<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1999
-----------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____________ to _______________.
Commision File Number
0-18208
----------------
MAXXIM MEDICAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 76-0291634
- ------------------------------------ ------------------------------------------
State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
10300 49th Street North, Clearwater, Florida 33762
- --------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code.........(727) 561-2100
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_______________
-------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at June 9,1999
- -------------------------------- ---------------------------------
Common Stock, $.001 par value 14,276,682
<PAGE>
MAXXIM MEDICAL, INC.
INDEX
-----
PART I. Financial Information Page No.
--------------------- --------
Item 1. Condensed Consolidated Balance Sheets
as of May 2, 1999 and November 1, 1998 2
Condensed Consolidated Statements of
Operations for the Three Months and
Six Months Ended May 2, 1999 and
May 3, 1998 3
Condensed Consolidated Statements of
Cash Flows for the Six Months
Ended May 2, 1999 and May 3, 1998 4
Notes to Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of
Results of Operations and
Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. Other Information
-----------------
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 6. Exhibits and Reports 14
Signatures 15
- ----------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
May 2, November 1,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,139 $ 4,125
Accounts receivable, net of allowances of $2,193 and $1,840, 102,659 70,429
respectively
Inventory, net 125,080 79,648
Deferred tax assets 17,078 10,325
Prepaid expenses and other 9,815 8,690
------------ -------------
Total current assets 262,771 173,217
Property and equipment 235,446 169,048
Less: accumulated depreciation ( 48,741) ( 41,538)
------------ -------------
186,705 127,510
Goodwill, net 273,192 147,016
Other assets, net 37,954 20,308
------------ -------------
Total assets $ 760,622 $ 468,051
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 22,500 $ -
Current maturities of other long-term obligations 2,322 2,544
Accounts payable 45,080 35,834
Accrued liabilities 46,745 25,921
------------ -------------
Total current liabilities 116,647 64,299
Long-term debt, net of current maturities 244,800 13,800
10 1/2% Senior subordinated notes 100,000 100,000
Other long-term obligations, net of current maturities 7,005 5,339
Deferred tax liabilities 12,693 11,704
------------ -------------
Total liabilities 481,145 195,142
Commitments and contingencies
Shareholders' equity
Preferred Stock, $1.00 par, 20,000,000 shares authorized,
none issued or outstanding - -
Common Stock, $.001 par, 40,000,000 shares authorized, 14,276,682
and 14,238,822 shares issued and outstanding, respectively 14 14
Additional paid-in capital 220,088 219,268
Retained earnings 74,829 64,886
Subscriptions receivable ( 5,200) ( 5,200)
Accumulated other comprehensive income ( 10,254) ( 6,059)
------------ -------------
Total shareholders' equity 279,477 272,909
------------ -------------
Total liabilities and shareholders' equity $ 760,622 $ 468,051
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -----------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $ 175,963 $ 132,958 $ 312,089 $ 260,961
Cost of sales 115,316 98,216 209,881 193,158
--------- --------- ---------- ---------
Gross profit 60,647 34,742 102,208 67,803
Selling, general and administrative expenses 42,288 23,283 69,367 45,617
Transition expenses - - 3,371 -
--------- --------- ---------- ---------
Income from operations 18,359 11,459 29,470 22,186
Interest expense ( 7,934) ( 3,508) ( 12,231) ( 7,838)
Other income, net 346 228 351 389
--------- --------- ---------- ---------
Income before income taxes 10,771 8,179 17,590 14,737
Income taxes 4,704 3,460 7,647 6,267
--------- --------- ---------- ---------
Net income $ 6,067 $ 4,719 $ 9,943 $ 8,470
========= ========= ========== =========
