manufactures and distributes Medica products which are self-manufactured and
assembled single-use hospital supply products and custom procedure kits for
transfusion, infusion and patient monitoring. The Company maintains an
administrative staff to support sales of its products to OEM customers and
international customers outside of North America and Europe.
The Company has experienced significant growth since its initial public
offering in 1990, principally by successfully integrating several major
acquisitions of specialty medical products and custom procedure tray businesses.
Since fiscal 1989, these acquisitions, combined with internal growth, have
generated a compound annual growth rate of 46.4% in net sales, 45.2% in net
income and 15.2% in diluted earnings per share. Significant recent acquisitions
include Sterile Concepts and Circon. In July 1996, the Company acquired Sterile
Concepts, which increased its custom procedure tray business by over 200%
thereby dramatically expanding the Company's vertical integration opportunities.
In January 1999, subsequent to the Company's fiscal year end, the Company
acquired all of the outstanding common stock of Circon Corporation. This
acquisition will provide the Company with an array of endoscope products and
will enhance its ability to compete in the healthcare market place. See "Recent
Developments."
Industry Trends
The Company's products compete in the multi-billion dollar market for
specialty medical products. Management believes that demand in the United States
for the Company's single-use medical products has been favorably impacted by the
emphasis on less invasive surgical procedures, outpatient care and the
continuing pressure 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.
Although the aggregate number of surgical procedures performed in Europe
is approximately equivalent to the number of surgical procedures performed in
the United States, the prevalence of single-use products and custom procedure
trays in Europe is not as great as in the United States. 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 United States healthcare providers to do so. Certain European countries
have implemented healthcare price controls and have 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.
Management believes that there has been a growing trend by large customers
to concentrate their purchases of medical products with fewer, larger suppliers,
and that recent acquisitions, including Sterile Concepts and Circon, have
significantly improved the Company's ability to attract and service such larger
customers. Management believes that this trend will continue to benefit the
Company as it grows and diversifies its product lines.
The growth in the market for gloves, both latex and non-latex, over the
past several years has largely resulted from the increased concerns among
healthcare professionals over protection from the transmission of infectious
diseases, particularly HIV and Hepatitis B. The non-latex segment of the glove
market has grown rapidly principally as a result of reported increases in
allergic reactions to the water soluble proteins in latex and to the chemical
and other additives used in processing latex and manufacturing latex gloves. In
1991, the FDA issued a medical alert warning healthcare professionals about the
increased incidence of allergic reactions to latex medical products by both
medical personnel and patients.
Strategic Objectives
The Company's goal is to be a major, profitable medical company by
enhancing its position as a leading developer, manufacturer, distributor and
marketer of a diversified range of single-use specialty medical products for use
in medical treatment facilities, both domestically and abroad. To achieve this
long-term goal, the Company's objectives in fiscal 1999 are to: (i) assimilate
Circon, (ii) continue to increase sales, (iii) improve profitablility, (iv)
increase shareholder value with continued improvement in earnings per share, (v)
expand its European presence and (vi) continue product line expansions.
Assimilate Circon. (See "Recent Developments" for a description of
Circon's products and markets) In certain respects, the assimilation of
Circon will be challenging due to the size of the organization and its
recent sub-par financial performance. In other respects, the Company
will easily realize benefits due to Circon's technological expertise
and management experience. However, in order to achieve the full
benefit of the acquisition, the Company must immediately begin to
leverage selling relationships, manufacturing competences and
technological expertise to create opportunities to improve short-term
and long-term financial results.
Continue to Increase Sales. Many of the product lines and markets in
which the Company participates are very competitive. It is the
Company's desire to have a leading or substantial market share in each
of the markets it services. The custom procedure tray market is
especially important to the Company because it is the vehicle which is
instrumental to selling single-use products to medical providers.
Therefore, a focus on increasing sales in all product lines is
fundamental to the Company.
Improve Profitability. Vertical integration of Company manufactured
products in procedure trays; maximizing the utilization of Company
facilities; emphasizing relationships with large buying groups,
healthcare provider networks and healthcare distributors; as well as a
constant focus on the reduction of operating expenses have been, and
will continue to be, an important and integral part of the Company's
strategy to increase profitability.
Increase Shareholder Value by Continuing Improvements in Earnings per
Share. The Company has achieved a 15.2% compounded annual growth rate
in diluted earnings per share since its initial public offering in
1990. The Company has a goal of maintaining at least a 15% increase in
diluted earnings per share going forward.
Expand European Presence. Management believes that the international
market for single-use medical products is in the early stage of
development. The Company first established its beachhead in Europe in
January 1995. In fiscal 1998, European sales were $45.8 million or 8.8%
of total Company sales. As the aggregate number of procedures performed
in Europe is approximately equivalent to those in the United States,
the Company feels it has significant opportunity to expand its
penetration of European healthcare markets. .
Continue Product Line Expansions. The Company continually conducts
research and development of new products and enhancements to existing
products. In particular, product improvement and line extension have
been, and are expected to continue to be, important sources of revenue.
Another part of the Company's strategy has been to add or expand
product lines through acquisitions, enabling the Company to develop its
core business of manufacturing, distributing and marketing specialty
medical products. The Company believes that the acquisitions of Sterile
Concepts and Circon, as well as the glove product lines acquired from
Becton Dickinson ("Glove Operations"), have significantly helped
further this strategy. With Sterile Concepts, the Company increased its
custom tray business by over 200%, providing greater direct customer
contact while increasing the Company's distribution of its disposable
medical products. The Company entered the medical glove market as a
worldwide market leader by acquiring the glove operations. The addition
of Circon expands the Company's products into the field of endoscopy
with offerings of both capital equipment and disposable medical
products. Geographically, these acquisitions provided the Company with
expanded manufacturing coverage of domestic and international markets.
The Company intends to continue to pursue acquisitions of businesses
and product lines that promote its strategy and complement its existing
product offerings or increase market share, 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 custom procedure trays.
Products
Custom Procedure Trays -- The Company assembles and markets custom
procedure trays for use in a variety of medical and surgical procedures. Custom
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
custom procedure trays are surgical gowns, surgical drapes, electrosurgical
accessories, instruments, needles, gloves, syringes, tubing, sponges, towels and
gauze. The Company's ValuQuote(TM) system allows 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 procedure tray prototypes
helps to ensure that client product and sequencing needs are met. Assembly of
custom procedure trays is then performed in facilities located in Temecula,
California, Clearwater, Florida, Richmond, Virginia and Athens, Texas. The
Company's EnCompass(TM) program bundles the customer's choice of sterile and
nonsterile procedure-based products and then converts into an efficient disposal
system after use. World-wide custom procedure tray sales were $307,862,000 in
fiscal 1998 or 59% of the Company's net sales.
Gloves -- The Company 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(TM), SensiCare(TM), Tradition(TM),
Eudermic(TM), Integron(TM) and Neolon(TM), are manufactured from latex,
synthetic rubber and various non-latex materials and are offered lightly powered
or powderfree. The Company's non-latex medical examination gloves currently hold
an estimated 58% share of the United States acute care market. 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(TM), Tru-Touch(TM) and Neolon(TM) gloves. The Company continues to
research and develop new compounds to improve its non-latex products. The
gloves, together with 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, Eaton, Ohio, Mississauga, Canada, and
Aalst/Erembodegem, Belgium. The highly mechanized, non-labor intensive
facilities in California, Ohio, Canada and Belgium are currently producing
non-latex medical examination gloves continuously at full capacity. World-wide
glove sales were $109,784,000 in fiscal 1998 or 21% of the Company's net sales.
Other Products -- The Company manufactures single-use specialty vascular
access and pressure monitoring products for the cardiology and interventional
radiology markets as well as a range of medical waste containment products,
sharps disposals, a complete line of single-use, non-woven infection control
apparel for operating room personnel, patient draping systems, a variety of
single-use medical bowls and containers, a line of electrosurgery accessory
products 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. World-wide
sales of these products outside of custom procedure trays were $104,870,000 or
20% of the Company's net sales.
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
$5,649,000, $5,158,000, and $5,124,000 in fiscal 1998, 1997 and 1996,
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 patent covers product sales that
constituted 5% or more of net sales of the Company in fiscal 1998, 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.
Maxxim Medical is a registered trademark of the Company. Argon(TM), Argon
BiCath(R), Argo-Bagz(TM), Boundary(R), Cool Zone(TM), Dextron(TM), Dextren
Clear(TM), Dextron PF(TM), EnCompass(TM), Eudermic(TM), Jawz(TM), Medica(TM),
Neolon(TM), Procedure Based Case Management(TM), SensiCare(R), SensiCare PF(R),
SmartCart(TM), Sterile Design(R), Sterile Concepts(TM), Tradition(TM),
Tru-Touch(R) and ValuQuote(TM) are proprietary common law trademarks of the
Company.
Manufacturing and Distribution
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 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 four
exam glove manufacturing facilities operate almost continuously at full
capacity.
In North America, the Company has twenty-one distribution centers
throughout the United States and 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 the Company's
European computer system at its headquarters in s'Hertogenbosch, the
Netherlands.
Sales and Marketing
Management believes that its approach to selling is consistent with 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's 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 North America
and 24 in Europe.
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. Pricing to its ultimate customer under
these supply agreements is usually established for the contract period which
will typically be from one to three years. The Company views its ultimate
customers as the medical professionals who use its products, rather than the
distributors.
It is the 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 1, 1998. Management believes
that such policy and practice are typical of industry practice.
No individual customer or affiliated group of customer accounts represented
more than five percent of the Company's net sales in any of the past three
fiscal years. The Company regularly sells its products through wholesalers and
distributors including Owens & Minor, Inc. ("Owens & Minor"), a diversified
distribution company. Sales through Owens & Minor totaled 25.7% of North
American product sales in fiscal 1998, 23.1% in fiscal 1997 and 31.3% in fiscal
1996. Since 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, it is not considered to be the Company's actual
customer.
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.
In North America, the Company competes for sales of custom procedure trays,
critical care products and gloves with numerous major companies, including among
others, Allegiance Corporation, Baxter Healthcare Corp. and Johnson & Johnson
and divisions or subsidiaries thereof. In Europe, the Company'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 heathcare
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 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 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 enactment of the FDCA. Most of the
Company's remaining products are Class I devices. Recent passage of the FDA
Modernization Act of 1997 has lessened 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 scruntiny 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 Company has obtained ISO certification
and CE Mark certification for its facilities and products in Europe as well as
for those facilities and products in North America which are sold
internationally.
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.
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 1, 1998, the Company had approximately 2,954 full-time domestic
employees and 1,114 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.
Recent Developments
Effective January 8, 1999, Maxxim acquired all the outstanding common stock
of Circon. The Company believes that this acquisition is an excellent strategic
fit with its long-term objectives. Circon provides a unique opportunity to
strengthen Maxxim's long-term competitive position and brings an outstanding
array of products. The combination of Maxxim and Circon creates immediate scale
opportunities and cost synergies and will offer expanded marketing capabilities
and customer base. Information, including financial information about Circon and
its business, is contained in Schedule 14D-1, filed with the Commission on
November 30, 1998, Schedule 14D-1 as amended by Amendment No. 1, filed with the
Commission on December 10, 1998, Schedule 14D-1 as amended by Amendment No. 2,
filed with the Commission on January 5, 1999 and Schedule 14D-1 as amended by
Amendment No. 3, filed with the Commission on January 6,1999.
<PAGE>
Business
Circon designs, manufactures, markets and services medical endoscopy
systems for diagnosis and minimally invasive surgery. Circon's systems are used
for a growing number of medical specialties, including urology, arthroscopy,
laparoscopy, gynecology, thoracoscopy and plastic surgery. Circon also designs,
assembles and markets miniature color video systems used with endoscope systems.
Industry
Minimally invasive surgery refers to surgical procedures which can be
accomplished without a major incision or other traumatization to the patient,
and, in some cases without general anesthesia. Endoscopy, which refers to the
visualization of interior organs and tissues, is one of the most important
minimally invasive surgical techniques. In addition to decreasing patient trauma
and frequently avoiding general anesthesia, endoscopy can substantially reduce
or eliminate postoperative hospitalization. The resulting cost savings and
patient benefits have caused government reimbursement programs, as well as
private insurance and prepaid health plans, to encourage the use of endoscopic
procedures over traditional open surgery.
Specialized endoscopes for various diagnostic and surgical procedures
include laparoscopes (used for abdominal cavity surgery below the diaphragm),
thoracoscopes (used for chest surgery above the diaphragm), ureteroscopes (used
for urinary tract surgery), cystoscopes (used for surgery in the uro-genital
tract) and arthroscopes (used for knee and other joint surgery). Endoscopic
procedures are often televised using miniature video camera systems connected to
the endoscope. The procedures are performed in hospitals, ambulatory surgical
centers and physicians' offices.
Products
Circon manufactures products which comprise the core technology of
endoscopy --- the endoscope system comprised of rigid endoscopes, flexible
endoscopes and medical video systems. Circon also manufactures accessory
instrumentation which are used in conjunction with endoscope systems for a
variety of diagnostic and therapeutic applications such as electrosurgery
systems, manual instruments, cryosurgery products, wound closure products, and
tubal ligation products. In addition, Circon manufactures cost-effective
diagnostic and disposable products for specific applications such as ureteral
stents, vacuum curettage products, urinary diagnostic products and gynecological
diagnostic products.
Primary Markets
Urology. The Company believes that Circon products have the largest share
of the urology endoscope market in the United States and more Circon products
are in current use in that market than those of any competitor. Having the
largest installed base is an important advantage when introducing new technology
and products. Circon's urology products are used for diagnosis and surgery
throughout the urinary tract, including the urethra, prostate, bladder, ureter
and kidney.
