SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended October 28, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
to .
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Commission File Number
333-92825
MAXXIM MEDICAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0291634
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
950 WINTER STREET, SUITE 2900, WALTHAM, MASSACHUSETTS 02451
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(Address of Principal Executive Offices) (Zip Code)
781-906-0700
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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 [ ] No [ X ].
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 [X].
As of January 21, 2002, 30,365,161 shares of the registrant's Common
Stock, $.001 par value, were outstanding.
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1: BUSINESS
OVERVIEW
Maxxim Medical, Inc. together with its consolidated subsidiaries ("we"
or the "company"), is a leading developer, manufacturer, distributor and
marketer of a broad range of single-use specialty medical products primarily
used in the operating rooms of hospitals and surgery centers. We have four
operating groups: Surgical Products Group, Medical Products Group, Vascular
Products Group and European Products Group. The Surgical Products Group
manufactures, assembles and sells custom procedure trays and infection control
apparel for operating room personnel and patient draping systems. The Medical
Products Group manufactures and sells a line of medical and surgical gloves and
biosafety containment products. The Vascular Products Group manufactures and
sells single-use specialty vascular access and pressure monitoring products and
assembles and sells procedure trays for the cardiology and interventional
radiology markets. The European Products Group manufactures, assembles, sells
and distributes custom procedure trays, non-latex medical examination gloves,
single-use specialty vascular access and pressure monitoring products and
single-use specialty medical products.
We are a leading supplier of custom procedure trays in the United
States, and we are a leading supplier of non-latex medical examination gloves to
hospitals, surgery centers and other acute care facilities in the United States.
For the fiscal year ended October 28, 2001, approximately 87.4% of our net sales
were in the United States, and 12.6% of our net sales were outside the United
States, primarily in Europe. For the fiscal year ended October 28, 2001, our
operations generated net sales of $500.8 million.
Hospitals and surgery centers are the primary end-use customers of our
products. Our North American sales force maintains close, direct relationships
with the healthcare professionals and administrators who make the purchasing
decisions for these customers. In addition, a majority of our U.S. hospital and
surgery center customers are members of buying groups. See " -- Industry" for a
description of buying groups. Our nationwide customer service and distribution
capabilities, broad product offerings and sophisticated supply management
systems, combined with the efforts of our 10 national account managers, have
enabled us to develop close relationships with a number of buying groups.
Buying groups typically enter into contracts with various suppliers.
These contracts provide that the suppliers will make available specified
products at agreed-upon prices to members of the buying groups. Buying groups
strongly encourage their members to purchase these products, although compliance
by different buying group members may vary. Our sales efforts at the hospital
and surgery center level, which are strengthened by the use of our proprietary
DataStat(TM) and ValuQuote(TM) systems, increase demand for our products among
our end-use customers, including those that make purchases under buying group
contracts.
INDUSTRY
We compete primarily in the U.S. single-use specialty medical products
industry. The products included in the U.S. single-use specialty medical
products industry are:
- latex and non-latex - shoe covers; - syringes;
medical gloves;
- face masks; - tubing;
- custom procedure
trays; - non-powered - prepackaged needle kits
instruments; and trays;
- drapes;
- headgear; - diagnostic and interventional
- gowns; devices for cardiac and
- needles; radiology
We sell all such products. The primary customers for single-use
specialty medical products are hospitals, surgery centers, cardiac
catheterization labs and interventional radiology labs, alternate site care
providers and physician practices.
1
We believe several trends have had and will continue to have an impact
on the single-use specialty medical products industry. First, we expect the
projected aging of the population to increase demand for such products because
older people tend to undergo more surgical procedures. Second, we expect efforts
to reduce the transmission of infectious diseases and to address the
occupational safety of healthcare professionals to favorably impact demand for
single-use specialty medical products. Finally, in recent years, widespread
efforts have been made in both the public and private sectors to control
healthcare costs in the United States and abroad. Among other implications, this
has led to a growing trend in the United States for hospitals and surgery
centers to consolidate and/or to join buying groups, which are groups of
independent hospitals and surgery centers that coordinate their purchasing and
supply requirements on a regional or national basis in order to obtain price
concessions and contain costs. We believe this trend favors suppliers, like us,
that are able to serve national contracts with a broad product line,
sophisticated supply management processes, high brand name recognition with
member hospitals and other end use customers and nationwide customer service and
distribution capabilities.
We believe the market for custom procedure trays has several factors
that will contribute to continued growth in demand in the United States,
including: continued growth in the number of overall surgical and labor and
delivery procedures; growth in the number of more complex surgical procedures
for which custom procedure trays are used; and growing demand for products that
improve productivity and contain costs.
The medical glove market can be divided into latex gloves and non-latex
gloves, each of which can be designed either for medical examinations or
surgical procedures. A greater emphasis on protecting healthcare professionals
from the transmission of infectious diseases is expected to help drive growth in
sales of both latex and non-latex gloves.
Although we believe the number of surgical procedures performed in
Europe is only slightly less than the number of surgical procedures performed in
the United States, the use of single-use specialty medical products, including
custom procedure trays, currently is not as prevalent in Europe as it is in the
United States. We believe that European healthcare providers will increase their
use of single-use specialty medical products, including custom procedure trays,
as demand increases in Europe for products that improve productivity, help
contain healthcare costs and reduce the transmission of infectious diseases.
OPERATING GROUPS
Surgical Products Group
The Surgical Products Group manufactures, assembles and sells custom
procedure trays and infection control apparel for operating room personnel and
patient draping systems. Surgical Products Group products are marketed
principally through its sales force consisting of approximately 55 account
managers throughout the United States and Canada. Surgical Product Group sales
were $272.9 million in fiscal 2001 or 54.5% of the Company's net sales.
Surgical Products Group Product Lines
Custom Procedure Trays - The Surgical Products Group assembles and
markets procedure trays for use in a variety of medical and surgical procedures.