Basic earnings per share $ 0.43 $ 0.38 $ 0.70 $ 0.76
========= ========= ========== =========
Diluted earnings per share $ 0.42 $ 0.37 $ 0.68 $ 0.74
========= ========= ========== =========
Basic weighted average shares outstanding 14,275 12,429 14,264 11,111
========= ========= ========== =========
Diluted weighted average shares outstanding 14,552 12,836 14,622 11,668
========= ========= ========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------
May 2, May 3,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,943 $ 8,470
Adjustment to reconcile net income to net cash provided by
operating activities:
Deferred income tax expense 289 2,637
Amortization of financing fees 510 185
Depreciation and amortization 14,527 9,357
Gain on sale of building (167) -
Change in operating assets and liabilities (6,538) 10,061
---------------- ----------------
Net cash provided by operations 18,564 30,710
Cash flows from investing activities:
Proceeds from product line sale 1,500 -
Proceeds from building sale 335 1,200
Proceeds from long-term investment sale - 1,500
Purchase of Circon, net of cash acquired (245,733) -
Purchase of property and equipment (18,567) (8,703)
---------------- ----------------
Net cash used in investing activities (262,465) (6,003)
Cash flows from financing activities:
Proceeds from long-term borrowings 186,200 -
Payments on long-term borrowings (5,000) (81,000)
Net borrowings (payments) on revolving line of credit 72,300 (10,300)
Payments on other obligations (2,364) (2,315)
Payment of debt financing costs (5,584) -
Net proceeds from secondary stock offering - 91,394
Increase in bank overdraft 2,327 2,827
Other, net 415 160
---------------- ----------------
Net cash provided by financing activities 248,294 766
Effect of foreign currency translation adjustment on cash and cash equivalents (379) (74)
---------------- ----------------
Net increase in cash and cash equivalents 4,014 25,399
Cash and cash equivalents at beginning of period 4,125 3,130
---------------- ----------------
Cash and cash equivalents at end of period $ 8,139 $ 28,529
---------------- ----------------
Supplemental cash flow disclosures:
Interest paid during the period $ 7,052 $ 8,139
Income taxes paid during the period 4,872 1,312
Conversion of 6 3/4% convertible subordinated debentures - 22,278
Noncash investing and financing activities
Note receivable from sale of product line $ 1,600 $ -
Note receivable from sale of building 198 -
Conversion of long-term note investment into stock investment - 4,000
Unrealized loss on available for sale securities 1,160 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Maxxim Medical, Inc. and its wholly owned subsidiaries
(collectively, the Company). The Company develops, manufactures and markets
specialty hospital products.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments of a normal recurring nature which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. All significant intercompany balances and transactions have
been eliminated in consolidation.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended November 1, 1998,
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to the fiscal 1998 condensed
consolidated financial statements to conform with the fiscal 1999 presentation.
Note 2 - Summary of Significant Accounting Policies
Fiscal Year.
The Company has a fiscal year which ends on the Sunday nearest to the end
of the month of October. Normally each fiscal year will consist of 52 weeks,
but every five or six years, the fiscal year will consist of 53 weeks. For
fiscal 1999, the year end date will be October 31/st/ compared to a 1998 year
end date of November /1st/. Fiscal 1999 will consist of 52 weeks. The second
quarter of fiscal 1999 ended on May 2 compared to the fiscal 1998 second quarter
end date of May 3.
Translation Of Foreign Currency Financial Statements.
Assets and liabilities of foreign subsidiaries have been translated into
United States dollars at the applicable rates of exchange in effect at the end
of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected in accumulated other
comprehensive income as a separate component of shareholders' equity.