The demand for ways of diagnosing and correcting medical problems
associated with the urinary tract and the prostate has increased as the average
age of the U.S. population has increased. In addition, the Company believes that
the introduction of new products such as vaporizing electrodes, lasers and other
new endoscopic urological instruments with features not found in older products
coupled with the growing familiarity of urologists and the general public with
these innovative endoscopic techniques are factors contributing to the growth of
the urology market.
Circon offers a comprehensive product line for the urology market place.
The breadth of Circon's urology products includes urodynamic equipment for
diagnosing urinary problems, flexible scopes for examining the bladder and
complete urinary tract, rigid scopes and accessories for correcting prostrate,
bladder and kidney problems, as well as ureteral stents used to insure proper
urine flow post-operatively.
Gynecology. Circon currently develops, manufactures and markets medical
devices and systems for use in gynecological procedures. The products include
endoscopy systems, tubal ligation systems, cryosurgical and electrosurgical
systems, colposcopic equipment, curettage systems, hemorrhoid treatments systems
and uterine resectoscope systems as well as disposable products used in
conjunction with these systems.
Colposcopes are optical diagnostic instruments used in gynecology to
examine the cervix at high magnification to detect abnormal tissues which could
lead to cervical cancer or other lesions. A range of accessory instruments are
offered which provide various magnification levels and documentation
capabilities (35mm photography, Polaroid photography, videocolposcopy, etc.).
Colposcopes are also used in conjunction with law enforcement efforts to
diagnose and document evidence in rape and child abuse cases.
The cryosurgical system is marketed principally to gynecology offices and
clinics. The primary application is to precisely destroy defined areas of benign
or pre-malignant lesions of the cervix. A cryosurgical system consists of a gas
cylinder (usually nitrous oxide or carbon dioxide), a gun assembly, and special
tips configured for the intended application. During cryosurgery, the tip is
cooled by rapidly expanding gas to temperatures low enough to freeze abnormal
tissues and destroy the lesion. Cryosurgery offers the advantage of less pain,
faster healing, less scarring and faster and more cost-efficient treatment over
conventional surgery procedures. Other medical specialties also use cryosurgery
for dermatology, proctology, ophthalmology and other procedures.
General Surgery/Laparoscopy. Circon offers a complete line of medical
instrumentation specifically designed to allow the general surgeon to remove the
gall bladder endoscopically using a procedure called video laparoscopic
cholecystectomy. The surgeon performs the procedure through small punctures in
the abdomen through which specially-designed surgical instruments are inserted.
Some of the emerging markets Circon is beginning to enter include
thoracoscopy, arthroscopy, gastroenterology and cardiology.
Sales and Marketing
Circon sells its endoscopy/urological products, video systems and primary
care products to hospitals, surgi-centers, clinics and physicians' offices
throughout the United States. These products are sold by a direct sales
organization with 156 employee representatives, including 131 direct sales
personnel, 16 region managers, 3 area managers, 1 vice president of sales, 1
national contract manager, 1 video specialist and 3 nurses. The domestic sales
and marketing activities are supervised and supported by an in-house sales and
marketing group, including telemarketing, of approximately 84 individuals.
In international markets, Circon employs 35 individuals and sells through
70 local dealers. The international organization includes 4 direct sales
representatives in Canada. Circon's German subsidiary, Circon GmbH, has 2
employees in sales and marketing. Circon France SA, Circon's French subsidiary,
has 6 sales representatives, 2 marketing managers and 3 administrative support
personnel. International sales are denominated in U.S. dollars except sales made
by Circon GmbH which are denominated in German marks, sales made by Circon
Canada which are denominated in Canadian dollars, and sales made by Circon
France which are denominated in French francs. Circon bears the risk of currency
exchange losses from German, Canadian and French customers although no material
losses have occurred in the past.
Circon's key decision maker for most purchases of Circon products is either
the physician utilizing the equipment or the materials manager. Circon tends to
reach these individuals through a combination of direct selling, national and
regional group contracts, training seminars, telemarketing, advertising, direct
mail and trade shows. Circon participated in approximately 300 exhibitions,
workshops and conventions worldwide during 1998 in which the Circon
representatives demonstrated endoscopes, urological stents, video camera
products and primary care urodynamic products.
Circon maintains a specialized sales force for Endotek(TM) Urodynamic
products and utilizes approximately 23 independent representatives and sales
organizations who devote a substantial portion of their time to selling the
primary care, cryosurgery and electrosurgery products.
Circon establishes and maintains long-term relationships with faculty
members of leading medical schools as well as with leading surgeons and
endoscopists throughout the world. Circon's management, product development and
marketing personnel periodically meet with these faculty members, corporate
advisors and practitioners at hospitals, clinics, company facilities, teaching
seminars and trade shows. Intensive concentrations occur with regard to new or
planned products within the specialist's particular area of interest. These
relationships have provided information concerning practitioners' needs as well
as valuable marketing contacts and goodwill. In addition, working with leading
practitioners of medical skills in new product development is a source of
product innovation. The majority of the Company's sales are to repeat customers.
Circon sales for fiscal 1997, 1996, and 1995 were $159,954,000, $153,779,000 and
$160,447,000, respectively.
Research and Development
The medical endoscopy system business has seen numerous continuing
engineering innovations. Circon believes that its ability to apply technical
innovations quickly to products designed for specific medical applications has
been and will continue to be important to its success. Expenditures for research
and development were $11,896,000, $10,941,000 and $10,828,000 in 1996, 1997
and 1998, respectively. During 1997 and 1998, Circon's development efforts were
directed toward expansion of the endoscope product line for gynecology, office
hysteroscopy, transvaginal hydrolaparoscopy (THL), a new flexible cystoscope and
ureteroscope, a new distortion free rigid endoscope, and new alternative
versions of the VaporTrode(TM) electrode for urology. Endovideo product
development concentrated on a new digital camera platform with enhanced
performance and user-controlled features. Circon has continued to develop
cost-effective procedure-based disposables such as the 5mm Tripolar(TM) Cutting
Forceps, new ureteral stents, electrosurgical/suction irrigation products and a
new fluid management pump for hysteroscopy.
Manufacturing and Service
Circon manufactures entire endoscope systems, using proprietary
technologies and exacting quality assurance. Lens assemblies are manufactured
from blocks of optical glass, some of which Circon manufactures from raw silica.
Glass fibers are drawn using advanced "3G" or "glass on glass" processes. Circon
has developed, refined and automated the technology required for grinding and
polishing large quantities of lenses and prisms having dimensions and radius of
curvatures less than one millimeter. These lenses and prisms are used in the
manufacturing of high performance small diameter flexible endoscopes. A key
component in lens manufacturing is the application of appropriate coatings to
the surfaces of each lens, using state-of-the-art vapor deposition equipment.
In addition, Circon manufactures endoscopic video systems, electrosurgical
generators and electrodes required for electrosurgical procedures. Most
components used in the manufacturing of video and electrosurgical devices are
bought from outside suppliers to Circon specifications. Some components,
including certain sensors and cables, are currently purchased from a single
source. The loss of any single source of supply would have no more than a
temporary effect on the Company's operations.
Circon's manufacturing organization follows good manufacturing practices
within the FDA's regulated guidelines. At the same time, quality assurance
consistently strives for worldclass standards per ISO 9000 regulations. In 1996,
the Racine facility became ISO 9002 certified. In 1998, Circon's other
facilities became ISO 9001 and EN46001 certified and obtained a "CE" mark for
all of its products. Such mark is obtained by demonstrating compliance with the
ISO quality system standards, and for medical device manufacturers, the medical
Device Directive promulgated by the European union.
Service and Repairs
Circon provides a two-year warranty on endovideo systems sold in the United
States. Most endovideo system repairs are performed by Circon in Santa Barbara,
California within 24 hours of receipt. For repairs requiring more than 24 hours,
loaner systems are provided to the customer. Circon also provides service and
ongoing maintenance to customers with video equipment that is no longer under
warranty.
All endoscope repairs are performed in Stamford, Connecticut and Norwalk,
Ohio. For rigid out-of-warranty endoscopes and other equipment repairs or
service, Circon offers a repair exchange instrument typically in less than 48
hours for a fee well below the cost of a new instrument.
Patents and Trademarks
While Circon holds numerous patents covering certain aspects of its
endoscope, video, electrosurgical, silicone stent and accessing technology, the
Company does not believe that its business is materially dependent on any single
patent or license.
Circon utilizes several trademarks, including "Circon", "ACMI", "BICAP",
"Cabot" and "Surgitek".
<PAGE>
Government Regulation and Reimbursement Programs
The medical devices manufactured and marketed by Circon are subject to
regulation by the FDA as well as state and foreign regulatory agencies.
Depending on the classification of medical device, different levels of
regulation apply, ranging from extensive premarket testing and approval
procedures for Class III devices, such as implantable devices, to substantially
lower levels of regulation for Class II devices, such as endoscopes, and Class I
devices, such as video cameras. While Circon does market a Class III device,
most of Circon's products are Class I or II. Some of Circon's new products and
some improvements to existing products require premarket notification to the FDA
under an expedited procedure known as a 510(K) that is available only for
products which are substantially equivalent to a legally marketed device. If the
FDA rejects Circon's claim that there is such a substantially equivalent
product, Circon would be required to obtain premarket approval from the FDA
which involves a procedure requiring extensive clinical testing, additional cost
and substantial delay in the introduction of the product to market.
FDA and state regulations also require adherence to certain "good
manufacturing practices" ("GMP") which mandate detailed quality assurance and
record-keeping procedures, and Circon is subject to unscheduled periodic
regulatory inspections. In 1998, Circon received a "warning letter" from the FDA
citing Circon for marketing a device that had not been cleared by the FDA.
Although Circon had a reasonable position as to why clearance was not required,
Circon promptly filed a 510(K) for the subject device as the FDA indicated. That
510(K) was subsequently cleared by the FDA. On previous occasions, Circon
received FDA "regulatory letters" notifying Circon of deficiencies and warning
of enforcement action if the deficiencies were not corrected. Circon believes
that the deficiencies have been corrected and that it is in substantial
compliance with FDA regulations.
The system for Medicare reimbursement of hospital expenses is based on the
diagnosis of the patient. Under this Diagnostic Related Groups ("DRG") system, a
hospital is paid a fixed amount for admitting a patient with a specific
diagnosis according to a schedule of fees, regardless of the hospital's actual
costs of treating the patient. Whether or not the DRG reimbursement is
sufficient to cover the hospital's costs in a particular case, the ceiling on
reimbursement may provide an incentive to reduce such costs. To the extent that
the DRG program, and similar programs of private insurers, provide such an
incentive, Circon believes that they promote the use of minimally invasive
diagnostic and surgical procedures such as endoscopy which reduce postoperative
hospitalization costs. Circon is unable to predict whether future changes to
reimbursement or other healthcare reform efforts will materially affect sales of
Circon's products.
Competition
The Company believes that Circon's products have the largest share of the
urology endoscope market in the United States. Major competitors in endoscopic
markets include a Japanese company (Olympus Optical Co. Ltd.) and two German
companies (Karl Storz GmbH and Richard Wolf GmbH). These companies, as well as
Stryker Corporation and Dyonics (an affiliate of Smith & Nephew plc), are the
principal competitors in the miniature medical color video camera market and
hold a larger share of the International market than Circon.
The urology market is relatively mature and dominated by a small number of
competitors. The principal competitive factors are product quality and
reliability, product features, innovation, price and service. The Company
believes that it competes favorably with respect to each of these factors.
The gynecology market is a rapidly growing area in which Circon has
substantial presence. With the addition of Cabot's line of specialty office and
disposable products to Circon's hysteroscopy products, the Company believes that
Circon is well positioned with respect to competition and provides a complete
array of products.
Some surgical procedures which utilize Circon's products could potentially
be replaced or reduced in importance by alternative medical procedures or new
drugs. Since 1992, Merck & Co., Inc. has been marketing a drug that, according
to clinical testing reported by the pharmaceutical company, caused the prostate
gland to stop growing in most cases, to shrink in some cases, and to restore
urine flow to near-normal rates in some cases. Abbott Laboratories, Inc. and
Pfizer, Inc. also have drugs which are FDA approved for treatment of
hypertension and of benign prostatic hyperplasia. High percentages of patients
using these drugs are reported to be showing some levels of symptomatic
improvement. Alternative procedures under evaluation include implantation of a
stent (metal coil) in the prostate to provide mechanical relief from pressure on
the urethra, and hyperthermia to shrink the prostate using microwave probes
inserted rectally or urethrally. Another procedure under evaluation uses a laser
probe inserted in the urethra to treat the prostate. Circon is unable at this
time to assess the efficacy, safety, cost effectiveness, physician acceptance
and potential regulatory approval of these new drugs, modalities and alternative
medical procedures. To the extent that any of them significantly reduces the
need for Circon's products, sales of it's products could be adversely affected.
The markets in which Circon's products compete are characterized by
continuing technical innovation and competition. In order to continue to be
competitive, Circon is engaged in continuing efforts to improve its products, to
develop additional products and, where appropriate, to distribute products of
other manufacturers. There is no assurance that competition will not further
intensify, either from existing competitors or from new entrants into the
markets, or that some future medical breakthrough or technological development
will not confer a competitive advantage on another company.
Employees
As of December 31, 1998, Circon had 1,180 full-time employees, of whom 667
were engaged in manufacturing, 149 in research and development, 280 in sales and
marketing and 84 in administration. Approximately 380 employees are covered by
collective bargaining agreements. Circon's collective bargaining agreements
covering union workers expire in January 2002 and March 2003. Circon has not
experienced any strikes or other work stoppages in recent years.