Procedure trays are assembled with single-use products selected by the operating
room/labor and delivery personnel performing a certain medical, surgical, or
obstetrical procedure. Among the types of single-use medical or surgical
products typically included in the procedure trays are surgical gowns, surgical
drapes, electrosurgical accessories, instruments, needles, gloves, syringes,
tubing, sponges, towels and gauze. Our custom procedure tray sales are supported
by our proprietary DataStat(TM) software system, which reviews various surgical
procedures, tracks components used in each procedure and records surgery time
and operating delays, and ValueQuote(TM) software system, which allows account
managers to search our component database for cost-effective component parts
that meet the sequencing needs of each customer. Our custom procedure trays are
also used as a component in our EnCompass(SM) Integrated Product Packaging
system, which is a unitized delivery program that packages most of the
single-use sterile and non-sterile components used in a surgical or labor and
delivery procedure, together with the custom procedure tray, into a single
modular container. We specifically design and label these containers to meet
inventory and operating room set-up, turnaround and disposal needs of hospitals
and surgery centers.
Drapes & Gowns - The Surgical Products Group manufactures a complete
line of single-use, non-woven infection control apparel for operating room and
labor and delivery personnel and patient draping systems. These products offer a
wide range of features such as patented fluid collection pouches to minimize the
risk of transmission of infectious agents or other waste during medical
procedures. The drapings are utilized in various general and specialty surgical
and labor and delivery procedures, as components of procedure trays (including
those assembled and distributed by the Company), in a sterile pack, or as a
single product. The Company has modified the design of many of its products and
has developed new products to accommodate new medical advances.
2
Medical Products Group
The Medical Products Group manufactures and sells a line of medical and
surgical gloves and biosafety containment products. The gloves we manufacture
include non-latex medical examination gloves, which are manufactured entirely
from synthetic materials, as well as non-latex and latex gloves for use in
surgical procedures. A greater emphasis on protecting healthcare professionals
from the transmission of infectious diseases is expected to help drive growth in
sales of both latex and non-latex gloves. Medical Products Group products are
marketed principally through its sales force consisting of approximately 30
account managers throughout the United States and Canada. Medical Product Group
sales were $112.4 million in fiscal 2001 or 22.4% of the Company's net sales.
Medical Products Group Product Lines
Gloves - Our gloves are manufactured by our Medical Products Group
consist of synthetic rubber, various non-latex materials or latex and are
offered lightly powdered or powder-free. For the fiscal year ended October 28,
2001, sales of non-latex medical examination gloves, latex medical examination
gloves, latex surgical gloves and non-latex surgical gloves accounted for 80.0%,
8.8%, 7.8% and 3.4% of our total glove net sales, respectively. Our gloves are
being sold under the brand names Eudermic(TM), Neolon(TM), SensiCare(R),
SensiCare PF(TM), Tradition(TM) and Tru-Touch(R). We believe that our non-latex
medical gloves provide a viable alternative to traditional latex gloves.
Biosafety Containment Products - The Medical Products Group
manufactures biosafety containment products, such as plastic boxes and bags,
which are used to dispose of sharp medical instruments and biological waste.
Vascular Products Group
The Vascular Products Group manufactures and sells specialty medical
products relating to coronary and peripheral diagnostic and interventional
procedures, including products used in radiology as well as products used in
critical care procedures and assembles and sells procedure trays for the
cardiology and interventional radiology markets. Vascular Products Group
products are marketed principally through its sales force consisting of
approximately 32 account managers throughout the United States and Canada.
Vascular Product Group sales were $81.3 million in fiscal 2001 or 16.2% of the
Company's net sales.
Vascular Products Group Product Lines
Vascular Devices - The Vascular Products Group's specialty medical
products include single-use guidewires, needles, introducers, catheters,
manifolds, transducers and high pressure syringes. Its products are either
utilized in the cath lab trays or are sold separately. The vascular devices
manufactured by the Vascular Products Group include technologically advanced
products which have been developed by the Group's technical staff and are sold
under the tradename Argon(TM).
Catheterization Lab Trays - The Vascular Products Group assembles
procedure trays specifically for the cardiology and interventional radiology
markets. These cath lab trays are assembled with single-use products selected by
the cardiac cath and radiology lab personnel performing diagnostic and
interventional procedures. Our proprietary DataStat(TM) and ValueQuote(TM)
software systems, used by the Surgical Products Group for the manufacture of
custom procedure trays are also used by the Vascular Products Group to assist in
the manufacture of cath lab trays.
European Products Group
The European Products Group manufactures, assembles, sells and
distributes custom procedure trays, non-latex medical examination gloves,
single-use specialty vascular access and pressure monitoring products and
single-use specialty medical products. European Products Group products are
marketed principally through its sales force consisting of approximately 14
direct sales persons in the Netherlands and Belgium. Dealers and independent
sales representatives are utilized throughout the rest of Europe. European
Products Group sales were $34.2 million in fiscal 2001 or 6.9% of the Company's
net sales.
European Products Group Products
Custom Procedure Trays - The custom procedure trays assembled and
marketed by our European Products Group are for use in a variety of medical and
surgical procedures. As in the United States, procedure trays are assembled with
single-use products selected by the operating room personnel performing a
certain medical or surgical procedure. Among the types of single-use medical or
surgical products typically included in the procedure trays are surgical gowns,
surgical drapes, electrosurgical accessories, instruments, needles, gloves,
syringes, tubing, sponges, towels and gauze.
3
Gloves - The gloves manufactured by our European Products Group consist
of synthetic rubber and various non-latex materials and are offered lightly
powdered or powder-free. Our gloves are being sold under the brand names
Eudermic(TM), Neolon(TM), SensiCare(R), SensiCare PF(TM), Tradition(TM) and
Tru-Touch(R). We believe that our non-latex medical gloves provide a viable
alternative to traditional latex gloves.
Vascular Devices - The European vascular devices sold as part of the
European Products Group include single-use guidewires, needles, introducers,
catheters, manifolds, transducers and high pressure syringes. Its products are
either utilized in the cath lab trays or are sold separately. The vascular
devices are manufactured by the Company's Vascular Products Group and include
those technologically advanced products which have been developed by the
Vascular Products Group's technical staff and are sold under the tradename
Argon(TM).