Earnings Per Share.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", (SFAS No. 128) effective with the release of February 1,
1998 earnings data. Basic earnings per share is based on the weighted average
shares outstanding without any dilutive effects considered. Diluted earnings per
share reflects dilution from all contingently issuable shares, including options
and convertible debt. A reconciliation of such earnings per share data is as
follows:
5
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended May 2, 1999 Three Months Ended May 3, 1998
------------------------------------ ------------------------------------
(unaudited) (unaudited)
Per Share Per Share
Income Shares Amounts Income Shares Amounts
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income $ 6,067 14,275 $0.43 $ 4,719 12,429 $0.38
========== ==========
Effect of dilutive securities:
Options 277 407
--------- --------- --------- --------
Diluted EPS $ 6,067 14,552 $0.42 $ 4,719 12,836 $0.37
========= ========= ========== ========= ======== =========
<CAPTION>
Six Months Ended May 2, 1999 Six Months Ended May 3, 1998
------------------------------------- -------------------------------------
(unaudited) (unaudited)
Per Share Per Share
Income Shares Amounts Income Shares Amounts
---------- ----------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income $ 9,943 14,264 $0.70 $ 8,470 11,111 $0.76
========= ==========
Effect of dilutive securities:
Convertible Debt 107 182
Options 358 375
--------- --------- --------- ---------
Diluted EPS $ 9,943 14,622 $0.68 $ 8,577 11,668 $0.74
========= ========= ========= ========= ========= ==========
</TABLE>
Estimates Involved in Preparing the Condensed Consolidated Financial
Statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories.
The amount reflected as inventory as of May 2, 1999, and the related amount
for the cost of sales, have been determined using the Company's normal
accounting procedures. In management's opinion, no significant adjustment would
have been required had an actual count of the inventory been made. Inventory as
of May 2, 1999, and November 1, 1998, included the following:
<TABLE>
<CAPTION>
May 2, November 1,
1999 1998
------------------ -------------------
(unaudited) (In thousands)
<S> <C> <C>
Raw materials................................. $ 55,401 $ 33,936
Work in progress.............................. 19,648 8,450
Finished goods................................ 56,514 43,487
Reserve....................................... (6,483) (6,225)
------------------ -------------------
$ 125,080 $ 79,648
================== ===================
</TABLE>
6
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Goodwill.
The goodwill resulting from the Circon acquisition was approximately
$130,000,000 and is being amortized over 30 years. Goodwill resulting from the
Company's previous acquisitions is approximately $158,000,000 of which
approximately $144,000,000 remains unamortized as of May 2, 1999. Amortization
periods for previous goodwill amounts range from 15 to 40 years. The Company
believes that no impairment of goodwill exists.
Income Taxes.
The Company has calculated current and deferred income tax provisions for
the periods ended May 2, 1999, and May 3, 1998, based on its best estimate of
the effective income tax rate expected to be applicable for the full fiscal
year.
New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" (SFAS
No. 131), which is effective for the Company's fiscal year ending in 1999. This
statement establishes standards for reporting segment information in annual and
interim financial statements. It also establishes standards for related
disclosure of products and services, geographical areas and major customers.
Under SFAS No. 131, reporting segments are determined consistent with the way
management organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company does not believe the
adoption of SFAS No. 131 will have a material impact on its consolidated
financial statements.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), was issued by the
Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company will adopt SFAS No.
133 beginning in the first quarter of fiscal 2001.
Note 3 - Comprehensive Income
Effective November 2, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive income
includes all changes in a company's equity including, among other things,
foreign currency translation adjustments, and unrealized gains (losses) on
marketable securities classified as available-for-sale. Total comprehensive
income for the three and six months ended May 2, 1999 and May 3, 1998 follow:
<TABLE>
<CAPTION>
Three Months Ended
May 2, 1999 May 3, 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
Net earnings................................................... $ 6,067 $ 4,719
Foreign currency translation adjustments....................... (1,363) 350
Net unrealized loss on available for sale securities........... (369) -
------------------ ------------------
Total comprehensive income..................................... $ 4,335 $ 5,069
================== ==================
<CAPTION>
Six Months Ended
May 2, 1999 May 3, 1998
------------------ ------------------
(In thousands)
<S> <C> <C>
Net earnings................................................... $ 9,943 $ 8,470
Foreign currency translation adjustments....................... (1,851) (1,030)
Net unrealized loss on available for sale securities........... (1,160) -
------------------ ------------------
Total comprehensive income..................................... $ 6,932 $ 7,440
================== ==================
</TABLE>
7
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 4 - Debt
In connection with the acquisition of Circon Corporation ("Circon") (See
Note 5), the Company entered into a Third Amended and Restated Credit Agreement
("Credit Agreement") with several lending institutions. This new Credit
Agreement replaced the Company's previous credit facility. The Credit Agreement
provides for a term loan of $200,000,000 and a $125,000,000 revolving line of
credit. Additionally the Credit Agreement requires a pledge of the common stock
of the Company's subsidiaries. Financing for the Circon acquisition required the
full use of the term loan and approximately $60,000,000 of the revolver. (See
Note 5). At May 2, 1999, the term loan balance was approximately $195,000,000
and approximately $72,300,000 was drawn on the revolver. Both loans mature on
January 6, 2005, with the term loan requiring repayment in twenty-four quarterly
installments ranging from $5,000,000 to $10,000,000, commencing April 30, 1999.