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 regional distribution centers.
<TABLE>
<CAPTION>
Owned or Building Area
Location Leased Facility (square feet)
<S> <C> <C>
Los Gatos, California............. Owned 79,000
Santa Barbara, California*........ Owned 76,000
San Diego, California............. Leased 45,000
Temecula, California.............. Leased 162,500
Stamford, Connecticut*............ Leased 98,000
Clearwater, Florida............... Owned 21,000
Clearwater, Florida............... Owned 189,500
Oldsmar, Florida.................. Leased 20,000
Columbus, Mississippi............. Owned 135,000
Eaton, Ohio....................... Owned 230,000
Norwalk, Ohio*.................... Owned 52,000
Norwalk, Ohio*.................... Leased 14,000
Honea Path, South Carolina........ Owned 89,000
Athens, Texas..................... Owned 142,900
Richmond, Virginia................ Leased 253,000
Clarksburg, West Virginia......... Owned 45,000
Racine, Wisconsin*................ Owned 109,000
Aalst/Erembodegem, Belgium........ Owned 150,700
Mississuagua, Ontario, Canada..... Owned 170,000
La Romana, Dominican Republic..... Leased 69,000
Ommen, The Netherlands............ Owned 24,340
s'Hertogenbosch, The Netherlands.. Owned 25,000
s'Hertogenbosch, The Netherlands.. Leased 20,580
</TABLE>
* Facilities recently acquired as a result of the Circon acquisition.
The Company has distribution centers in twenty 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.
<PAGE>
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).
Circon is involved in the following legal proceedings:
On May 28, 1996, two purported stockholders of Circon, Bart Milano and
Elizabeth Heaven, commenced an action in the Superior Court of the State of
California for the County of Santa Barbara, Case No. 213476, purportedly on
behalf of themselves and all others who purchased Circon's common stock between
May 2, 1995 and February 1, 1996, against Circon, Richard A. Auhll, Rudolf R.
Schulte, Harold R. Frank, John F. Blokker, Paul W. Hartloff, Jr., R. Bruce
Thompson, Jon D. St. Clair, Frederick A. Miller, David P. Zielinski, Winton L.
Berci, Jurgen Zobel, Trevor Murdoch and Warren G. Wood. That complaint alleged
that defendants violated Sections 11 and 15 of the Federal Securities Act of
1933, as amended, Sections 25400-02 and 25500-02 of the California Corporations
Code, and Sections 1709-10 of the California Civil Code, by disseminating
allegedly false and misleading statements relating to Circon's acquisition of
Cabot Medical Corp. by merger and to the combined companies' future financial
performance. In general the complaint alleged that defendants knew that
synergies from the merger would not be achieved, but misrepresented to the
public that they would be achieved, in order to obtain approval for the merger
so they would be executives of a much larger corporation. This alleged conduct
allegedly had the effect of inflating Circon's stock price. On July 29, 1996,
defendants filed demurrers to the complaint on the ground that plaintiffs'
allegations fail to state facts sufficient to constitute a cause of action. On
or about August 6, 1996, plaintiffs served their response to defendants'
demurrers, stating their intention to file an amended complaint prior to the
hearing on defendants' demurrers. On September 20, 1996, plaintiffs voluntarily
dismissed Rudolf R. Schulte, Harold R. Frank, John F. Blokker and Paul W.
Hartloff, Jr. from the action, without prejudice. On September 30, 1996,
plaintiffs, joined by a third purported stockholder of Circon, Adam Zetter,
filed a first amended complaint against the remaining defendants. Plaintiffs'
amended complaint is substantially similar to the original complaint, but adds a
new purported cause of action under the unfair business practices provisions of
the California Business & Professions Code, Sections 17200, et seq. and 17500,
et seq. Like the original complaint, the amended complaint seeks compensatory
and/or punitive damages, attorneys fees and costs, and any other relief
(including injunctive relief) deemed proper. On December 2, 1996, defendants
filed demurrers to the amended complaint again on the grounds that plaintiffs'
allegations fail to state facts sufficient to constitute a cause of action. On
April 17, 1997, a hearing was held regarding the defendants demurrers to the
first amended complaint. By order dated May 28, 1997, the Superior Court
overruled the defendant's demurrers to the amended complaint. The parties are
now engaged in discovery proceedings. Circon believes plaintiffs' allegations to
be without merit and intends to vigorously defend the lawsuit.
On August 15, 1996, an action captioned Steiner v. Auhll, et al., No. 15165
was filed in the Court of Chancery of the State of Delaware. Shortly thereafter,
three substantially similar actions were filed by three other individuals
claiming to be stockholders of Circon. All four actions allege that Circon and
certain of its officers and directors breached their fiduciary duties to
Circon's stockholders by taking steps to resist the hostile tender offer by U.S.
Surgical Corporation announced on August 2, 1996. All four of these actions
purport to be brought as class actions on behalf of all Circon stockholders. On
August 16, 1996, a separate action captioned Krim v. Circon Corp., et al., No.
153767, was filed in the Superior Court of California in Santa Barbara. The
plaintiff in that action also claims to be a Circon stockholder and purports to
bring his claim as a class action. On September 27, 1996, that action was stayed
by the Court in favor of the actions pending in Delaware; the Court also
encouraged the plaintiff to refile his action in Delaware. On or about August
30, 1996, the Chancery Court consolidated the four Delaware complaints into a
single action, and plaintiffs filed an amended complaint. Circon and its
officers and directors filed an answer to the amended complaint on November 12,
1996. On July 15, 1998, plantiffs agreed to postpone further action in the case
until after Circon holds its annual meeting later in the year. Circon believes
plaintiffs' allegations to be without merit and intends to vigorously defend the
lawsuits in the event that plaintiffs continue to pursue the matter. The Parties
are currently in discussions regarding the litigation.
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 1, 1998.
<PAGE>
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>
<S> <C> <C>
High Low
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
Fiscal Year Ended November 1, 1998:
First Quarter......................... 24 15/16 19 1/2
Second Quarter........................ 28 15/16 22 1/8
Third Quarter......................... 29 3/8 22 7/8
Fourth Quarter........................ 26 15/16 16 1/8
Fiscal Year Ending October 31, 1999:
First Quarter (through January 15, 1999) 29 3/4 24 3/4
</TABLE>
As of January 15, 1999, there were 237 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 payments of dividends.
b: Recent Sales of Unregistered Securities
On July 30, 1996, the Company issued an aggregate of $100,000,000 principal
amount of 10 1/2% Senior Subordinated Promissory Notes due 2006 (the "Notes") to
NationsBanc Capital Markets, Inc. and Bear Stearns & Co. Inc. (the "Initial
Purchasers"). The Notes were issued to the Initial Purchasers in a private
offering in reliance on Section 4(2) under the Securities Act of 1933. The
Initial Purchasers subsequently resold the Notes in reliance on Rule 144A under
the Securities Act of 1933. Total commissions and fees paid to the Initial
Purchasers were $3,000,000.
On October 3, 1997, the Company called for redemption of $10,000,000 in
principal amount of its $28,750,000 6 3/4% Debentures due March 1, 2003, (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 consolidated financial
statements.
On November 12, 1997, the Company called for the redemption of the
remaining outstanding principal amount of 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. In the first quarter of fiscal 1998, $22,983,000 of the Debentures
converted into 1,276,732 shares of common stock and debt issuance costs of
$701,000 related to these converted Debentures were written off to additional
paid-in capital and are reflected in the accompanying consolidated financial
statements. The Company paid $369,000 to debenture holders who did not exercise
their right to convert upon surrender of their certificates in fiscal 1998.
The common stock described above was issued in transactions exempt under
the Securities Act of 1933, pursuant to Sections 3(a)(9) and 4(2).
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected historical consolidated financial data is derived
from the consolidated financial statements of the Company. The information for
the five fiscal years 1998, 1997, 1996, 1995 and 1994 has been derived from the
Company's Consolidated Financial Statements which financial statements have been
audited by KPMG LLP, independent certified public accountants. 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
Form 10K.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Statement of Operations Data:
Net sales................................... $ 522,516 $ 529,552 $ 399,836 $ 265,726 $ 191,382
Cost of sales............................... 381,638 397,691 294,164 186,495 129,569
-------------- -------------- -------------- -------------- --------------
Gross profit................................ 140,878 131,861 105,672 79,231 61,813
Operating expenses.......................... 94,410 90,101 77,980 60,329 48,390
Nonrecurring charges........................ - - - 10,845 -
-------------- ----------- -------------- -------------- --------------
Income from operations...................... 46,468 41,760 27,692 8,057 13,423
Interest expense............................ ( 13,998 ) ( 22,145 ) ( 13,143 ) ( 4,088 ) ( 2,059 )
Other income, net........................... 1,620 2,751 583 1,014 859
-------------- -------------- -------------- -------------- --------------
Income before income taxes (1).............. 34,090 22,366 15,132 4,983 12,223
Income taxes................................ 14,454 9,485 6,422 2,054 4,538
Changes in accounting for income taxes...... - - - - 380
-------------- -------------- -------------- -------------- --------------
Net income.................................. $ 19,636 $ 12,881 $ 8,710 $ 2,929 $ 8,065
============== ============== ============== ============== ==============
Basic earnings per share (2), (3)........... $ 1.55 $ 1.55 $ 1.08 $ 0.36 $ 1.10
============== ============== ============== ============== ==============
Diluted earnings per share (2), (3)......... $ 1.50 $ 1.42 $ 1.02 $ 0.36 $ 1.05
============== ============== ============== ============== ==============
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
(In thousands)
Balance Sheet Data:
Working capital............................. $ 108,918 $ 99,815 $ 122,086 $ 73,286 $ 82,886
Total assets................................ 468,051 424,046 465,347 264,490 165,416
Long-term liabilities (includes current
portion) (4):
Bank debt and other....................... 13,800 91,300 128,590 76,987 -
Convertible debentures.................... - 23,352 28,750 28,750 28,750
Senior notes.............................. 100,000 100,000 100,000 - -
Shareholders' equity........................ 272,909 137,928 123,556 116,351 111,470
- --------
<FN>
(1) Income before income taxes includes the following nonrecurring charges and
benefits: a. A pre-tax gain in fiscal 1997 of $1.5 million from the sale of
equity securities. b. Pre-tax charges in fiscal 1996 of $3.5 million relating to
the acquisition of Sterile Concepts. c. Pre-tax charges in fiscal 1995 of $10.8
million related to the formation of the Company's Case Management division.
(2) For information concerning calculation of earnings per share, see Note 1 of
the Notes to Consolidated Financial Statements. The Company has restated all
previous earnings per share data to comply with Statement of Financial
Accounting Standards No. 128, "Earnings per Share".
(3) Fiscal 1994 basic and diluted earnings per share exclude a $.05 and $.04
adjustment respectively, to reflect the change in accounting for income taxes.
(4) Excludes capital leases and other long-term obligations of the Company.
</FN>
</TABLE>
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Maxxim Medical is a major, diversified developer, manufacturer, distributor
and marketer of disposable specialty medical products such as custom procedure
trays, medical gloves, containment products, electrosurgical systems and
disposable products primarily for use in the operating room at hospitals or
surgery centers. The Company has grown significantly during the past five years.
Net sales increased from $191,382,000 in 1994 to $522,516,000 in 1998, a
compound annual growth rate of 29%. This growth resulted primarily from
acquisitions of established businesses or product lines. 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).
CIRCON. In January 1999, the Company completed a tender offer for the
outstanding common stock of Circon. Circon was the largest U.S. producer of
endoscope systems and maintained leading market share in urology endoscopes,
gynecology endoscopes, gynecology sterilization, suction/irrigation and premium
urology stents. As this acquisition occurred subsequent to year end, no
financial results are included in this report. (See "Business - Recent
Developments" and Note 16 of the Notes to Consolidated Financial Statements).
WINFIELD MEDICAL. In June 1998, the Company purchased the outstanding
common stock of Winfield Medical. Winfield Medical was a developer, manufacturer
and distributor of medical products, primarily sharps disposal and medical waste
containment products. This acquisition has expanded the Company's core
technologies into film extrusion and blow molding.
STERILE CONCEPTS. In July 1996, the Company acquired the outstanding common
stock of Sterile Concepts through completion of a tender offer. Sterile Concepts
assembled, packaged and distributed sterile custom procedure trays for
hospitals, outpatient surgery centers and medical clinics. As a result of the
acquisition, the Company became the second largest producer of custom procedure
trays in the United States and holds an approximate 29% 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(R), SensiCare(R), Tradition(TM), Eudermic(TM), Dextren(TM) and
Neolon(TM), include latex and non-latex surgical and examination versions. 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. ("Medica"), 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.