Specialty Medical Products - The European Medica(TM) products include
various self-manufactured and assembled single-use specialty medical products
such as scrub brushes, swabbing sticks and custom procedure kits for
transfusions, infusions and patient monitoring. Our European Products Group also
distributes a number of specialty medical products from American and British
manufacturers into the Benelux region of Europe.
PRODUCT DEVELOPMENT AND PATENTS; OTHER INTELLECTUAL PROPERTY
Although we have developed a number of our own products, most of our
research and development efforts have historically been directed towards product
improvement and enhancement of previously developed or acquired products, with
an emphasis on medical gloves. We bring a team approach to research and
development that involves the cooperative effort of our engineering,
manufacturing and marketing resources. By working closely with our sales force,
our research and development teams get up-to-date feedback and information from
the hospitals, surgery centers and healthcare professionals that use our
products. Our research and development expenses were $2.5 million, $5.5 million
and $6.1 million in fiscal years 2001, 2000 and 1999, respectively.
We pursue a policy of seeking exclusive licenses and/or patent
protection both in the United States and abroad for certain of our technology
and/or manufacturing processes. While no patent covered product sales that
constituted 5 % or more of our total net sales for the fiscal year ended October
28, 2001, obtaining or maintaining patents and/or exclusive technology licenses
on certain of our new products or products under development may be critical to
the success of such products. The failure to obtain or maintain such patents and
licenses could have an adverse effect on our prospects or future operating
results.
We also rely on trade secrets and know-how to maintain our competitive
position and to protect significant portions of our technology and/or
manufacturing processes, including our DataStat(TM) and ValuQuote(TM) software
systems and our EnCompass(SM) Integrated Product Packaging System. It is our
practice 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 our trade secrets and know-how or
that others may not independently develop similar trade secrets or know-how or
obtain access to our trade secrets, know-how or proprietary technology.
Maxxim Medical(R) is a registered trademark of our company. Other
important registered and common law trademarks, servicemarks and copyrights of
our company include:
- Argon(R); - EnCompass(SM); - Neolon(TM); - Tru-Touch(R); and
- Argon BiCath(TM); - Eudermic(TM); - SensiCare(R); - ValuQuote(TM)
- Boundary(R); - Integra(TM); - SensiCare PF(TM);
- DataStat(TM); - Medica(TM); - Tradition(TM);
MANUFACTURING
Our products are manufactured and/or assembled from a variety of
component parts and materials. The products included in our custom procedure and
cath lab trays are finished products, all of which we expect to continue to be
readily available at reasonable costs from a variety of manufacturers and
suppliers, including, where applicable, our manufacturing facilities. We
assemble our custom procedure trays for our Surgical Products Group at our
plants in California, Florida and Virginia in the United States and for our
European Products Group at our plant in Ommen in the Netherlands. We assemble
our cath lab trays for our Vascular Product Group at our plant in Texas. Each
tray is assembled to the exact specifications of the end-use customer using a
procedure in which employees are provided with exact directions as to which
components to include and how to assemble them on the tray.
4
Currently, most of the items included in our custom procedure trays,
based on the cost of materials, are purchased from third parties. No single
third-party manufacturer is material to our custom procedure tray sales.
We also manufacture approximately 84.6% of the gloves we sell. The
primary raw materials used to manufacture our medical gloves are synthetic
resins, polymers and latex. All of the gloves that we manufacture, for the
Medical Products Group as well as the European Products Group, are manufactured
at our facilities in South Carolina in the United States and Canada and Belgium.
Our glove manufacturing facilities are highly automated. We manufacture our
gloves utilizing two different processes. The primary process is a high-speed
continuous line that transports a single line of glove molds through dipping,
curing, automatic glove stripping and automatic packaging. The secondary and
less widely used process is a medium-speed process that transports a batch of
multiple side-by-side molds through dipping, curing, automatic glove stripping
and automatic packaging. Process logic controllers and sensors control both
processes and allow on-line real-time manufacturing and quality adjustments.
All of the vascular device products that we manufacture for both the
Vascular Products Group and the European Products Group are manufactured at our
facility in Texas. All of the drapes and gowns that we manufacture for our
Surgical Products Group are manufactured at our facilities in Mississippi and
the Dominican Republic. Our biosafety containment products are manufactured for
our Medical Products Group at our facility in West Virginia. The products that
we describe as our specialty medical products are manufactured for our European
Products Group at our facilities in the Netherlands. For products other than
gloves, we currently operate our manufacturing facilities using one or two
shifts per day and, as a result, we have the capacity to produce more of such
products by adding additional shifts.
SALES, MARKETING AND DISTRIBUTION
For the fiscal year ended October 28, 2001, 87.4% of our total net
sales were in the United States, 7.9% were in Europe, primarily in the
Netherlands, Germany and Belgium, and 4.7% were in the rest of the world.
UNITED STATES. Our primary customers are hospitals and surgery centers,
a majority of whom purchase our products under supply contracts negotiated with
us by the buying group of which the hospital or surgery center is a member. As a
result, our sales and marketing efforts target both hospitals and surgery
centers as well as buying groups. To increase sales and awareness of our
products at the hospital and surgery center level, our sales force maintains
close, direct relationships with the healthcare professionals and administrators
who make the purchasing decisions for these customers. Additionally, our sales
force offers access to our proprietary DataStat(TM) and ValuQuote(TM) systems.
At the same time, our national account managers focus on building relationships
with buying groups. The buying group contracts typically contain the key
purchasing terms and conditions, including price, for a list of products
approved by the buying group for purchase by its member hospitals and surgery
centers. Buying groups strongly encourage their members to purchase under their
buying group contracts, although compliance by different buying group members
may vary.