Both loans bear interest, payable quarterly on the Interest Period as defined in
the Credit Agreement. The interest rate is prime or, for LIBOR advances, the
LIBOR rate, plus a margin ranging from 1.5% to 2.75%, indexed according to a
defined financial ratio. In connection with the credit agreement, the Company
incurred approximately $5,584,000 in debt financing fees which are being
amortized over the life of the Credit Agreement.
Note 5 - Acquisition
Effective January 6, 1999, the Company successfully completed a tender
offer for Circon. Upon the completion of the merger of Circon and Maxxim on
January 8, 1999, all of the outstanding stock of Circon was purchased for
approximately $15.00 per share or $260,000,000, including the repayment of
$32,500,000 of Circon debt and certain fees and expenses incurred in connection
with the acquisition. The Company obtained all funds required in connection
with the acquisition through a bank loan, pursuant to the Third Amended and
Restated Credit Agreement, dated as of January 4, 1999 (See Note 4). The
assets acquired in the Circon acquisition consist primarily of accounts
receivable, inventory, furniture and equipment, intangible assets and owned or
leased facilities in Stamford, Connecticut; Norwalk, Ohio; Racine, Wisconsin and
Santa Barbara, California. Circon markets medical devices for diagnosis and
minimally invasive surgery and general surgery. This acquisition was accounted
for by the purchase method of accounting and approximately $144,000,000 of
intangible assets were recorded in connection with the transaction
(approximately $13,500,000 related to patents and $130,500,000 related to
goodwill). Patents are being amortized over 15 years and goodwill is being
amortized over 30 years, using the straight-line method in each case. Transition
expenses of $3,371,000 were recorded in the first quarter of fiscal 1999 (See
Note 6).
The following unaudited pro forma summary results of operations assume the
acquisition of Circon occurred on November 4, 1996.
<TABLE>
<CAPTION>
Fiscal Year Ended
November 1, 1998 November 2, 1997
------------------------ ------------------------
(In thousands, except per share data)
<S> <C> <C>
Revenues..................................... $674,980 $689,321
Net income................................... 4,059 4,132
Basic earnings per share..................... $ 0.32 $ 0.50
Diluted earnings per share................... 0.31 0.48
</TABLE>
The pro forma adjustments to the historical accounts include (a) the
elimination of intercompany sales, (b) the additional amortization expense
associated with goodwill and intangibles acquired, (c) the elimination of
expenses incurred by Circon related to the merger, (d) the additional interest
expense on the debt incurred to make the acquisition as of the beginning of the
Company's fiscal year as well as the additional amortization expense associated
with debt financing costs and (e) the federal income tax impact of the previous
adjustments.
8
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The pro forma information does not purport to be indicative of results of
operations or financial position which would have occurred had the acquisition
been consummated on the date indicated, or which may be expected to occur in the
future by reason of such acquisition.