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>
Percent Change
Fiscal Year Ended from Prior Period
-------------------------------------- ------------------------------------
1998 1997 1996 1998 vs. 1997 1997 vs. 1996
---------- ---------- ---------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0 % 100.0 % 100.0 % -1.3 % 32.4 %
Gross profit............................ 27.0 24.9 26.4 6.8 24.8
Marketing and selling expenses.......... 12.6 11.8 13.0 5.2 20.9
General and administrative expenses..... 5.5 5.2 6.5 3.9 5.0
Income from operations.................. 8.9 7.9 6.9 11.3 50.8
Interest expense........................ (2.7 ) (4.2 ) (3.3 ) -36.8 68.5
Other income, net....................... 0.3 0.5 0.2 -41.1 371.9
Income before income taxes.............. 6.5 4.2 3.8 52.4 47.8
Income taxes............................ 2.7 1.8 1.6 52.4 47.7
Net income.............................. 3.8 2.4 2.2 52.4 47.9
</TABLE>
<PAGE>
Fiscal 1998 Compared to 1997
Net Sales - Net sales for fiscal 1998 were $522,516,000, versus
$529,552,000 reported for fiscal 1997. The decrease of 1.3% is primarily
attributable to the planned cessation of low margin custom procedure trays
during fiscal 1998. The decrease in custom tray sales is offset in part by
increases in glove sales throughout the year and the addition of containment
products to the Company's product line in the third and fourth quarters. The
increase in glove sales during the year is primarily due to changes in product
mix as well as the acquisition of a glove plant in the fourth quarter of fiscal
1998.
Gross Profit - The Company's gross profit increased to $140,878,000 in
fiscal 1998 from $131,861,000 reported in fiscal 1997. Additionally, the gross
profit margin rose to 27.0% in fiscal 1998 from 24.9% in fiscal 1997. Gross
margin dollar and rate increases are primarily due to the Company's fiscal 1998
focus on product profitablity. As a result of the planned cessation of low
margin custom procedure trays, the shift to sales of higher margin gloves and
the addition of higher margin containment products, the Company's gross margin
increased 2.1 percentage points year over year.
Operating Expenses - Marketing and selling expenses increased to
$65,837,000 in fiscal 1998 from $62,603,000 reported in fiscal 1997. As a
percentage of net sales, these expenses were 12.6% and 11.8% in fiscal 1998 and
1997, respectively. This increase in both total dollar and percent of net sales
is the result of increased administrative fees paid on group purchasing
contracts, lower sales in fiscal 1998, and higher selling costs associated with
the containment products. General and administrative expenses increased modestly
from $27,498,000 in fiscal 1997 to $28,573,000 in fiscal 1998, and, as a
percentage of net sales, these expenses were 5.5% in fiscal 1998 and 5.2% in
fiscal 1997. The increase in general and administrative expenses is primarily
attributable to the acquisition of Winfield Medical in fiscal 1998.
Income from Operations - Income from operations increased 11.3% to
$46,468,000 in fiscal 1998, from $41,760,000 in fiscal 1997. As a percentage of
sales, income from operations increased 1.0 percentage points in fiscal 1998 to
8.9% from 7.9% in fiscal 1997.
Interest Expense - The Company's interest expense decreased to $13,998,000
in fiscal 1998 from $22,145,000 in fiscal 1997. The decrease in interest expense
is due to the repayment of the term loan and revolving credit agreement from the
proceeds of the Company's secondary common stock offering completed in March
1998.
Income Taxes - Maxxim's effective income tax rate was 42.4% in both fiscal
1998 and fiscal 1997. The Company's effective tax rate is higher than the
statutory rate primarily as a result of nondeductible amortization resulting
from goodwill recorded in past acquisitions.
Net Income - As a result of the foregoing, fiscal 1998 net income increased
52.4% to $19,636,000 as compared to fiscal 1997 net income of $12,881,000.
Diluted earnings per share were $1.50 and $1.42 for fiscal years 1998 and 1997
respectively and weighted average shares outstanding were 13,124,057 and
9,830,506, respectively.
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 due to the increase in custom
procedure tray sales. Fiscal 1997 sales reflected a full year of custom
procedure tray sales from the Sterile Concepts acquisition as compared to the
three months of sales in fiscal 1996 (see Note 2 of the Notes to Consolidated
Financial Statements).
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 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 $22,145,000
in fiscal 1997 from $13,143,000 in fiscal 1996. The Company estimates that
interest expense for fiscal 1996 includes approximately $1,889,000 of one-time
bridge financing expenses related to the acquisition of Sterile Concepts. 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. Diluted
earnings per share were $1.42 and $1.02 for fiscal years 1997 and 1996
respectively.
Liquidity and Capital Resources
At November 1, 1998, the Company had cash and cash equivalents of
$4,125,000, working capital of $108,918,000, long-term liabilities of
$130,843,000 and shareholders equity of $272,909,000. Cash flow from operating
activities was $55,542,000 in fiscal 1998 versus $49,577,000 in fiscal 1997.
Cash flow from operating activities was favorably impacted by a reduction in
inventory and accounts receivable balances resulting from an increase in
management's focus on asset management.
On October 3, 1997, the Company called for redemption of $10,000,000 in
principal amount of its $28,750,000 6 3/4% due March 1, 2003, effective as of
November 4, 1997. On November 12, 1997, the Company called for the redemption of
the remaining outstanding principal amount of the Debentures effective as of
December 12, 1997. In fiscal 1998, $22,983,000 of the Debentures converted into
1,276,732 shares of common stock and debt issuance costs of $705,000 related to
these converted Debentures were written off to additional paid-in capital. The
Company paid $369,000 to debenture holders who did not exercise their right to
convert upon surrender of their certificates in fiscal 1998. (See Note 3 of the
Notes to Consolidated Financial Statements).
In March 1998, the Company completed an offering of 4,025,000 shares of its
common stock at a price to the public of $24.00 per share, including 525,000
shares pursuant to the underwriters' exercise of the overallotment option. After
deducting offering costs and commissions, the Company received net proceeds of
approximately $91,418,000. The Company used the proceeds to repay the term loan
and a revolving line of credit facility.
Subsequent to November 1, 1998, the Company entered into a Third Amended
and Restated Credit Agreement ("Credit Agreement") with several lending
institutions in connection with the acquisition of Circon ("the Transaction").
This new Credit Agreement replaced the Company's previous credit facility. The
Credit Agreement provides for a term loan of $200,000,000 and a $125,000,000
revolving line of credit. Upon full payment for all of the Circon shares and
transaction expenses, the term loan will be fully drawn and approximately
$60,000,000 of the revolver will be used to finance the Circon acquisition (See
Note 16 of the Notes to Consolidated Financial Statements). Both loans mature on
January 6, 2005 with the term loan requiring repayment in twenty-four quarterly
installments ranging from $5,000,000 to $10,000,000, commencing April 30, 1999.
Both loans bear interest, payable quarterly on the Interest Period as defined in
the Credit Agreement. The interest rate is prime or, for LIBOR advances, the
LIBOR rate, plus a margin ranging from 1.5% to 2.75%, indexed according to a
defined financial ratio. In connection with the credit agreement, the Company
incurred approximately $5,500,000 in commitment fees which will be amortized
over the life of the agreement.
In June 1998, the Company used approximately $31,267,000 in cash and
assumed $5,300,000 of capital lease obligations in connection with the purchase
of Winfield Medical. (See Note 2 of the Notes to Consolidated Financial
Statements).
In September 1998, the Company purchased a glove plant for approximately
$16,096,000 in cash. The manufacturing plant located in Eaton, Ohio, produces
synthetic examination gloves used primarily in hospitals and other medical
facilities. The purchase provided the Company immediate additional capacity and
a highly experienced work force. (See Note 2 of the Notes to Consolidated
Financial Statements).
The Company believes that its present cash balances, together with
internally generated cash flows and borrowings under the Credit Agreement, will
be sufficient to meet its future working capital requirements. The Company
intends to pursue strategic acquisitions which promote its growth strategy or
complement its present product offerings and increase market share. The Company
anticipates using bank or other commercial financing, seller financing and
additional sale of debt or equity securities to finance any such possible
acquisitions.
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.
Year 2000
Maxxim Medical relies on electronic information systems technology ("IS")
to operate its business. The Company continuously seeks to improve these systems
in order to provide better service to its customers and to support the Company's
growth objectives. The Company has established a three-phased approach to
address year 2000 issues, including embedded technology ("ET") utilized in the
Company's facilities and equipment. The three phases included in the Company's
approach are (1) identification, (2) compliance, and (3) validation. Internally,
the Company has substantially completed, with the aid of outside consultants,
the identification and compliance phases and is currently completing the
validation phase. The validation phase consists primarily of monitoring and
testing of new software and all other components and interfaces that were
implemented or upgraded as part of the software installation or as a result of
other identified year 2000 deficiencies. The Company expects to complete all
phases of the year 2000 project during the first half of 1999. The Company is
not currently aware of any significant exposure that would prevent it from being
year 2000 compliant on a timely basis.
Externally, the Company is formally communicating with its significant
suppliers, customers and other third parties to assess their year 2000
readiness. The Company is currently also determining its potential exposure if
any of these external parties fail to correct their year 2000 issues in a timely
manner. The Company is currently in the compliance and validation phases with
most of its significant external parties which includes the monitoring and
testing of significant interfaces with those external parties among other
things. There can be no guaranty that such external parties will achieve year
2000 compliance on a timely basis and failure by such significant external party
to achieve compliance could have a material adverse effect on the Company.
The Company has not yet obtained information sufficient to quantify the
potential effects of possible internal and external year 2000 non-compliance, to
determine the likely worst case scenarios or to develop contingency plans to
deal with such scenarios. However, as the Company completes its year 2000
project during the first half of 1999, the appropriate contingency plans will be
developed and the implementation will begin. While the Company has proceeded
over the past two years in what it believes to be a reasonable and prudent
manner to identify and remediate year 2000 issues, there can be no assurances
that the Company's internal and external contingency plans, once developed, will
substantially reduce the risk of year 2000 non-compliance. A significant
interruption in the Company's business due to a year 2000 non-compliance issue
could have a material adverse effect on the Company's financial position,
operations and liquidity.
The total incremental direct and indirect costs, of the Company's year
2000 project, are estimated to be approximately $1.0 million, including costs
totaling approximately $0.1 million incurred through November 1, 1998 and
exclusive of Circon; the total incremental direct and indirect costs related to
Circon's year 2000 project are not yet known. The estimated costs of the year
2000 project are not expected to have a material impact on the Company's
business, operations or financial condition in the future periods. The
anticipated impact and the total costs of the year 2000 project are based on
management's best estimates and information currently available.
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. Foreign currency transaction gains and losses are included in the
Consolidated Statements of Operations.
<PAGE>
Euro
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their national currencies and the
"euro," which will ultimately result in the replacement of the currencies of
these participating countries with the euro (the "Euro Conversion"). The Company
is currently assessing the potential impact of the Euro Conversion and has
initiated an internal analysis to plan for the conversion and implement
remediation measures. The Company's analysis will encompass the costs and
consequences of incomplete or untimely resolution of any required systems
modifications, various technical and operational challenges and other risks
including possible effects on the Company's financial position and results of
operations. Costs associated with the Euro Conversion are being expensed by the
Company during the period in which they are incurred and are not currently
anticipated to be material. The Company presently believes that, with
remediation measures, any material risks associated with the Euro Conversion can
be mitigated.
Forward-Looking Statements
Statements, either written or oral, that are not historical facts and which
express the Company's intent, belief or current expectations 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 assumptions: 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 the Company's market
share in its most significant product lines; the Company will continue to
manufacture high quality products at competitive costs and maintain or increase
product pricing, and the Company will become Year 2000 compliant without
material expenditures and the Company's key suppliers and customers also will
become Year 2000 complaint so that the Company's business is not disrupted. 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 headings "Business"and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in this Form 10-K
report and "Risk Factors" in the Company's Form S-3 Registraiton Statement and
Prospectus effective March 10, 1998. 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.