Whether purchasing independently or under a buying group contract, our
North American hospitals and surgery center customers have the option of having
our products delivered directly by us or through a distributor. In the event a
customer chooses to purchase through a distributor, the distributor purchases
our products from us and resells them to the end-use customer. In general,
customers who choose to have products delivered by a distributor do so in order
to streamline their purchasing process and to consolidate deliveries, and such
customers bear the cost of such distributor. Under such arrangements we maintain
purchase orders or supply agreements directly with the hospital or surgery
center customer that set forth the basic terms upon which the hospital or
surgery center purchases our products from the distributor, including price. If
the customer is a member of a buying group, the terms, including price, will
ordinarily be dictated by the contract between the buying group and us. Because
we typically maintain direct contact with the hospital or surgery center even if
a buying group or distributor is involved, our sales representatives can provide
superior customer service to increase sales of our products that are currently
under contract with the buying group, and introduce and sell certain of our
products that are not included on the buying group contract. For the fiscal year
ended October 28, 2001, direct sales to hospitals/surgery centers and
distributors accounted for 25.4% and 74.6%, respectively, of our total net sales
in the United States. We believe that direct sales to distributors were made
primarily on behalf of hospitals and surgery centers with which we had a
purchase order or supply contract but which elected to have the products
distributed by a distributor. In each of the past three fiscal years, no
individual hospital or surgery center that purchased directly or through a
distributor represented more than 5% of our total net sales.
5
For products that we do not directly ship to customers, we distribute
primarily through major distributors in the United States such as Owens & Minor,
Inc. and General Medical, Corp., which typically serve as distributors under a
purchase order or supply agreement between the end-user and us. Sales through
Owens & Minor, Inc. and General Medical, Corp, our largest distributors, were
38.2% and 9.9% of our net sales in the United States in fiscal year 2001,
respectively were 29.2% and 11.2% of our net sales in the United States in
fiscal year 2000, respectively, and 26.6% and 10.4% of our net sales in the
United States in fiscal year 1999, respectively. For the year ended October 28,
2001, no other single distributor accounted for more than 10.0% of our total net
sales in the United States. We believe that in most cases, our relationship with
and sales to any hospital or surgery center is not dependent upon our
relationship with the distributor.
EUROPE. Our sales and marketing efforts in the Netherlands and Belgium
closely track our United States model by focusing on the end-users of our
products. In the rest of Europe, dealers play a large role in our sales,
marketing and distribution efforts. In such countries, dealers typically
purchase our products for their own account, and are responsible for selling and
marketing the product to the end-user. In these cases, we typically do not
maintain standing purchase orders with hospitals and surgery centers and our
sales representatives generally have less contact with the end-users of our
products. For the fiscal year ended October 28, 2001, direct sales to dealers
accounted for 46% and direct sales to end-users accounted for 54% of our total
net sales in Europe.
In Europe, we utilize a contract warehousing and logistics company to
deliver products to our customers, including dealers. We primarily warehouse our
products at facilities in the Netherlands and Belgium that are linked to our
European computer system at our headquarters in 's-Hertogenbosch, the
Netherlands.
COMPETITION
We are a leading supplier of custom procedure trays in the United
States, and we are a leading supplier of non-latex medical examination gloves to
hospitals, surgery centers and other acute care facilities in the United States.
Our products compete with the products of numerous companies in the business of
developing, manufacturing, distributing and marketing single-use specialty
medical products. Some of these competitors have more extensive financial
resources, research and development facilities and marketing organizations than
we do. We do not typically provide the least expensive products available.
Instead, we emphasize overall value through a combination of pricing, product
quality and customer service.
CUSTOM PROCEDURE TRAYS. Four companies accounted for a large majority
of the total sales of these products in the United States. These four companies
are:
- Cardinal Health, Inc.'s Allegiance - DeRoyal
Industries, Inc.; and Corporation subsidiary; - Medline Industries, Inc.
- - Maxxim;
We compete based on:
- the quality of relationships with hospitals, surgery centers
and individual healthcare providers;
- price;
- capacity;
- size and, in the case of contracts with buying groups, the
ability to service accounts nationally from regional
distribution centers; and
- product quality and custom value
By using our custom packaged products, customers receive the following
benefits:
- productivity increases, by reducing the amount of preparation
and turnaround time required for surgical procedures;
- improved supply management, by access to a large number of
single-use specialty medical components for use in procedures
without the need to maintain a significant inventory of these
products;
- cost savings, by reducing the commitment of capital and
personnel needed in the administration, inventory management
and sterilization of a large number of reusable medical
supplies for surgical and other medical procedures; and
- cost information and reporting on a procedure-specific basis,
which is important for determining a hospital's or surgery
center's cost per procedure.
6
MEDICAL GLOVES. Our primary North American competitors in the
manufacture of medical examination and surgical procedure gloves include:
- Cardinal Health, Inc.'s Allegiance - Ansell Perry, Inc.;
Corporation subsidiary;
- Johnson & Johnson; and
- Kimberly Clark; - Medline Industries, Inc.
Our most technologically advanced non-latex gloves are manufactured
using a combination of trade secrets and patented formulations and manufacturing
processes that we believe provide us with technological and performance
advantages over our competitors in these product areas. These advantages include
greater tactility and barrier protection for the user. In order to maintain our
advantage, we continue to research and develop new compounds to improve our
non-latex products and powder-free products.
Factors affecting medical glove competition include glove price and
performance and whether the glove is latex or non-latex. Medical glove
performance is measured by the degree of tactility and barrier protection that
the glove affords and, as a result, technology plays a significant role in the
development, manufacture and sale of medical gloves. See " -- Product
Development and Patents; Other Intellectual Property."
EUROPE. In Europe, our primary competitors in custom procedure trays
include:
- the European divisions of Cardinal Health, Inc., DeRoyal
Industries, Inc. and Medline Industries, Inc. and
- locally based competitors such as Schneider Worldwide, a unit
of Pfizer, Inc., and Molnlycke Health Care AB.
Our primary competitors in Europe in medical examination gloves include
the European divisions of:
- Cardinal Health, Inc.; - Johnson & Johnson;
- Kimberly Clark; - Medline Industries, Inc.; and
- Ansell Perry, Inc.; - Locally based competitors such as Schneider Worldwide
and Molnlycke Health Care AB.
Factors affecting competition in Europe that differ from those
affecting competition in the United States include the ability to address local
market concerns, such as language and product labeling, and, because direct
sales are smaller in Europe, strength of the manufacturer's relationship with
dealers. See " -- Sales, Marketing and Distribution -- Europe."
GOVERNMENT REGULATION
Our activities are subject to numerous and evolving state, federal and
foreign regulations.