Note 6 - Transition Expenses
Transition expenses for 1999 represent expenses incurred in connection
with the Company's sales force restructuring and the acquisition and integration
of Circon with the Company as follows:
<TABLE>
<CAPTION>
Six Months Ended
May 2, 1999
---------------------------
(unaudited)
(In thousands)
<S> <C>
Severance................................ $ 1,243
Training................................. 950
Other transition expenses................ 1,178
------------
$ 3,371
============
</TABLE>
Other transition expenses include bonuses and professional fees incurred as
a result of the acquisition of Circon.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and related Notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth, for the periods indicated, the percentage
which selected items in the Condensed Consolidated Statements of Operations bear
to net sales:
<TABLE>
<CAPTION>
Percentage of Net Sales
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
--------------------------------- ----------------------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 65.5% 73.9% 67.3% 74.0%
--------- --------- --------- --------
Gross profit................................... 34.5% 26.1% 32.7% 26.0%
Selling, general and administrative expenses... 24.1% 17.5% 22.2% 17.5%
Transition expenses............................ 0.0% 0.0% 1.1% 0.0%
--------- --------- --------- --------
Income from operations......................... 10.4% 8.6% 9.4% 8.5%
Interest expense............................... (4.5%) (2.7%) (3.9%) (3.0%)
Other income, net.............................. 0.2% 0.2% 0.1% 0.1%
--------- --------- --------- --------
Income before income taxes..................... 6.1% 6.1% 5.6% 5.6%
Income taxes................................... 2.7% 2.6% 2.4% 2.4%
--------- --------- --------- --------
Net income..................................... 3.4% 3.5% 3.2% 3.2%
========= ========= ========= ========
</TABLE>
Net sales - Net sales for the second fiscal quarter of 1999 increased 32.3%
---------
to $175,963,000 from $132,958,000 reported for the second quarter of 1998. Net
sales for the first six months of fiscal 1999 were $312,089,000, a 19.6%
increase from the $260,961,000 reported for the comparable period in the prior
fiscal year. This increase is primarily due to the acquisition of Circon during
the first quarter of fiscal 1999. Circon contributed $41,300,000 and $52,794,000
to net sales for the three and six months ended May 2, 1999.
Gross profit - In the second quarter of fiscal 1999 the Company's gross
------------
profit increased to $60,647,000, compared to $34,742,000 reported in the second
quarter of last year. The Company's gross profit rate increased to 34.5% in the
second quarter of fiscal 1999 from 26.1% in the second quarter of fiscal 1998.
For the six months ended May 2, 1999, and the six months ended May 3, 1998,
gross profit was $102,208,000 and $67,803,000, or 32.7% and 26.0% of net sales,
respectively. The increase in both dollars and rate is primarily attributable to
the Circon acquisition, which had a gross margin rate of 55.2% for the
year-to-date-period ended May 2, 1999.
Selling, general and administrative expenses - Selling, general and
--------------------------------------------
administrative expenses for the second quarter were $42,288,000 or 24.1% of net
sales for fiscal 1999 compared to $23,283,000 or 17.5% of net sales for fiscal
1998. For the first six months of fiscal 1999 and 1998 selling, general and
administrative expenses were $69,367,000 and $45,617,000, or 22.2% and 17.5% of
net sales, respectively. The increase in selling, general and administrative
spending and the percentage to net sales is primarily attributable to the higher
sales and marketing costs of Circon products in relation to the Company's
historical sales and marketing costs.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
Transition expenses - In the first quarter of fiscal 1999, the Company
-------------------
recorded transition expenses of $3,371,000 related to the restructuring of its
sales force and the acquisition of Circon. (See Note 6 to the Condensed
Consolidated Financial Statements)
Income from operations - Income from operations increased to $18,359,000,
----------------------
or 10.4% of net sales, in the second quarter of fiscal 1999 from $11,459,000, or
8.6% of net sales, in the comparable period of the prior fiscal year. This is
an increase of 60.2% over the prior fiscal period. For the first six months of
fiscal 1999 and 1998 income from operations was $29,470,000 and $22,186,000, or
9.4% and 8.5% of net sales, respectively.