<PAGE>
Item 8: Financial Statements and Supplementary Data
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of November 1, 1998 and November 2, 1997
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,125 $ 3,130
Accounts receivable, net of allowances of $1,840 and $3,181,
respectively............................................... 70,429 77,209
Inventory, net............................................. 79,648 83,184
Net current deferred tax asset............................. 10,325 8,691
Prepaid expenses and other................................. 8,690 2,309
---------------- ---------------
Total current assets........................ 173,217 174,523
Property and equipment........................................ 169,048 122,938
Less: accumulated depreciation............................. (41,538) ( 31,384)
---------------- ---------------
127,510 91,554
Goodwill and other intangibles, net of accumulated amortization
of $21,127 and $14,982, respectively....................... 164,014 150,234
Other assets, net............................................. 3,310 7,735
---------------- ---------------
Total assets................................. $ 468,051 $ 424,046
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligations............................................. $ 508 12,750
Current maturities of other long-term obligations......... 2,036 3,133
Accounts payable.......................................... 35,834 32,194
Accrued liabilities....................................... 25,921 26,631
---------------- ---------------
Total current liabilities.................. 64,299 74,708
Long-term debt, net of current maturities.................... 13,800 78,550
10 1/2% Senior subordinated notes............................ 100,000 100,000
6 3/4% Convertible subordinated debentures................... - 23,352
Capital lease obligations, net of current maturities......... 4,531 -
Other long-term obligations, net of current maturities....... 808 3,300
Net non-current deferred tax liability....................... 11,704 6,208
---------------- ---------------
Total liabilities.......................... 195,142 286,118
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,
14,238,822 and 8,871,355 shares issued and outstanding,
respectively............................................ 14 9
Additional paid-in capital................................ 219,268 103,872
Net unrealized gain on investment securities, net of tax... 796 -
Retained earnings.......................................... 64,886 45,250
Subscriptions receivable................................... ( 5,200) ( 5,200)
Cumulative translation adjustment.......................... ( 6,855) ( 6,003)
---------------- ---------------
Total shareholders' equity......................... 272,909 137,928
---------------- ---------------
Total liabilities and shareholders' equity......... $ 468,051 $ 424,046
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended November 1, 1998, November 2, 1997 and November 3, 1996
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales....................... $ 522,516 $ 529,552 $ 399,836
Cost of sales................... 381,638 397,691 294,164
--------------- --------------- -------------
Gross profit.................... 140,878 131,861 105,672
--------------- --------------- -------------
Operating expenses
Marketing and selling........ 65,837 62,603 51,781
General and administrative... 28,573 27,498 26,199
--------------- --------------- -------------
94,410 90,101 77,980
--------------- --------------- -------------
Income from operations........... 46,468 41,760 27,692
Interest expense................. ( 13,998 ) ( 22,145 ) ( 13,143 )
Other income, net................ 1,620 2,751 583
--------------- --------------- --------------
Income before income taxes....... 34,090 22,366 15,132
Income taxes..................... 14,454 9,485 6,422
--------------- --------------- -------------
Net income....................... $ 19,636 $ 12,881 $ 8,710
=============== =============== =============
Basic earnings per share........ $ 1.55 $ 1.55 $ 1.08
=============== =============== =============
Diluted earnings per share....... $ 1.50 $ 1.42 $ 1.02
=============== =============== =============
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Gain on
Common Stock Paid-In Retained Subscriptions Translation Investment
Shares Par Value Capital Earnings Receivable Adjustment Securities Total
-------- ----------- ------------ ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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..... - - - - - - 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.................... 400 1 5,199 - ( 5,200 ) - - -
Officer loan, net of payment
received.................... - - ( 11 ) - - - - ( 11)
Stock options
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...................... - - - - - - ( 259 ) ( 259)
Conversion of convertible
debentures.................. 299 - 5,232 - - - - 5,232
Net income................... - - - 12,881 - - - 12,881
Translation adjustment....... - - - - - ( 4,478 ) - ( 4,478)
-------- ----------- ------------ ----------- ------------ ------------ ------------ ------------
Balance at November 2, 1997 8,871 9 103,872 45,250 ( 5,200 ) ( 6,003 ) - 137,928
Officer loan, net of payment
received.................... - - ( 40 ) - - - - ( 40)
Stock options
compensation................ - - 625 - - - - 625
Stock options exercised,
including federal income tax
benefit of $269............. 66 - 1,119 - - - - 1,119
Conversion of convertible
debentures.................. 1,277 1 22,278 - - - - 22,279
Secondary stock offering..... 4,025 4 91,414 - - - - 91,418
Net unrealized gain on
investment securities, net
of tax...................... - - - - - - 796 796
Net income................... - - - 19,636 - - - 19,636
Translation adjustment....... - - - - - ( 852 ) - ( 852)
-------- ----------- ------------ ----------- ------------ ------------ ------------ ------------
Balance at November 1, 1998 14,239 $14 $219,268 $ 64,886 $( 5,200 ) $ ( 6,855 ) $796 $272,909
======== =========== ============ =========== ============ ============ ============ ============
See accompanying notes to Consolidated Financial Statements.
</TABLE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended November 1, 1998, November 2, 1997, and November 3, 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 19,636 $ 12,881 $ 8,710
Adjustment to reconcile net income to net cash provided by operating
activities:
Deferred income tax expense................................................ 5,584 3,846 3,352
Depreciation and amortization.............................................. 19,400 17,495 14,968
Compensation expense for outstanding stock options......................... 625 471 311
Gain on sale of building................................................... ( 25 ) - -
Gain on sale of investment in equity securities............................ - ( 1,510 ) -
Changes in current assets and liabilities, net of effects of asset
acquisitions and dispositions and business combinations:
Decrease (increase) in accounts receivable, net............................ 10,680 8,694 ( 8,793 )
Decrease (increase) in inventory, net...................................... 6,057 11,073 ( 9,447 )
Increase in prepaid expenses and other..................................... ( 454 ) ( 619 ) ( 2,248 )
(Decrease) increase in accounts payable.................................... ( 1,716 ) 23 10,299
Decrease in accrued liabilities............................................ ( 4,245 ) ( 2,777 ) ( 16,795 )
----------- ----------- -----------
Net cash provided by operating activities....................................... 55,542 49,577 357
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from building sale................................................... 1,200 500 -
Proceeds from sale of investment securities................................... 1,650 3,130 -
Purchase of investment securities............................................. - - ( 1,620 )
Proceeds from the sale of Henley assets....................................... - - 6,000
Purchase of Winfield Medical, net of cash acquired............................ ( 31,267 ) - -
Purchase of glove plant assets and assumption of liabilities, net............. ( 16,096 ) - -
Purchase of Sterile Concepts, net of cash acquired............................ - - ( 118,676 )
Purchase of property and equipment, net of asset acquisitions and business
combinations............................................................... ( 23,441 ) ( 6,829 ) ( 10,625 )
----------- ----------- -----------
Net cash used in investing activities........................................... ( 67,954 ) ( 3,199 ) ( 124,921 )
----------- ----------- -----------
Cash flows from financing activities:
Payments on long-term borrowings.............................................. ( 81,000 ) ( 7,500 ) ( 73,687 )
Increase in long-term borrowings.............................................. - - 90,000
Net borrowing (payments) on revolving line of credit.......................... 3,500 ( 29,790 ) 35,290
(Decrease) increase in other long-term obligations and capital lease
obligations............................................................... ( 4,143 ) ( 4,153 ) 4,580
Net proceeds from secondary stock offering.................................... 91,418 - -
Net proceeds from the issuance of 10 1/2% Notes............................... - - 97,000
Payments on Sterile Concepts debt............................................. - - ( 34,247 )
Increase (decrease) in bank overdraft......................................... 2,843 ( 7,893 ) 6,091
Other, net.................................................................... 753 529 457
----------- ----------- -----------
Net cash provided by (used in) financing activities............................ 13,371 ( 48,807 ) 125,484
----------- ----------- -----------
Effect of foreign currency translation adjustment............................... 36 ( 391 ) ( 44 )
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............................ 995 ( 2,820 ) 876
Cash and cash equivalents at beginning of year................................... 3,130 5,950 5,074
----------- ----------- -----------
Cash and cash equivalents at end of year........................................ $ 4,125 $ 3,130 $ 5,950
=========== =========== ===========
Supplemental cash flow disclosures:
Interest paid during the period............................................... $ 13,718 $ 21,643 $ 9,090
Income taxes paid during the period........................................... 5,568 6,147 5,336
Noncash investing and financing activities
Conversion of 63/4% convertible subordinated debentures.................... $ 22,278 $ 5,232 $ -
Conversion of note receivable into investment securities................... 4,000 - -
Receipt of investment securities in exchange for certain assets and
intangible assets........................................................ 2,706 - -
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
Net unrealized gain on investment.......................................... 796 - 259
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 1997 consolidated
financial statements to conform with the fiscal 1998 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 in consolidation.
Cash Equivalents and Financial Instruments
Cash equivalents consist of highly liquid investments purchased with
original maturities of three months or less.
Investment Securities
Investment securities at November 1, 1998 consist of corporate equity
securities and are reflected in the Balance Sheet in prepaid expenses and other
current assets. The Company classifies its equity securities as
available-for-sale. Available-for-sale securities are recorded at fair
value.Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of shareholders' equity until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Dividend income is recognized when earned.
At November 1, 1998, the cost, gross unrealized holding gains, gross
unrealized holding losses and fair value of available-for-sale equity securities
were $4,810,000, $1,794,000, $420,000, and $6,184,000, respectively. The Company
had no investment securities at November 2, 1997. Proceeds from the sale of
investment securities available-for-sale were $1,650,000, $3,130,000 and $0 in
1998, 1997 and 1996, respectively and gross realized gains included in income
were $0, $1,510,000, $0, and in 1998, 1997 and 1996, respectively, which is
reflected in other income in the Consolidated Statements of Operations. In
adjusting the Company's investment securities to fair value, an unrealized gain
of $796,000, net of tax, was recognized at November 1, 1998.
Concentration Of Credit Risk
Trade receivables have a concentration of credit risk with hospitals and
healthcare distributors.. 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.
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Inventory as of November 1, 1998 and November 2, 1997, included the
following:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(In thousands)
<S> <C> <C>
Raw Materials................................ $33,936 $36,613
Work in Progress............................. 8,450 7,227
Finished Goods............................... 43,487 43,393
Allowance for excess and obsolete inventory.. (6,225) (4,049)
---------- -----------
$79,648 $83,184
========== ===========
</TABLE>
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 1, 1998 and November 2,
1997, property and equipment included the following:
<TABLE>
<CAPTION>
Useful Life 1998 1997
----------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Land...................................... $ 15,815 $ 15,610
Buildings and improvements................ 5-25 years 47,658 40,240
Machinery and equipment................... 2-10 years 100,579 64,370
Furniture and fixtures.................... 3-5 years 4,996 2,718
Accumulated depreciation.................. ( 41,538 ) ( 31,384 )
--------------- ---------------
$ 127,510 $ 91,554
=============== ===============
</TABLE>
In fiscal 1997, the Company adopted 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 No. 121). SFAS No. 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 assets exceed the fair value of the assets. The adoption of SFAS
No. 121 did not have a material impact on the Company's Consolidated Financial
Statements.
Income Taxes
Income taxes are accounted for under the asset and liability method.
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 and operating loss carryforwards. 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.
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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
$5,649,000, $5,158,000, and $5,124,000, in fiscal 1998, 1997 and 1996,
respectively.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings per Share" (SFAS No. 128) during the first quarter of fiscal 1998. In
accordance with SFAS No. 128, basic earnings per share is computed by dividing
net earnings available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
determined on the assumption that outstanding dilutive stock options have been
exercised and the aggregate proceeds as defined were used to reacquire Company
common stock using the average price of such common stock for the period and
assuming the conversion of the convertible subordinated debentures from the date
of issue. Prior period earnings per share amounts have been restated.
The following table summarizes the calculation of net income, weighted
average number of common shares and weighted average number of diluted common
shares outstanding for purposes of the computation of earnings per share in
accordance with SFAS No. 128:
<TABLE>
<CAPTION>
Per Share
Income Shares Amounts
--------------- ----------- -------------
<S> <C> <C> <C>
1998 (In thousands, except per share amounts)
Basic EPS
Net Income............................ $ 19,636 12,665 $ 1.55
=============
Effects of dilutive securities:
Convertible Debt...................... $ 107 94
Options............................... - 365
--------------- -----------
Diluted EPS........................... $ 19,743 13,124 $ 1.50
=============== =========== =============
1997
Basic EPS
Net Income............................ $ 12,881 8,326 $ 1.55
=============
Effects of dilutive securities:
Convertible Debt...................... $ 1,123 1,297
Options............................... - 208
--------------- -----------
Diluted EPS........................... $ 14,004 9,831 $ 1.42
=============== =========== =============
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Per Share
Income Shares Amounts
----------------- ---------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
1996
Basic EPS
Net Income.......................... $ 8,710 8,102 $ 1.08
=============
Effects of dilutive securities:
Convertible Debt.................... $ 1,364 1,597
Options............................. - 162
--------------- -----------
Diluted EPS......................... $ 10,074 9,861 $ 1.02
=============== =========== =============
</TABLE>
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 No. 123). SFAS No. 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 No. 123, the Company's net income and earnings per
share for the years ended November 1, 1998, 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. 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 June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" (SFAS No. 130) which establishes
standards for reporting and display of comprehensive income and its components.
The components of comprehensive income refer to revenues, expenses, gains and
losses that are excluded from net income under current accounting standards,
including foreign currency translation items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. SFAS No. 130 requires that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement displayed in equal prominence with other financial
statements; the total or other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS No. 130
is effective for both interim and annual periods beginning after December 15,
1997. The Company plans to adopt SFAS No. 130 in the first quarter of fiscal
1999.
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related Information"
(SFAS No. 131) which is effective for the Company's fiscal year ending in 1999.
This statement establishes standards for reporting segment information in annual
and interim financial statements. It also establishes standards for related
disclosure of products and services, geographical areas and major customers.
Under SFAS No. 131, reporting segments are determined consistent with the way
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company does not believe the
adoption of SFAS No. 131 will have a material on its consolidated financial
statements.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), was issued by the Financial
Accounting Standards Board in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company will adopt SFAS No. 133 beginning in the first
quarter of fiscal 2000. As of November 1, 1998, the Company had no derivative
instruments.
(2) BUSINESS COMBINATIONS, SIGNIFICANT ASSET ACQUISITIONS AND DISPOSITIONS
Business Combinations
On June 26, 1998, the Company purchased all of the issued and outstanding
common stock of Winfield Medical. The assets acquired in the Winfield
acquisition consist primarily of accounts receivable, inventory, furniture and
equipment and leased manufacturing and other facilities in San Diego, California
and Clarksburg, West Virginia. Winfield Medical was a developer, manufacturer
and distributor of medical products. The purchase price consisted of
approximately $31,267,000 in cash and the assumption of approximately $5,300,000
of capital lease obligations. 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
$23,300,000 was recorded in connection with this transaction, and is being
amortized on a straight line basis over 30 years.
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 Company. The acquisition was accounted for by
the purchase method of accounting and approximately $116,000,000 of goodwill was
recorded with the transaction, which is being amortized on a straight line basis
over 40 years. One time costs of $3,500,000 relating to the acquisition were
recorded in the fourth fiscal quarter of fiscal 1996.
Asset Acquisition
In September 1998, the Company acquired the property, equipment and
inventory and assumed liabilities of a non-latex medical examination glove plant
in Eaton, Ohio for approximately $16,096,000. This acquisition was accounted for
by the purchase method of accounting.