DOMESTIC REGULATION. In the United States, most of our products, and
products that we are likely to develop or market in the future, are subject to
regulation as medical devices by the U.S. Food and Drug Administration ("FDA")
pursuant to the U.S. Food, Drug and Cosmetic Act and regulations promulgated
under the act (collectively, the "FDCA"). The FDA regulates the research,
testing, manufacture, safety, labeling, storage, record keeping, promotion and
distribution of medical devices in the United States to ensure that medical
products distributed domestically are safe and effective for their intended
uses.
Pursuant to the FDCA, a medical device is classified as either a class
I, class II or class III device depending on the degree of risk associated with
the device and the extent of control necessary to ensure safety and
effectiveness. Class I devices are those for which safety and effectiveness can
be assured by adherence to a set of general controls and guidelines that are
applicable to all medical devices. Such controls include compliance with the
applicable portions of the Quality Systems Regulations ("QSR") regarding FDA
registration and inspections of facilities, "good manufacturing practices,"
labeling, promotion and advertising, maintenance of records, reporting of
adverse medical events and filings with the FDA (the "General Controls"). Some
class I devices also require premarket clearance by the FDA through the section
510(k) premarket notification process described below. Class II devices are
those that are subject to the General Controls and most require premarket
demonstration of adherence to certain performance standards or other special
controls, as specified by the FDA, and clearance by the FDA. Class III devices
are those that support or sustain human life, are of substantial importance to
preventing impairment of human health, or which present a potential unreasonable
risk of illness or injury, or are based on advanced technology that is not
substantially equivalent to a use or technology with respect to a legally
marketed device.
7
Most of our products are class II devices and the remainder are class I
devices. We do not manufacture and are not developing any products that are or
that we expect to be classified as class III devices. FDA marketing clearance of
class II devices is obtained through the premarket notification procedure under
section 510(k) of the FDCA. For most class II devices, the manufacturer must
submit to the FDA a premarket notification submission, demonstrating that the
device is "substantially equivalent" to either:
- a device that was legally marketed prior to May 28, 1976, the
date upon which the Medical Device Amendments of 1976 were
enacted, or
- another commercially available, similar device that was
subsequently cleared through the section 510(k) process.
If the FDA agrees that the device is "substantially equivalent," it
will grant clearance to commercially market the device. By regulation, the FDA
is required to clear a section 510(k) application within 90 days of submission
of the application. As a practical matter, clearance often takes longer. The FDA
may require further information, including clinical data, to make a
determination regarding substantial equivalence. If the FDA determines that the
device, or its intended use, is not "substantially equivalent," to a legally
marketed device the FDA will place the device, or the particular use of the
device, into class III, and the device sponsor must then fulfill much more
rigorous premarket approval ("PMA") application process.
Approval of a PMA from the FDA is required before the marketing of
products that are class III devices can proceed. The PMA process is much more
demanding than the section 510(k) premarket notification process. A PMA
application, which is intended to demonstrate that the device is safe and
effective, must be supported by extensive data, including data from preclinical
studies and human clinical trials and existing research material. It must also
contain a full description of the device and its components, a full description
of the methods, facilities and controls used for manufacturing and proposed
labeling. Following receipt of a PMA application, once the FDA determines that
the application is sufficiently complete to permit a substantive review, the FDA
will accept the application for review. The FDA, by statute and by regulation,
has 180 days to review a filed PMA application, although the review of an
application more often occurs over a significantly longer period of time, up to
several years. In approving a PMA application or clearing a section 510(k)
application, the FDA may also require some form of post-market surveillance
whereby the manufacturer follows certain patient groups for a number of years
and makes periodic reports to the FDA on the clinical status of those patients
when necessary to protect the public health or to provide additional safety and
effectiveness data for the device.
In addition, our manufacturing processes are required to comply with
good manufacturing practices contained in the QSR.
The QSR also, among other things, requires maintenance of a device
master record, device history record and complaint files. Our facilities,
records and manufacturing processes are subject to periodic unscheduled
inspections by the FDA. In addition, all of our products must be periodically
listed with the FDA. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain instances, by the Federal Trade Commission. The
export of devices is also subject to regulation in certain instances.
The FDA's mandatory Medical Device Report ("MDR") regulation obligates
us to keep records and provide information to the FDA on injuries or deaths
alleged to have been associated with the use of a product or in connection with
certain product failures that could cause injury or death. If, as a result of
FDA inspections, MDR reports or other information, the FDA believes that we are
not in compliance with the law, the FDA can institute proceedings to:
- detain or seize products;
- enjoin future violations; and
- impose product labeling restrictions or enforce product
recalls or withdrawals from the market.
Failure to comply with the applicable FDA medical device regulatory
requirements could result in, among other things:
- warning letters; - civil penalties;
- additional product labeling requirements; - repairs;
- fines; - replacements;
- injunctions; - refunds;
- recalls or seizures of products; - total or partial suspension of production;
- suspension of all federal contracts; - refusal to issue export certificates;
- the FDA's refusal to grant future premarket clearances
or approvals; and
- withdrawals or suspensions of current product
applications and criminal prosecution.
8
There are currently no adverse regulatory compliance issues or actions
pending with the FDA at any of our facilities or relating to our products and no
recent FDA audit of our facilities has resulted in any enforcement action by the
FDA.
There are no restrictions under United States law on the export from
the United States of any medical device that can be legally distributed in the
United States. Certificates for export, certifying the status of a product under
the FDCA, are not required by the FDA for export. However, they are often
required by the foreign country importing the product.
Many of the states in which we do business or in which our products are
sold impose licensing, labeling or certification requirements that are in
addition to those imposed by the FDA. To date, we have not experienced
difficulty in complying with these requirements; however, there can be no
assurance that one or more states will not impose additional regulations or
requirements that have a material adverse effect on our ability to sell our
products. In addition, 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 our business, financial condition or results of operations, though
none have done so to date.