Interest expense - The Company's interest expense increased to $7,934,000
----------------
in the second quarter of fiscal 1999 from $3,508,000 in the second quarter of
fiscal 1998. For the six months ended May 2, 1999, and May 3, 1998, interest
expense was $12,231,000 and $7,838,000, respectively. The increase in interest
expense is due to the debt incurred to finance the Circon acquisition.
Income taxes - The Company's effective tax rate for the six months ended
------------
May 2, 1999, and May 3, 1998, was 43.5% and 42.5%, respectively, and is higher
than the statutory rate primarily due to non-deductible goodwill from
acquisitions.
Net income - As a result of the foregoing, net income for the second
----------
quarter of fiscal 1999 was $6,067,000 versus $4,719,000 for fiscal 1998.
Diluted earnings per share was $0.42 compared to $0.37 for the same period last
year. For the first six months of fiscal 1999 and 1998, net income was
$9,943,000 and $8,470,000, respectively. Diluted earnings per share were $0.68
compared to $0.74 for the same period last year. Excluding the transition
expenses, diluted earnings per share would have been $0.82 versus $0.74 for the
same period last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At May 2, 1999, the Company had cash and cash equivalents of $8,139,000,
working capital of $146,124,000, long-term liabilities of $364,498,000 and
shareholders' equity of $279,477,000. Working capital increased by $33,311,000
and $37,187,000 for accounts receivable and inventory acquired in the Circon
acquisition and was offset by increases of $8,790,000 and $16,679,000 in
acquired accounts payable and accrued liabilities. For the six months ended
May 2, 1999, cash flow from operations, exclusive of the impact of the Circon
acquisition noted above, was negatively impacted by a decline in operations
working capital of $6,538,000 primarily resulting from an increase in glove
inventory levels.
On January 4, 1999, the Company entered into a Third Amended and Restated
Credit Agreement ("Credit Agreement") with several lending institutions in
connection with the acquisition of Circon ("the Transaction"). This new Credit
Agreement replaced the Company's previous credit facility. The Credit Agreement
provides for a term loan of $200,000,000 and a $125,000,000 revolving line of
credit. Upon full payment for all the Circon shares and transaction expenses and
repayment of the $32,500,000 outstanding Circon debt, the term loan was fully
drawn and approximately $60,000,000 of the revolver was used to finance the
Circon acquisition (See Note 4 to the Condensed Consolidated Financial
Statements). Both loans mature on January 6, 2005, with the term loan requiring
repayment in twenty-four quarterly installments ranging from $5,000,000 to
$10,000,000, commencing April 30, 1999. The Company made its first scheduled
$5,000,000 payment in the second fiscal quarter of 1999 resulting in a term loan
balance of $195,000,000 on May 2, 1999. In connection with the credit agreement,
the Company incurred approximately $5,584,000 in debt financing fees which are
being amortized over the life of the Credit Agreement.
In March 1998, the Company completed an offering of 4,025,000 shares of its
common stock at a price to the public of $24.00 per share, including 525,000
shares pursuant to the underwriters' exercise of the overallotment option.
After deducting offering costs and commissions, the Company received net
proceeds of approximately $91,418,000. The Company used the proceeds to repay
amounts due under its primary credit facility.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (Continued)
On October 3, 1997, the Company called for redemption of $10,000,000 in
principal amount of its $28,750,000 6 3/4% Debentures due March 1, 2003,
effective as of November 4, 1997. On November 12, 1997, the Company called for
the redemption of the remaining outstanding principal amount of the Debentures
effective as of December 12, 1997. In fiscal 1998, $22,983,000 of the
Debentures converted into 1,276,732 shares of common stock and debt issuance
costs of $705,000 related to these converted Debentures were written off to
additional paid-in capital. The Company paid $369,000 to debenture holders who
did not exercise their right to convert upon surrender of their certificates in
fiscal 1998.