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Asset Dispositions
In May 1998, the Company sold certain assets and liabilities associated
with its Bovie brand of electrosurgical products to An-Con Genetics for
3,000,000 shares of An-Con Genetics common stock. Included in this sale was the
"Bovie" Tradename which An-Con Genetics now uses as its Company name. The
assets, which were sold at net book value, consisted primarily of inventory and
intangibles. The Company's consolidated financial statements reflect these
available-for-sale securities at fair value at November 1, 1998.
Effective May 1, 1996, the Company sold certain assets related to its
Henley Healthcare division operations to Henley Healthcare, Inc., formerly and
at the time of the transaction, Lasermedics, Inc. 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. In fiscal 1998, the Company, at its option, converted
$4,000,000 of the convertible note into 2,000,000 shares of Henley Healthcare
common stock. Subsquent to this conversion, the Company sold 975,000 shares
during fiscal 1998 in various private transactions. The Company's consolidated
financial statements reflect the remaining available-for-sale securities at fair
value at November 1, 1998.
(3) DEBT AND OTHER LONG-TERM OBLIGATIONS
Long-Term Debt
The following summarizes the Company's long-term debt at November 1, 1998
and November 2, 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
(In thousands)
<S> <C> <C>
Revolving line of credit........... $ 13,800 $ 10,300
Term loan.......................... - 81,000
Less - Current maturities.......... - ( 12,750 )
------------ -------------
$ 13,800 $ 78,550
============ =============
</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; however, the term loan was repaid
in March 1998 from the net proceeds of the Company's public stock offering. (See
Note 13). The interest rate for the credit facilities 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 1998, the weighted average
rate of interest on the revolver was 5.94% In connection with this repayment,
$464,000 of financing costs were written off to interest expense. On November 1,
1998, the unused portion of the revolver was approximately $61,200,000. The
credit facility is unsecured and requires the Company to maintain certain
customary financial and operating ratios and prohibits payment of dividends.
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with the acquisition of Circon (See Note 16), the Company
entered into a Third Amended and Restated Credit Agreement ("Credit Agreement")
with several lending institutions. This new Credit Agreement replaced the
Company's previous credit facility. The Credit Agreement provides for a term
loan of $200,000,000 and a $125,000,000 revolving line of credit. Upon
completion of the acquisition, the term loan will be fully drawn and
approximately $60,000,000 of the revolver will be used to finance the Circon
acquisition. Both loans mature on January 6, 2005 with the term loan requiring
repayment in twenty-four quarterly installments ranging from $5,000,000 to
$10,000,000, commencing April 30, 1999. Both loans bear interest, payable
quarterly on the Interest Period as defined in the Credit Agreement. The
interest rate is prime or, for LIBOR advances, the LIBOR rate, plus a margin
ranging from 1.5% to 2.75%, indexed according to a defined financial ratio.
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.
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
were convertible at the option of the holder into Common Stock at a conversion
price of $18 per share and paid interest every six months commencing September
1, 1993, through maturity on March 1, 2003.
On October 3, 1997, the Company called for 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 been
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
consolidated 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. In the
first quarter of fiscal 1998, $22,983,000 of the Debentures were converted into
1,276,732 shares of the Company's common stock and debt issuance costs of
$705,000 related to these converted debentures were written off to additional
paid-in capital and are reflected in the accompanying consolidated financial
statements in fiscal 1998. The Company paid $369,000 to debenture holders who
did not exercise their right to convert upon surrender of their certificates in
fiscal 1998.
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future Minimum Principal Payments
Future minimum principal payments on long-term debt and other obligations
are as follows:
<TABLE>
<CAPTION>
Fiscal Years (In thousands)
<S> <C>
1999................. $ 2,036
2000................. 505
2001................. 175
2002................. 13,928
2003................. -
Thereafter........... 100,000
-----------------
$ 116,644
=================
</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 converted a
portion of the non-indexed part of the interest rate of the Credit Agreement
facilities to a fixed rate of 5.4%. The original notional amount of the swap was
$63,750,000 with an expiration of March 31, 2000. During fiscal 1998, the
Company sold this agreement for $191,000. In fiscal 1998, the Company's
financial position and results of operations were not materially impacted by the
swap agreement.
The Company used the 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 accounted for its interest rate swap on the
accrual method, whereby the net receivable or payable was 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,
and accounts payable, approximate their carrying amount. The estimated fair
values and carrying amounts of long-term borrowings and the interest rate swap
were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
-------------------- -------------- -------------------- -------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Swap agreement, receiving fixed..... $ - $ - $ - $ 310
Long-term debt(including current maturities) ( 121,683 ) ( 130,133 ) ( 221,085 ) ( 230,559 )
Fair values were determined from quoted market prices or discounted cash
flows.
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) COMMITMENTS AND CONTINGENCIES
Capital Leases
The Company leases a production facility and various equipment under
long-term leases and has the option to purchase the assets for a nominal cost at
the termination of the lease.
Included in property, plant and equipment are the following assets held
under capital leases:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(In thousands)
<S> <C> <C>
Land.................... $ 271 $ -
Buildings............... 1,914 -
Machinery and equipment. 6,240 -
Accumulated amortization ( 358 ) -
------------ -----------
$ 8,067 $ -
============ ===========
</TABLE>
Future minimum lease payments for assets under capital leases at November
1, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Years (In thousands)
<S> <C>
1999....................................... $ 854
2000....................................... 784
2001....................................... 760
2002....................................... 760
2003....................................... 760
Thereafter................................. 2,455
----------
Total minimum lease payments............... 6,373
Less- amount representing interest......... 1,334
----------
Present value of net minimum lease payments. 5,039
Less current maturities..................... 508
-----------
$ 4,531
===========
</TABLE>
Operating Leases
The Company is obligated under various operating leases. Rent expense under
these operating leases for fiscal years 1998, 1997 and 1996 was approximately
$3,430,000, $3,519,000 and $1,215,000, respectively. Minimum future rental
payments are as follows:
<TABLE>
<CAPTION>
Fiscal Years (In thousands)
<S> <C>
1999.......... $ 3,533
2000.......... 3,322
2001.......... 3,367
2002.......... 3,144
2003.......... 2,484
Thereafter.... 3,658
------------
$ 19,508
============
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 $600,000 future payment is 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 has been an increasing number of lawsuits
brought against latex glove manufactures 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,
1999.
(6) INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
(In thousands)
<S> <C> <C> <C>
Current domestic......... $ 8,189 $ 3,784 $ 1,050
Current foreign.......... 681 1,855 2,020
------------ ----------- -----------
$ 8,870 $ 5,639 $ 3,070
------------ ----------- -----------
Deferred domestic........ $ 5,118 $ 3,724 $ 2,693
Deferred foreign......... 466 122 659
------------ ----------- -----------
$ 5,584 $ 3,846 $ 3,352
------------ ----------- -----------
Total.................... $ 14,454 $ 9,485 $ 6,422
============ =========== ===========
</TABLE>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate...................... 35% 35% 35%
Amortization of goodwill............ 3 4 4
State taxes, net of federal benefit. 3 2 2
Other, net.......................... 1 1 1
----------- ----------- -----------
Effective rate....................... 42% 42% 42%
=========== =========== ===========
</TABLE>
The net effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at November 1,
1998 and November 2, 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
(In thousands)
<S> <C> <C>
Current deferred:
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts..... $ 1,359 $ 1,257
Inventory, principally due to reserve for obsolescence and costs inventoried
for tax purposes.......................................................... 3,507 3,369
Net operating loss carryforwards............................................ 629 84
Accruals and provisions not currently deductible............................ 4,830 4,160
------------ -------------
10,325 8,870
Deferred tax liabilities:
Tax over book depreciation.................................................. - ( 179 )
------------ -------------
Net current deferred tax asset.............................................. $ 10,325 $ 8,691
============ =============
Noncurrent deferred:
Deferred tax assets:
Net operating loss carryforwards........................................... $ 1,440 $ 506
Deferred tax liabilities:
Book over tax amortization................................................. ( 7,299 ) ( 5,933 )
Differences between book and tax basis of property and equipment........... ( 5,845 ) ( 781 )
------------ -------------
Net noncurrent deferred tax liability...................................... $ ( 11,704 ) $ ( 6,208 )
============ =============
</TABLE>
There is no valuation allowance as of the fiscal year ended November 1,
1998. 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 1, 1998, the Company has $10.1 million of net operating loss
carryforwards for federal income tax purposes which were acquired in various
acquisitions. The utilization of certain net operating loss carryforwards is
subject to limitations under U.S. Federal Income Tax laws. The Company did not
record a deferred tax asset for $4.2 million of these net operating loss
carryforwards in the allocation of the purchase price of these acquisitions, for
which subsequently recognized benefits will be allocated to reduce goodwill. The
net operating loss carryforwards are available to offset future federal taxable
income, if any, through 2009.
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) ACCRUED LIABILITIES
Accrued liabilities as of November 1, 1998 and November 2, 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(In thousands)
<S> <C> <C>
Health insurance and benefit accrual............. $ 7,799 $ 8,471
Accrued taxes payable............................ 5,314 3,831
Fees payable to hospital buying groups........... 2,357 1,941
Accrued payroll and commissions.................. 2,958 2,751
Accrued interest payable......................... 2,807 3,349
Other............................................ 4,686 6,288
---------- -----------
$ 25,921 $ 26,631
============ =============
</TABLE>
(8) GOODWILL AND INTANGIBLES
Goodwill and intangibles, net of accumulated amortization, as of November
1, 1998 and November 2, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
(In thousands)
<S> <C> <C>
Goodwill...................................... $ 146,381 $ 128,782
Patents....................................... 12,069 13,336
Debt offering costs........................... 2,660 4,343
Non-compete agreements........................ 2,269 3,048
Other intangibles............................. 635 725
------------ -------------
$ 164,014 $ 150,234
============ =============
</TABLE>
(9) STOCK OPTION AGREEMENTS
Commencing with November 1, 1989, it has been the practice of the board of
directors to grant stock options to certain employees of the Company from time
to time. 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 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>
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Weighted
Average Exercise
Shares Price
-------------- --------------
<S> <C> <C>
Fiscal 1998:
Granted........................ 302,800 $ 19.64
Exercised...................... ( 65,760 ) 12.94
Cancelled...................... ( 11,680 ) 13.13
-------------
Balance at November 1, 1998....... 1,242,080 13.31
=============
</TABLE>
The 1,242,080 options outstanding as of November 1, 1998 had exercise
prices ranging between $10.73 and $24.76, a weighted average exercise price of
$13.31 and a weighted average remaining contract life of 2.68 years. At November
1, 1998, options to purchase 667,476 shares, were exercisable with exercise
prices ranging between $10.73 and $19.02, and a weighted average exercise price
of $11.84.
The Company has elected to continue to follow APB Opinion No. 25: however,
if the Company adopted SFAS No. 123, the Company's net income and earnings per
share for the years ended November 1, 1998, November 2, 1997, and November 3,
1996 would have been reduced as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ------------------------------
As Reported Proforma As Reported Proforma As Reported Proforma
-------------- ------------ -------------- ------------ ------------- ----------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income................... $ 19,636 $ 19,042 $ 12,881 $ 12,638 $ 8,710 $ 8,663
Basic earnings per share..... 1.55 1.50 1.55 1.52 1.08 1.07
Diluted earnings per share... 1.50 1.46 1.42 1.40 1.02 1.02
</TABLE>
The weighted average fair value of options granted in 1998, 1997, and 1996
was $13.58, $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 53% for
1998 and 36% for 1997 and 1996, and estimated option terms ranging from 2 to 6
years. The Company has no present plans to pay dividends on its Common Stock.
The effect of applying SFAS No. 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
$910,000, $801,000, and $606,000 for the 1998, 1997 and 1996 plan years,
respectively.
(11) DEFERRED COMPENSATION PLAN
During 1998, the Company established a nonqualified deferred compensation
plan for key employees of the Company. Under the program, participants may elect
to reduce their compensation and to have elective deferrels credited to their
accounts by making an election under the Plan, but no participants may defer
more than 90% of their base and 100% of bonuses. The Company will match 100% of
the first 6% of the participants' compensation deferral. Vesting in the plan is
100% immediate and the retirement age under the plan is age 55. A participant
terminating employment before retirement age is entitled to a lump sum payment
of all vested amounts. In fiscal 1998 employer contributions were $50,200.
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) MANAGEMENT STOCK PURCHASE PLAN
In May 1997, the Company issued 400,000 shares of common stock pursuant to
a Senior Management Stock Purchase Plan at $13.00 per share. 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.
(13) PUBLIC OFFERING OF COMMON STOCK
In March 1998, the Company completed an offering of 4,025,000 shares of its
common stock at a price to the public of $24.00 per share, including 525,000
shares pursuant to the underwriters' exercise of the overallotment option. After
deducting offering costs and commissions, the Company received net proceeds of
approximately $91,418,000. The Company used approximately $20,000,000 to expand
glove production capacity and the balance to repay the Company's term loan and a
revolving creditfacility.
(14) 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").
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.
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.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
----------- ------------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Year ended November 1, 1998
Net Sales.................. $ 128,003 $ 132,958 $ 128,057 $ 133,498
Gross Profit............... 33,061 34,742 35,324 37,751
Net Income................. 3,751 4,719 5,444 5,722
Basic earnings per share... 0.38 0.38 0.38 0.40
Diluted earnings per share. 0.37 0.37 0.37 0.39
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
Basic earnings per share... 0.43 0.33 0.38 0.41
Diluted earnings per share. 0.39 0.31 0.34 0.37
</TABLE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(16) SUBSEQUENT EVENTS (UNAUDITED)
On January 6, 1999, the Company successfully completed a tender offer for
Circon Corporation ("Circon"). Upon the completion of the merger of Circon and
Maxxim on January 8, 1999, all of the outstanding stock of Circon was purchased
for approximately $15.00 per share or $257,000,000, including certain fees and
expenses incurred in connection with the acquisition. The Company obtained all
funds required in connection with the acquisition through a bank loan, pursuant
to the Third Amended and Restated Credit Agreement, dated as of January 4, 1999.