We are subject to various federal and state laws pertaining to
healthcare fraud and abuse, including anti-kickback laws and physician
self-referral laws. Violations of these laws are punishable by criminal and/or
civil sanctions, including, in some instances, imprisonment and exclusion from
participation in federal and state healthcare programs, including Medicare,
Medicaid and Veterans Affairs health programs. We believe that our operations
are in substantial compliance with such laws; however, because of the
far-reaching nature of these laws, we or certain of our sales representatives
may be required to alter one or more of our or their practices to be in
compliance with these laws. In addition, we cannot assure you that the
occurrence of one or more violations of these laws would not result in a
material adverse effect on our business, financial condition or results of
operations. If there is a change in law, regulation or administrative or
judicial interpretations, we may have to change our business practices or our
existing business practices could be challenged as unlawful, which could have a
material adverse effect on our business, financial condition or results of
operations.
INTERNATIONAL REGULATION. The products manufactured and sold by us in
Europe are subject to the European Community regulations for medical devices.
The European Community has a registration process which includes manufacturing
facilities ("ISO certification") and product certification ("CE Mark
certification"). ISO certification requires that there be functioning quality
systems at each facility. Following an acceptable certification inspection, the
facility receives an ISO certification number. The CE Mark certification is
granted once it is determined that certain products or product types meet the
European Community 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
Community. We have obtained ISO certification and CE Mark certification for our
facilities and products in Europe as well as for those facilities and products
in North America that are sold into those markets or countries which require
such certification. However, there is no guarantee that we will be successful in
obtaining European certifications for new facilities or products, or that we
will be able to maintain our existing certifications for facilities or products
in the future.
In many of the countries in which we do business or in which our
products are sold outside of the United States, we are subject to regulation by
national governments and supranational agencies as well as by local agencies
affecting, among other things:
- product standards; - import restrictions; - duties; and
- packaging requirements; - tariff regulations; - tax requirements
- labeling requirements;
To date, we have not experienced difficulty in complying with these
regulations; however, there can be no assurance that one or more countries or
agencies will not impose additional regulations or requirements that could have
a material adverse effect on our ability to sell our products. The harmonization
of standards in the European Community has caused a shift from a
country-by-country regulatory system to a European Community-wide single
regulatory system. However, many members of the European Community have imposed
additional country specific regulations and/or requirements. Although our
products generally are already subject to European Community regulation through
CE Mark certification processes, there can be no assurance that the changes in
the regulatory schemes imposed either by the European Community, supranational
agencies or individual countries affecting our products will not have a material
adverse effect on our ability sell our products in Europe.
9
ENVIRONMENTAL AND OTHER MATTERS
Our facilities and operations are subject to federal, state and local
environmental and occupational health and safety requirements of the United
States and foreign countries, including those relating to discharges of
substances to the air, water and land, the handling, storage and disposal of
wastes and the cleanup of properties affected by pollutants. We believe we are
currently in substantial compliance with such requirements and we do not
currently anticipate any material adverse effect on our business, financial
condition or results of operation as a result of such environmental, health or
safety requirements. In the future, federal, state, local or foreign governments
could enact new or more stringent requirements concerning environmental, health
and safety matters that could affect our operations. Also, in the future,
contamination may be found to exist at our current or former facilities or
off-site locations where we have sent wastes. We could be held liable for such
newly discovered contamination. Changes in environmental, health and safety
requirements or liabilities from newly discovered contamination could have a
material adverse effect on our business, financial condition or results of
operations.
EMPLOYEES
At October 28, 2001, we had 2,092 full-time domestic employees and
1,250 full-time foreign employees. Approximately 113 employees in Canada are
covered by a collective bargaining agreement that expires in October 2003.
Approximately 83 employees at our Clarksburg, West Virginia facility are covered
by a collective bargaining agreement that expires in January 2003. We are
currently not experiencing any strikes or other work stoppages; however, there
can be no assurance that we will not experience strikes or work stoppages in the
future. We believe that our relations with our employees are satisfactory. See
also Item 3. Legal Proceedings.
10
ITEM 2: PROPERTIES
FACILITIES
Our principal executive and administrative offices are located in
Waltham, Massachusetts. The following table sets forth information with respect
to our principal facilities:
OWNED OR LEASED BUILDING AREA
LOCATION USE FACILITIES (SQUARE FEET)
------------------------------ ----------------------------- ---------- -------------
Temecula, California Tray Manufacturing; Distribution Leased 162,500
Clearwater, Florida Tray Manufacturing Owned 107,500
Clearwater, Florida Administration Owned 21,000
Oldsmar, Florida Tray Sterilization; Distribution Owned 45,000
Oldsmar, Florida Distribution; Office/Warehouse Leased 20,000
Waltham, Massachusetts Headquarters Leased 28,330
Columbus, Mississippi Drapes and Gown Manufacturing; Owned 135,000
Distribution
Asheville, North Carolina Drapes and Gown Manufacturing Leased 11,900
Honea Path, South Carolina Glove Manufacturing; Distribution Owned 89,000
Athens, Texas Vascular Systems Manufacturing; Owned 142,900
Bio-Safety Containment
Manufacturing; Distribution
Richmond, Virginia Tray Manufacturing; Distribution Leased 253,000
Clarksburg, West Virginia Bio-Safety Containment Owned 45,000
Manufacturing; Distribution
Aalst/Erembodegem, Belgium Glove Manufacturing Owned 134,550
Mississauga, Ontario, Canada Glove Manufacturing; Distribution Owned 170,000
La Romana, Dominican Republic Drapes and Gowns Manufacturing Leased 70,325
`s-Hertogenbosch, the Netherlands Administrative Offices Leased 25,000
Oss, the Netherlands Tray Manufacturing Leased 63,271
Ommen, the Netherlands Brush Manufacturing; Injection Molding Owned 27,600
Ommen, the Netherlands Warehouse Leased 4,844
11
ITEM 3: LEGAL PROCEEDINGS
GENERAL. We are currently, and are from time to time, subject to claims
and lawsuits arising in the ordinary course of business, including those
relating to product liability, safety and health and employment matters. In some
of such actions, plaintiffs request punitive or other damages or nonmonetary
relief, which may not be covered by insurance, and which could, in the case of
nonmonetary relief, if granted, materially affect the conduct of our business.