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 the
additional sale of debt or equity securities to finance such possible
acquisitions.
Year 2000
Maxxim Medical relies on electronic information systems technology ("IS")
to operate its business. The Company continuously seeks to improve these systems
in order to provide better service to its customers and to support the Company's
growth objectives. The Company has established a three-phased approach to
address year 2000 issues, including embedded technology ("ET") utilized in the
Company's facilities and equipment. The three phases included in the Company's
approach are (1) identification, (2) compliance, and (3) validation. Internally,
the Company has substantially completed, with the aid of outside consultants,
the identification and compliance phases and is currently completing the
validation phase. The validation phase consists primarily of monitoring and
testing of new software and all other components and interfaces that were
implemented or upgraded as part of the software installation or as a result of
other identified year 2000 deficiencies. The Company expects to complete most
phases of the year 2000 project during the first half of calendar 1999. The
Company is not currently aware of any significant exposure that would prevent it
from being year 2000 compliant on a timely basis.
Externally, the Company is formally communicating with its significant
suppliers, customers and other third parties to assess their year 2000
readiness. The Company is also currently determining its potential exposure if
any of these external parties fail to correct their year 2000 issues in a timely
manner. The Company is currently in the compliance and validation phases with
all of its significant external parties which includes the monitoring and
testing of significant interfaces with those external parties among other
things. There can be no guarantee that such external parties will achieve year
2000 compliance on a timely basis and failure by such significant external
parties to achieve compliance could have a material adverse effect on the
Company.
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 calendar 1999, the appropriate contingency
plans will be developed and the implementation will begin. While the Company has
proceeded over the past two years in what it believes to be a reasonable and
prudent manner to identify and remediate year 2000 issues, there can be no
assurances that the Company's internal and external contingency plans, once
developed, will substantially reduce the risk of year 2000 non-compliance. A
significant interruption in the Company's business due to a year 2000 non-
compliance issue could have a material adverse effect on the Company's financial
position, operations and liquidity.
The total incremental direct and indirect costs of the Company's year 2000
project are estimated to be approximately $1.5 million, including costs totaling
approximately $603,000 incurred through May 2, 1999. The estimated costs of the
year 2000 project are not expected to have a material impact on the Company's
business, operations or financial condition in the future periods. The
anticipated impact and the total costs of the year 2000 project are based on
management's best estimates and information currently available.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks. Market risk is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into derivative or other financial instruments for trading or speculative
purposes. The Company's market risk could arise from changes in interest rates
and foreign exchange rates.
Interest Rate Risk. The Company is subject to market risk exposure related
to changes in interest rates on its Amended Credit Facility. Interest on
borrowings under the Amended Credit Facility is at a fixed percentage point
spread from either the prime interest rate or LIBOR. The spread amount is
determined quarterly based upon the Company's financial results compared to a
financial covenant ratio matrix. The Company may, at its option, fix the
interest rate for LIBOR for periods ranging from 30 days to 6 months. At May 2,
1999, the Company had $267,300,000 outstanding under its Amended Credit
Facility. On February 12, 1999, the Company entered into a six year swap
agreement with three banks whereby the Company pays fixed LIBOR of 5.03% and
receives a variable interest payment. If LIBOR exceeds 6.75% on any payment
date, the respective amounts due from the parties shall be discharged for that
period. Total notional value of the swap agreement was $125,000,000. On May 2,
1999, the variable market rate approximated the swap fixed rate. Because of the
swap agreement only $142,300,000, or 53.2% of the current amount outstanding on
the Credit Agreement is subject to fluctuations in interest rate. Based upon
this balance, an immediate change of one percent in the interest rate would
cause either an increase or decrease in interest expense of approximately
$1,423,000 on an annual basis.