(See Note 3). The Company will account for this acquisition by the purchase of
accounting method in the first quarter of fiscal 1999.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
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 1, 1998, and November 2, 1997, and
the results of operations and their cash flows for the years ended November 1,
1998, November 2, 1997 and November 3, 1996, 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 LLP
Houston, Texas
January 7, 1999
<PAGE>
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 1999 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.......... 51 Chairman of the Board, President and Chief
Executive Officer
Peter M. Graham.............. 52 Senior Executive Vice President, Chief
Operating Officer and Secretary
David L. Lamont.............. 52 Executive Vice President, Research and
Product Development
Alan S. Blazei............... 43 Executive Vice President, Controller and
Treasurer
Henry T. DeHart.............. 52 Executive Vice President, Manufacturing
Operations
Joseph D. Dailey............. 50 Executive Vice President, Information
Services
Jack F. Cahill............... 49 Executive Vice President, Sales and
Marketing
Suzanne R. Garon............. 46 Executive Vice President, Human Resources
Rob W. Beek.................. 54 Executive 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 1999 Non-Employee Directors' Stock
Option Plan" in the Company's definitive proxy statement for its 1999 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 1999 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 1999 Annual Shareholders Meeting is incorporated herein
by reference.
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 1, 1998 and
November 2, 1997................................................................. 20
Consolidated Statements of Operations of the Company for the years ended
November 1, 1998, November 2, 1997 and November 3, 1996........................... 21
Consolidated Statements of Shareholders' Equity of the Company for the years
Ended November 1, 1998, November 2, 1997 and November 3,1996........... 22
Consolidated Statements of Cash Flows of the Company for the years ended
November 1, 1998, November 2, 1997 and November 3, 1996............................ 23
Notes to Consolidated Statements of the Company....................................... 24
Independent Auditors Report on Consolidated Financial Statements and
Financial Statement Schedule of the Company........................................ 39
</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
Exhibit
Number Description of Exhibit
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.
<PAGE>
Exhibit
Number Description of Exhibit
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 I to the Form
8-A of the Registrant filed with the Commission on July 11, 1997 and
incorporated herein by reference.
4.6 -Third Amended and Restated Credit Agreement, dated as of January 4, 1999,
by and among the Registrant, NationsBank, N.A., as Agent, The Bank of Nova
Scotia and First Union Bank, as managing agents, and the Banks named
therein - Exhibit(b)(2) to Amendment No. 2 to Schedule 14-D1 filed with the
Commission on January 5, 1999 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 ended 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* - Form 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, Registation No.
33-57800, filed with the Commission on February 2, 1993 and
incorporated herein by reference.
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.
Exhibit
Number Description of Exhibit
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 fisal year ended
October 31, 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 fisal year
ended October 31, 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 Directors' 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 Satement 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 Registration 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.
10.23* - Employment Agreement between Registrant and Kenneth W. Davidson -
Exhibit No. 10.2 to the Quarterly Report of Form 10-Q of Registrant for
the quarterly period ended February 1, 1998, filed with the Commission
on March 18, 1998 and incorporated herein by reference.
Exhibit
Number Description of Exhibit
10.24* - Form of 1998 Non-Employee Directors' Stock Option Plan - Exhibit No.
10.1 to the Quarterly Report of Form 10-Q of Registrant for the
quarterly period ended February 1, 1998, filed with the Commission on
March 18, 1998 and incorporated herein by reference.
10.25 - Agreement and Plan of Merger, dated as of November 21, 1998, by and
among MMI Acquisition Corp., the Registrant and Circon Corporation -
Exhibit (c)(1) to Schedule 14-D1 filed with the Commission on November
30, 1998 and incorporated herein by reference.
10.26 - Offer to Purchase for Cash All Outstanding Shares of Common Stock
(including the Associated Preferred Stock Purchase Rights) of Circon
Corporation at $15.00 Net Per Share by MMI Acquisition Corp. (a wholly-
owned subsidiary of the Registrant) and the Registrant, dated November
30, 1998 - Exhibit (a)(1) to Schedule 14D-1, filed with the Commission
on November 30, 1998 and incorporated herein by reference.
10.27* - Key Employee Non-Qualified Deferred Compensation Plan effective July
1, 1998.
21 - Subsidiaries of the Registrant
23 - Consent of KPMG LLP
27 - Financial Data Schedule (for SEC use only)
- ------------------
o Compensatory plan or agreement.
(d) Schedules
SCHEDULE II
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
Fiscal Years Ended 1998, 1997 and 1996
(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>
1998: Allowance for uncollectible accounts receivable....... $ 3,181 $ 1,271 $ ( 2,612 ) $ 1,840
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
1998: Allowance for excess and obsolete inventory........... $ 4,049 $ 3,313 $ ( 1,137 ) $ 6,225
1997: Allowance for excess and obsolete inventory........... $ 4,606 $ 1,585 $ ( 2,142 ) $ 4,049
1996: Allowance for excess and obsolete inventory........... $ 5,149 $ 2,133 $ ( 2,676 ) $ 4,606
The notes to the consolidated financial statements
of Maxxim Medical,Inc. and subsidiaries
are an integral part of this schedule.
</TABLE>
<PAGE>
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
Dated: January 29, 1999
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 29, 1999.
Signatures Title
/s/ KENNETH W. DAVIDSON Chairman of the Board, President and Chief
(Kenneth W. Davidson) Executive Officer (principal executive officer)
/s/ PETER M. GRAHAM Senior Executive Vice President, Secretary and
(Peter M. Graham) Chief Operating Officer (principal financial
officer)
/s/ ALAN S. BLAZEI Executive Vice President, Treasurer and
(Alan S. Blazei) Controller (principal accounting officer)
/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, M.D.)
/s/ HENK R. WAFELMAN, ING. Director
(Henk R. Wafelman, Ing.)
/s/ DONALD R. DePRIEST Director
(Donald R. DePriest)
Exhibit 10.27
The Merrill Lvnch Non-Qualified Deferred
Compensation Plan Trust Agreement
TRUST UNDER: MAXXIM MEDICAL, INC.
DEFERRED COMPENSATION PLAN
This Agreement made this Ist day of July, 1998 by and between Maxxim Medical,
Inc. (Company) and Merrill Lynch Trust Company, a Florida corporation (Trustee);
WHEREAS, Company has adopted the non-qualified deferred compensation Plan(s)
identified above and such other plan(s) as are listed in Appendix A.
WHEREAS, Company has incurred or expects to incur liability under the terms of
such Plan(s) with respect to the individuals participating in such Plan(s).
WHEREAS, Company wishes to establish a trust (the "Trust") and to contribute to
the Trust assets that shall be held therein, subject to the claims of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plan(s);
WHEREAS, it is the intention of the parties that this Trust shall constitute an
unfunded arrangement and shall not affect the status of the Plan(s) as an
unfunded plan maintained for the purpose of providing deferred compensation for
a select group of management or highly compensated employees for purpose of
Title I of the Employee Retirement Income Security Act of 1974.
WHEREAS, it is the intention of Company to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the
Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a)Company hereby deposits with Trustee in trust such cash and/or marketable
securities, if any, listed in Appendix B, which shall become the principal of
the Trust to be held, administered and disposed of by Trustee as provided in
this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a. grantor trust, of which Company is the
grantor, within the meaning of subpart E, Part 1, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d)The principal of the Trust, and any earnings thereon, shall be held separate
and apart from other funds of Company and shall be used exclusively for the uses
and purposes of Plan participants and general creditors as herein set forth.
Plan participants and their beneficiaries shall have no preferred claim on, or
any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Plan(s) and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Companv's general
creditors under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time to time, make
additional deposits of cash or other property in trust with Trustee to augment
the principal to be held, administered and disposed of by Trustee as provided in
this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary
shall have any night to compel such additional deposits.
(f) Trustee shall not be obligated to receive such cash and/or property unless
prior thereto Trustee has agreed that such cash and/or property is acceptable to
Trustee and Trustee has received such reconciliation, allocation, investment or
other information concerning, or representation with respect to, the cash and/or
property as Trustee may require. Trustee shall have no duty or authority to (a)
require any deposits to be made under the Plan or to Trustee, (b) compute any
amount to be deposited under the Plan to Trustee, or (c) determine whether
amounts received by Trustee comply with the Plan. Assets of the Trust may, in
Trustee's discretion, be held in an account with an affiliate of Trustee.
Section 2. Payments to Plan Participants and Their Beneficiaries
(a) With respect to each Plan participant, Company shall deliver to Trustee a
schedule (the "Payment Schedule") that indicates the amounts payable in the
respect of the participant (and his or her beneficiaries), that provides a
formula or other instructions acceptable to Trustee for determining the amounts
so payable, the form in which such amount is to be paid (as provided for or
available under the Plan(s)), and the time of commencement for payment of such
amounts. The Payment Schedule shall be delivered to Trustee not more than (30)
business days nor fewer than (15) business days prior to the first date on which
a payment is to be made to the Plan participant. Any change to a Payment
Schedule shall be delivered to Trustee not more than (30) days nor fewer than
(15) days prior to the date on which the first payment is to be made in
accordance with the changed Payment Schedule. Except as otherwise provided
herein, Trustee shall make payments to Plan participants and their beneficiaries
in accordance with such Payment Schedule. The Trustee shall make provisions for
the reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by Company, it being understood among the parties hereto that (1) Company shall
on a timely basis provide Trustee specific information as to the amount of taxes
to be withheld and (2) Company shall be obligated to receive such withheld taxes
from Trustee and properly pay and report such amounts to the appropriate taxing
authorities. (b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan(s) shall be determined by Company or
such party as it shall designate under the Plan(s), and any claim for such
benefits shall be considered and reviewed under the procedures set out in the
Plan(s).
(c) Company may make payment of benefits directly to Plan participants or their
beneficiaries as they become due under the terms of the Plan(s). Company shall
notify Trustee of its decision to make payment of benefits directly prior to the
time amounts are payable to participants or their beneficiaries. In addition, if
the principal of the Trust, and any earnings thereon. are not sufficient to make
payments of benefits in accordance with the terms of the Plan(s), Company shall
make the balance of each payment as it falls due. Trustee shall notify Company
where principal and earnings are not sufficient.
(d) Trustee shall have no responsibility to determine whether the Trust is
sufficient to meet the liabilities under the Plan(s), and shall not be liable
for payments or Plan(s) liabilities in excess of the value of the Trust's
assets.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When
Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay
its debts as they become due, or (ii) Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in Section
l(d) hereof, the principal and income of the Trust shall be subject to claims of
general creditors of Company under federal and state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of Company (or, if
there is no Chief Executive Officer, the highest ranking officer) shall have the
duty to inform Trustee in writing of Company's Insolvency. If a person claiming
to be a creditor of Company alleges in writing to Trustee that Company has
become Insolvent, Trustee shall determine whether Company is Insolvent and,
pending such determination, Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or has received
notice from Company or a person claiming to be a creditor alleging that Company
is Insolvent, Trustee shall have no duty to inquire whether Company is
Insolvent. Trustee may in all events rely on such evidence concerning Company's
solvency as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent, Trustee
shall discontinue payments to Plan participants or their beneficiaries and shall
hold the assets of the Trust for the benefit of Company's general creditors.
Nothing in this Trust Agreement shall in any way diminish any rights of Plan
participants or their beneficiaries to pursue their rights as general creditors
of Company with respect to benefits due under the Plan(s) or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or their
beneficiaries in accordance with Section 2 of this Trust Agreement only after
Trustee has determined that Company is not Insolvent (or is no longer
Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan participants provided for hereunder during any such period of
discontinuance; provided that Company has given Trustee information with respect
to such payments made during the period of discontinuance prior to resumption of
payments by the Trustee.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, since the Trust is irrevocable, in
accordance with Section l(b) hereof, Company shall have no right or power to
direct Trustee to return to Company or to divert to others any of the Trust
assets before all payment of benefits have been made to Plan participants and
their beneficiaries pursuant to the terms of the Plan(s).
Section 5. Investment Authority.
(a) Trustee may invest in securities (including stock or rights to acquire
stock) or obligations issued by Company. All rights associated with assets of
the Trust shall be exercised by Trustee or the person designated by Trustee, and
shall in no event be exercised by or rest with Plan participants, except that
voting rights with respect to Trust assets will be exercised by Company, unless
an investment adviser has been appointed pursuant to Section 5(c) and voting
authority has been delegated to such investment adviser.
(b) Company shall have the right at anytime, and from time to time in its sole
discretion, to substitute assets of equal fair market value for any asset held
by the Trust. This right is exercised by Company in a nonfiduciary capacity
without the approval or consent of any person in a fiduciary capacity.
(c) Trustee may appoint one or more investment advisers who are registered as
investment advisers under the Investment Advisers Act of 1940, who may be
affiliates of Trustee, to provide investment advice on a discretionary or
non-discretionary basis with respect to all or a specified portion of the assets
of the Trust.