Although we maintain insurance that we believe to be reasonable and appropriate,
the amount and scope of any coverage may be inadequate to protect us in the
event of a substantial adverse judgment. In management's opinion, taking third
party indemnities into consideration, these various asserted claims and
litigation in which we are currently involved are not reasonably likely to have
a material adverse effect on our business, results of operations or financial
position. However, no assurance can be given as to the ultimate outcome with
respect to such claims and litigation.
LATEX GLOVE LITIGATION. Since March 1996, we have been served with
lawsuits alleging various adverse reactions to the latex used in certain of the
medical gloves alleged to have been manufactured by us or the prior owner of the
assets relating to our latex glove operations acquired in June 1995 as well as
certain glove products distributed by us since 1989. We believe that most of
such claims relate to gloves sold or shipped prior to June 1995. We have been
and we believe we will continue to be indemnified by the prior owner with regard
to such claims. Because we, as well as our competitors, have continued to
manufacture and sell latex gloves, we may be subject to further claims. We are
not entitled to indemnification from the prior owner for gloves that were
manufactured, sold or shipped in or from one of their plants or our plants after
June 1995. We intend to vigorously defend against such claims. We are aware that
an increasing number of lawsuits have been brought against latex glove
manufacturers with respect to such adverse reactions. There can be no assurance
that we will prevail in any such lawsuits, that the prior owner will continue to
indemnify us or that we will not incur costs or liabilities relating to such
claims that will result in a material adverse effect on our business, financial
condition or results of operations.
SHAREHOLDER LITIGATION. A complaint was filed on June 25, 1999 in state
court in Pinellas County, Florida, naming us, our former directors and Fox
Paine & Company, LLC as defendants. The case was styled Burnetti v. Maxxim
Medical, Inc. et al. No. 99-4347-CI-15 (6th Judl. Circ., Pinellas Cty., Fla.).
The complaint was brought on behalf of a purported class of our former public
shareholders and alleged that the consideration paid in the merger was unfair
and inadequate, and that our former directors breached their fiduciary duties by
failing to obtain the best price for our stock in the merger. As remedies, the
complaint sought, among other things, equitable relief and damages in an
unspecified amount. A settlement was reached among the parties and the case was
dismissed by the court on July 25, 2001. Pursuant to the settlement agreement,
nothing was paid to the plaintiffs, but plaintiff's counsel was paid fees
in the amount of $500,000.
On September 28, 1999 a complaint was filed in state court in
Henderson County, Texas naming us and our former directors as defendants. This
case is styled Krim v. Maxxim Medical, Inc., et al., No. 99-143 (3rd Judl.
Dist., Henderson Cty., Tex.). The complaint was brought on behalf of a
purported class of our former public shareholders and alleged, among other
things, that the consideration paid in the merger was unfair and inadequate and
that our former directors breached their fiduciary duties by failing to obtain
the best price for our stock in the merger. As remedies, the complaint sought,
among other things, equitable relief and damages in an unspecified amount. This
case has been dismissed without any payment by us, with an Order of Nonsuit
with Prejudice being issued by the court on September 19, 2001.
EMPLOYEE LITIGATION. We and certain of our directors and their
affiliates are defendants in two lawsuits brought by certain former employees
(including one of our directors) in state court in Florida, in September 2000
and October 2001, respectively. The plaintiffs therein allege various common
law and statutory causes of action arising out of the termination of their
employment following our November 1999 recapitalization. Pursuant to a March
2001 order of the Florida court (with respect to the September 2000 plaintiffs)
and to an agreement among the parties (with respect to the October 2001
plaintiffs), these claims, as well as certain counterclaims by the Company, are
the subject of arbitration proceedings before the American Arbitration
Association in New York City. The Company has denied all material allegations
related to these claims.
A related lawsuit based on the same events and against the same parties
was brought in state court in Texas by another one of our directors. That
lawsuit was dismissed for lack of personal jurisdiction over defendants other
than the Company in August 2001, and was voluntarily dismissed with respect to
the Company by the plaintiff in September 2001. In November 2001, the same
plaintiff filed a substantially identical complaint in state court in Florida.
The Company denies all material allegations of this lawsuit and, pursuant to an
agreement among the parties, expects to answer or move in response to the
Florida complaint on January 31, 2002.
12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following are descriptions of matters submitted to a vote of our
common stockholders after fiscal year 2001.
On November 8, 2001, shareholders owning 25,224,285 shares of our
common stock, representing a majority of our common stock, acted by written
consent to expand the Board of Directors to eleven members and to elect Russell
D. Hays, Thomas Mercer and Marc Abramowitz as members of the Board. Saul A. Fox,
W. Dexter Paine, III, Jason B. Hurwitz, Mark S. Sellers, James R. Kroner, Greg
Barrett, Kenneth W. Davidson, and Ernest J. Henley continued as members of the
Board. In addition, such shareholders also acted by written consent to approve
resolutions of the Board appointing our officers, amending our Bylaws,
designating and constituting a special committee, executive committee and
operating committee, and ratifying certain actions taken by our directors,
officers, representatives or agents ("our affiliates") taken at the direction of
or on behalf of us or our affiliates. Subsequently, notice was given to the
non-voting shareholders in accordance with Texas law.
On November 29, 2001, shareholders owning 25,224,285 shares of our
common stock, representing a majority of our common stock, acted by written
consent to increase the authorized common shares from 50,000,000 shares to
150,000,000 shares. Subsequently, notice was given to non-voting shareholders in
accordance with Texas law.
PART II
ITEM 5: a: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is not publicly traded on any exchange or in any
market. There are 15 holders of the common stock. See Item 12. Security
Ownership of Certain Beneficial Owners and Management
We have never paid cash dividends on our common stock. We presently
intend retained earnings to finance the expansion of our business and make
payments on our debt and, therefore, do not expect to pay any cash dividends in
the foreseeable future. Any determination as to the payment of cash dividends
will depend upon our 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. Our present credit
facility prohibits the payment of dividends.