Foreign Currency Exchange Rate Risk. The Company conducts business in
several foreign currencies. Predominately all of its foreign transactions are
denominated in U.S. dollars. Other than some limited trade payables, the Company
does not currently have financial instruments that are sensitive to foreign
currency exchange rates.
PART II. OTHER INFORMATION
Items 1, 2, 3 and 5 for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Shareholders on April 9, 1999,
and took the following actions:
(1) As set forth in the table below, the following directors were elected to
serve until the next annual meeting of shareholders or until their respective
successors are elected and qualified:
<TABLE>
<CAPTION>
VOTES VOTES
NAME FOR WITHHELD
<S> <C> <C>
Kenneth W. Davidson 11,293,204 79,658
Donald R. DePriest 11,292,504 80,358
Peter G. Dorflinger 11,293,504 79,358
Martin Grabois, M.D. 11,293,404 79,458
Ernest J. Henley, Ph.D. 11,291,904 80,958
Richard O. Martin, Ph.D. 11,292,940 79,922
Henk R. Wafelman, Ing. 11,292,140 80,722
</TABLE>
(2) The shareholders approved the 1999 Non-Employee Directors' Stock Option
Plan ("Directors' Plan") providing for the reservation of up to 80,000 shares in
connection with the grant of options to purchase such shares to non-employee
directors, and approved the grant of options to purchase 60,000 shares to
current non-employee directors, with 10,318,467 shares voting for the Directors'
Plan and grant, 1,041,619 shares voting against the Directors' Plan and grant
and 12,776 shares abstaining.
(3) The shareholders approved the 1999 Employee Stock Option Plan ("Employee
Plan") providing for the issuance of up to 500,000 shares to employees, with
10,529,207 shares voting for the Employee Plan, 829,613 shares voting against
the Employee Plan and 14,042 shares abstaining.
(4) The shareholders approved the appointment of KPMG LLP as the Company's
independent auditors for fiscal year 1998 with 11,309,252 shares voting for the
appointment, 53,532 shares voting against the appointment and 10,078 shares
abstaining.
13
<PAGE>
PART II. OTHER INFORMATION - (Continued)
All of the foregoing are discussed in further detail in the Company's definitive
Proxy Statement and related documents filed with the Securities and Exchange
Commission in connection with the 1999 Annual Meeting of Shareholders.
Item 6. EXHIBITS AND REPORTS
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXXIM MEDICAL, INC.
Date: 6/16/99 By: /s/ Kenneth W. Davidson
--------- ---------------------------------
Kenneth W. Davidson
Chairman of the Board, President &
Chief Executive Officer
(principal executive officer)
Date: 6/16/99 By: /s/ Peter M. Graham
--------- ---------------------------------
Peter M. Graham
Senior Executive Vice President,
Chief Operating Officer & Secretary
(principal financial officer)
Date: 6/16/99 By: /s/ Alan S. Blazei
--------- ---------------------------------
Alan S. Blazei
Treasurer, Executive Vice President,
& Corporate Controller
(principal accounting officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-02-1998
<PERIOD-END> MAY-02-1999
<CASH> 8,139
<SECURITIES> 0
<RECEIVABLES> 104,852
<ALLOWANCES> 2,193
<INVENTORY> 125,080
<CURRENT-ASSETS> 262,771
<PP&E> 235,446
<DEPRECIATION> 48,741
<TOTAL-ASSETS> 760,622
<CURRENT-LIABILITIES> 116,647
<BONDS> 100,000
0
0
<COMMON> 14
<OTHER-SE> 279,463
<TOTAL-LIABILITY-AND-EQUITY> 760,622
<SALES> 312,089
<TOTAL-REVENUES> 312,089
<CGS> 209,881
<TOTAL-COSTS> 282,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,231
<INCOME-PRETAX> 17,590
<INCOME-TAX> 7,647
<INCOME-CONTINUING> 9,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,943
<EPS-BASIC> .70
<EPS-DILUTED> .68
</TABLE>