(d) Trustee, or the Trustee's designee, is authorized and empowered:
(1) To invest and reinvest Trust assets, together with the income therefrom, in
common stock, preferred stock, convertible preferred stock, bonds, debentures,
convertible debentures and bonds, mortgages, notes, commercial paper and other
evidences of indebtedness (including those issued by the Trustee), shares of
mutual funds (which funds may be sponsored, managed or offered by an affiliate
of the Trustee), guaranteed investment contracts, bank investment contracts,
other securities, policies of life insurance, annuity contracts, options,
options to buy or sell securities or other assets, and all other property of any
type (personal, real or mixed, and tangible or intangible);
(2) To deposit or invest all or any part of the assets of the Trust in savings
accounts or certificates of deposit or other deposits in a bank or saving and
loan association or other depository institution, including the Trustee or any
of its affiliates, provided with respect to such deposits with Trustee or an
affiliate the deposits bear a reasonable interest rate;
(3) To hold, manage, improve, repair and control all property, real or personal,
forming part of the Trust; to sell, convey, transfer, exchange, partition, lease
for any term, even extending beyond the duration of this Trust, and otherwise
dispose of the same from time to time;
(4) To hold in cash, without liability for interest, such portion of the Trust
as is pending investments, or payment of expenses, or the distribution of
benefits;
(5) To take such actions as may be necessary or desirable to protect the Trust
from loss due to the default on mortgages held in the Trust including the
appointment of agents or trustees in such other jurisdictions as may seem
desirable, to transfer property to such agents or trustees, to grant to such
agents such powers as are necessary or desirable to protect the Trust, to direct
such agent or trustee, or to delegate such power to direct, and to remove such
agent or trustee;
(6) To settle, compromise or abandon all claims and demands in favor of or
against the Trust;
(7) To exercise all of the further rights, powers, options and privileges
granted, provided for, or vested in trustees generally under the laws of the
state in which the Trustee is incorporated as set forth above, so that the
powers Conferred upon the Trustee herein shall not be in limitation of any
authority conferred by law, but shall be in addition thereto;
(8) To borrow money from any source and to execute promissory notes, mortgages
or other obligations and to pledge or mortgage any trust assets as security; and
(9) To maintain accounts at, execute transactions through, and lend on an
adequately secured basis stocks, bonds or other securities to, any brokerage or
other firm, including any fin-n which is an affiliate of Trustee.
Section 6. Additional Powers of Trustee.
To the extent necessary or which it deems appropriate to implement its powers
under Section 5 or otherwise to fulfill any of its duties and responsibilities
as Trustee of the Trust, the Trustee shall have the following additional powers
and authority:
(a) to register securities, or any other property, in its name or in the name of
any nominee, including the name of any affiliate or the nominee name designated
by any affiliate, with or without indication of the capacity in which property
shall be held, or to hold securities in bearer form and to deposit any
securities or other property in an depository or clearing corporation;
(b) to designate and engage the services of, and to delegate powers and
responsibilities to, such agents, representatives, advisers, counsel and
accountants as the Trustee considers necessary or appropriate, any of whom may
be an affiliate of the Trustee or a person who renders services to such an
affiliate, and, as a part of its expenses under this Trust Agreement, to pay
their reasonable expenses and compensation;
(c) to make, execute and deliver, as Trustee, any and all deeds, leases,
mortgages, conveyances, waivers, releases or other instruments in writing
necessary or appropriate for the accomplishment of any of the powers listed in
this Trust Agreement; and
(d) generally to do all other acts which Trustee deems necessary or appropriate
for the protection of the Trust.
Section 7. Disposition of Income.
(a) During the term of this Trust, all income received by the Trust, net of
expenses and taxes shall be accumulated and reinvested.
Section 8. Accounting by Trustee.
(a) Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 90 davs following the close of each calendar year
and within 90 days after removal or resignation of Trustee, Trustee shall
deliver to company a written account of its administration of the Trust during
such year or during the period from the close of the last preceding year to the
date of such removal or resignation, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a description of
all securities and investments purchased and sold with the cost or net proceeds
of such purchases or sales (accrued interest paid or receivable being shown
separately), and showing all cash, securities and other property held in the
Trust at the end of such year or as of the date of such removal or resignation,
as the case may be. Trustee may satisfy its obligation under this Section 8 by
rendering to Company monthly statements setting forth the information required
by this Section separately for the month covered by the statement.
Section 9. Responsibilitv and Indemnity of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims, provided, however, that Trustee shall incur no
liability to any person for any action taken pursuant to a direction, request or
approval given by Company which is contemplated by, and in conformity with, the
terms of the Plan(s) and this Trust and is given in writing by Company. Trustee
shall also incur no liability to any person for any failure to act in the
absence of direction, request or approval from the Company which is contemplated
by, and in conformity with, the terms of this Trust. In the event of a dispute
between Company and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) Company hereby indemnifies Trustee and each of its affiliates (collectively,
the "Indemnified Parties") against, and shall hold them harmless from, any and
all loss, claims, liability, and expense, including reasonable attorneys' fees,
imposed upon or incurred by any Indemnified Party as a result of any acts taken,
or any failure to act, in accordance with the directions from the Company or any
designee of the Company, or by reason of the Indemnified Party's good faith
execution of its duties with respect to the Trust, including, but not limited
to, its holding of assets of the Trust, the Company's obligations in the
foregoing regard to be satisfied promptly by the Company, provided that in the
event the loss, claim, liability or expense involved is determined by a no
longer appealable final judgment entered in a lawsuit or proceeding to have
resulted from the gross negligence or willful misconduct of the Trustee, Trustee
shall promptly on request thereafter return to the Company any amount previously
received by the Trustee under this Section with respect to such loss, claim,
liability or expense. If Company does not pay such costs, expenses and
liabilities in a reasonably timely manner, Trustee may obtain payment from the
Trust without direction from Company.
(c) Trustee may consult with legal counsel
(who may also be counsel for Company generally) with respect to
any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisers,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on Trustee by
applicable law, unless expressly provided otherwise herein, provided, however,
that if an insurance policy is held as an asset of the Trust, Trustee shall have
no power to name a beneficiary of the policy other than the Trust, to assign the
policy (as distinct from conversion of the policy to a different form) other
than to a successor Trustee, or to loan to any person the proceeds of any
borrowing against such policy.
(f) However, notwithstanding the provisions of Section 9(e) above, Trustee may
loan to Company the proceeds of any borrowing against an insurance policy held
as an asset of the Trust.
(g) Notwithstanding any powers to Trustee pursuant to this Trust Agreement or to
applicable law, Trustee shall not have any power that could give this Trust the
objective of carrying on a business and dividing the gains therefrom, within the
meaning of Section 301.7701-2 of the Procedure and Administrative Regulations
promulgated pursuant to the Internal Revenue Code.
Section 10. Compensation and Expenses of Trustee.
Trustee is authorized, unless otherwise agreed by Trustee, to withdraw from the
Trust without direction from Company the amount of its fees in accordance with
the fee schedule agreed to by the Company and Trustee. Company shall pay all
administrative expenses, but if not so paid, the expenses shall be paid from the
Trust.
Section II. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which shall be
effective 60 days after receipt of such notice unless Company and Trustee agree
otherwise.
(b) Trustee may be removed by Company on 60 days notice or upon shorter notice
accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within 60 days after receipt of notice of
resignation, removal or transfer, unless Company extends the time limit,
provided that Trustee is provided assurance by Company satisfactory to Trustee
that all fees and expenses reasonably anticipated will be paid.
(d) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 12 hereof, by the effective date or resignation or
removal under paragraph(s) (a) or (b) of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
(e) Upon settlement of the account and transfer of the Trust assets to the
successor Trustee, all rights and privileges under this Trust Agreement shall
vest in the successor Trustee and all responsibility and liability of Trustee
with respect to the Trust and assets thereof shall terminate subject only to the
requirement that Trustee execute all necessary documents to transfer the Trust
assets to the successor Trustee.
Section 12. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section I l(a) or (b)
hereof, Company may appoint any third party, such as a bank trust department or
other party that may be granted corporate trustee powers under state law, as a
successor to replace Trustee upon resignation or removal. The appointment shall
be effective when accepted in writing by the new Trustee, who shall have all of
the rights and powers of the former Trustee, including ownership rights in the
Trust assets. The former Trustee shall execute any instrument necessary or
reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and act of any prior
Trustee and may retain or dispose of existing Trust assets, subject to Sections
7 and 8 hereof. The successor Trustee shall not be responsible for and Company
shall indemnify and defend the successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes successor Trustee.
Section 13. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan(s) or shall make the Trust revocable, since
the Trust is irrevocable in accordance with Section l(b) hereof
(b) The Trust shall not terminate until the date on which Plan participants and
their beneficiaries are no longer entitled to benefits pursuant to the terms of
the Plan(s). Upon termination of the Trust any assets remaining in the Trust
shall be returned to Company.
(c) Upon written approval to participants or beneficiaries entitled to payment
of benefits pursuant to the terms of the Plan(s), Company may terminate this
Trust prior to the time all benefit payments under the Plan(s) have been made.
All assets in the Trust at termination shall be returned to Company.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be ineffective
to the extent of any such prohibition, without invalidating the remaining
provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance with
the laws of the state in which Trustee is incorporated as set forth above.
(d) The provisions of Sections 2(d), 3(b)(3), 9(b) and 15 of this Agreement
shall survive termination of this Agreement.
(e) The rights, duties, responsibilities, obligations and liabilities of the
Trustee are as set forth in this Trust Agreement, and no provision of the
Plan(s) or any other documents shall affect such rights, responsibilities,
obligations and liabilities.. If there is a conflict between provisions of the
Plan(s) and this Trust Agreement with respect to any subject involving the
Trustee, including but not limited to the responsibility, authority or powers of
the Trustee, the provisions of this Trust Agreement shall be controlling.
(f) For purposes of this Trust, Change of Control shall mean: The purchase or
other acquisition by any person, entity or group of persons, within the meaning
of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any
comparable successor provisions, of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Act) of 30 percent or more of either the
outstanding shares of common stock or the combined voting power of Company's
then outstanding voting securities entitled to vote generally, or the approval
by the stockholders of Company of a reorganization, merger, or consolidation, in
each case, with respect to which persons who were stockholders of Company
immediately prior to such reorganization, mer-er or consolidation do not
immediately thereafter, own more than 50 percent of the combined voting power
entitled to vote Generally in the election of directors of the reorganized,
merged or consolidated Company's then outstanding securities, or a liquidation
or dissolution of Company or of the sale of all or substantially all of
Company's assets.
Company agrees that all controversies which may arise between the Company and
either or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S") in connection with the Trust, including, but not
limited to, those involving any transactions, or the construction, performance,
or breach of this or any other agreement between Company and either or both the
Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date
hereof, shall be determined by arbitration. Any arbitration under this Agreement
shall be conducted only before the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., or arbitration facility provided by any other exchange of
which MLPF&S is a member, the National Association of Securities Dealers, Inc.,
or the Municipal Securities Rulemaking Board, and in accordance with its
arbitration rules then in force. Company may elect in the first instance whether
arbitration shall be conducted before the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., other exchange of which MLPF&S is a member, the
National Association of Securities Dealers, Inc., or the Municipal Securities
Rulemaking Board, but if the Company fails to make such election, by registered
letter or telegram addressed to Merrill Lynch Trust Company, Employee Benefit
Trust Operations, P.O. Box 30532, New Brunswick, New Jersey 08989-0532, before
the expiration of five days after receipt of a written request from MLPF&S
and/or the Trustee to make such election then MLPF&S and/or the Trustee may make
such election. Judgment upon the award of arbitrators may be entered in any
court, state or federal, having jurisdiction. No person shall bring putative or
certified class action to arbitration, nor seek to enforce any pre-dispute
arbitration agreement against any person who has initiated in court a putative
class action; who is a member of putative class who has not opted out of the
class with respect to any claims encompassed by the putative class action until:
(i) the class certification is denied; (ii) the class is decertified; or (iii)
the customer is excluded from the class bv the court. Such forbearance to
enforce an agreement to arbitrate shall not constitute a waiver of any rights
under this agreement except to the extent stated herein.
Section 16. Effective Date.
The effective date of this Trust Agreement shall be July 1, 1998.
IN WITNESS WHEREOF, the Company and the Trustee have executed this Trust
Agreement each by action of a duly authorized person.
By signing this Agreement, the undersigned Company acknowledges (1) that, in
accordance with Section 15 of this Agreement, the Company is agreeing in advance
to arbitrate any controversies which may arise with either or both the Trustee
or MLPF&S and (2) receipt of a copy of this Agreement.
MAXXIM MEDICAL, INC.
(Company)
By:/s/ Alan S. Blazei
(Signature)
Name/Title
By:/s/ Kurt A. Bremer
Vice President
MERRILL LYNCH TRUST COMPANY, a Florida
corporation
(Trustee)
Exhibit 21
Subsidiaries of the Registrant as of November 1, 1998
Maxxim Medical, Inc. - Delaware
Fabritek LaRomana, Inc.
Maxxim Medical Canada Limited
Maxxim Medical Holding Europe B.V. (Netherlands)
Maxxim Medical - Belgium N.V. (Belgium)
Maxxim Medical - Europe B.V. (Netherlands)
Exhibit 23
The Board of Directors
Maxxim Medical, Inc.
We consent to incorporation by reference in the registration statements (No.
333-27609 and No. 33-87112) on Form S-8 of Maxxim Medical, Inc. of our report
dated January 7, 1999, relating to the consolidated balance sheets of Maxxim
Medical, Inc. and subsidiaries as of November 1, 1998 and November 2, 1997, and
the related consolidated statements of operations and shareholders' equity and
cash flows for the years ended November 1 ,1998, November 2, 1997 and November
3, 1996 and the related financial statement schedule, which report appears in
the November 1, 1998, annual report on Form 10-K of Maxxim Medical, Inc. and
subsidiaries.
KPMG LLP
Houston, Texas
February 1, 1999
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