In connection with his employment agreement with us, in October 2001,
Russell Hays purchased 200,000 shares of our common stock for $1 million in a
transaction exempt from the registration requirements of the Securities Act of
1933, pursuant to the exemption contained in Section 4(2) of the Act. One-half
of the aggregate purchase price was paid in cash and the remaining half paid by
delivery of a promissory note. The payment of the note is non-recourse, other
than with respect to the shares of stock which Mr. Hays purchased and is secured
by a pledge of those shares. The note provides for interest at the lowest rate
allowable by the Internal Revenue Service which avoids the imputation of
interest income, compounded annually. Interest accrues on the note and is added
to principal, which is due and payable in full on the ninth anniversary of the
note. The note also provides for mandatory prepayment from the proceeds of any
sale of Mr. Hays common stock and/or options.
SALE OF PREFERRED STOCK AND WARRANTS
In November and December 2001, we sold 50,000 units ("Units"), each
Unit being comprised of one share of our Series A Participating Preferred Stock
("Series A Preferred Stock"), par value $1.00 per share, and 162 warrants to
purchase, for $.01 per share, one share of our common stock per warrant. The
aggregate offering price and proceeds to us from the sale were $50 million in
cash. The sale was effected in two closings. Pursuant to the Stock Purchase
Agreement by and among us, Maxxim Medical Group, Inc. (our wholly owned
subsidiary), Fox Paine Capital Fund, L.P., FPC Investors, L.P., and Fox Paine
Medic New Equity Corp., Fox Paine Capital Fund, L.P. and FPC Investors, L.P.
collectively purchased 23,500 Units for $23,500,000 on November 30, 2001.
Following that closing, we offered each of our existing shareholders and warrant
holders the right to purchase their pro rata share of the 50,000 Units on the
same terms as those in the Stock Purchase Agreement, based on such holder's pro
rata ownership of our common stock, on an as-converted basis. Those Units that
were not purchased by our existing shareholders and warrant holders were also
offered to select potential investors. Under the Stock Purchase Agreement, Fox
Paine Medic New Equity Corp. agreed to purchase any Units not subscribed for by
the other offerees at the second closing, which occurred on December 31, 2001.
On or prior to December 31, 2001, 26,500 Units were sold to Fox Paine Medic New
Equity Corp., certain of our existing warrant holders and new investors,
collectively, for $26.5 million. The sales of the Units were effected pursuant
to the exemption from the registration requirements of the Securities Act of
1933 set forth in Section 4(2) of that Act.
The following discussion summarizes certain terms of the Series A
Preferred Stock and the warrants, but is qualified in its entirety by reference
to the Statement of Resolution establishing the Series A Preferred Stock and the
warrant agreement setting forth the terms of the warrant, both of which are
exhibits to this Form 10-K.
SERIES A PREFERRED STOCK
In the aggregate, we sold 50,000 shares of Series A Preferred Stock.
We have authorized a total of 725,000 shares of Series A Preferred Stock,
including shares to be reserved for payment of pay-in-kind dividends on the
outstanding shares of Series A Preferred Stock. Each share of Series A
Preferred Stock has a liquidation preference of $1,000, which will be adjusted
for any stock dividends, combinations, splits, subdivisions, recapitalizations,
reclassifications or similar events affecting the Series A Preferred Stock. The
Series A Preferred Stock ranks senior to our common stock and to any other
stock that ranks junior to the Series A Preferred Stock with respect to the
payment of dividends, redemption payments and rights upon liquidation,
dissolution or winding up of our affairs. This is the only series of preferred
stock outstanding or designated by our board of directors.
The holders of Series A Preferred Stock are entitled to receive for
each share of Series A Preferred Stock dividends of, but only out of funds that
are legally available, the greater of (i) 18% of the liquidation preference per
year or (ii) a multiplier of 100 times any dividend or distribution declared
(in the form and amount so declared) on our common stock, other than, and
subject to adjustment for, common stock dividends, stock splits,
reclassifications, combinations, consolidations or other events effecting
common stock. Dividends are payable quarterly in additional shares of Series A
Preferred Stock. Dividends are payable on or after November 30, 2006 are payable
in Series A Preferred Stock or, at our option, cash provided that such cash
payment does not cause a default under our or our subsidiaries' material
agreements or indentures. With respect to liquidation, the holders of Series A
Preferred Stock are entitled to be paid out of our assets an amount per share
equal to the greater of (i) 100% of the liquidation preference, as adjusted,
plus accrued and unpaid dividends, whether or not theretofore declared, or (ii)
an amount equal to a multiplier of 100, as adjusted, multiplied by any
liquidating distribution or payment on our common stock.
Subject to certain procedural requirements and other restrictions, any
or all of the Series A Preferred Stock also may be redeemed at a redemption
price equal to 100% of the liquidation preference, as adjusted, in cash,
together with accrued and unpaid dividends 1) if permitted under our and our
subsidiaries material agreements and indentures, at the election of each holder
of Series A Preferred Stock anytime on or after November 30, 2011 or, if upon a
"change of control" (as defined under the Indenture, dated as of November 12,
1999, between us and Wilmington Trust Company, governing our Senior Discount
Notes due 2010), we elect to convert the Series A Preferred Stock into common
stock and 2) at our election any time on or after November 30, 2016.
Among other features of the Series A Preferred Stock, at any time on
or after November 30, 2001, each holder may elect to have any of his or her
shares of Series A Preferred Stock converted into shares of our common stock.
Also, upon a "change in control" (as defined under the Indenture, dated as of
November 12, 1999, between us and Wilmington Trust Company, governing our
Senior Discount Notes due 2010), we have the right to convert all, and not less
than all, of the Series A Preferred Stock into common stock at the conversion
ratio, provided that the then current market price per share of our common
stock (as defined in our warrant agreement with other parties, dated as of
November 30, 2001) is greater than the then current conversion price, or we
have funds legally available to redeem all outstanding shares of the Series A
Preferred Stock. The Series A Preferred Stock is redeemable by the holders if
we elect to convert the Series A Preferred Stock into common stock in
connection with a change of control. Following the closing of one or more
underwritten public offerings of our common stock in which we receive aggregate
proceeds of at least $50 million, we also have the right to convert all, and
not less than all, of the Series A Preferred Stock into our common stock at the
conversion ratio, provided that the per share offering price of our common
stock in the public offering is greater than the then current conversion price.
The conversion ratio is the quotient obtained by dividing the Series A
Preferred Stock liquidation preference by the conversion price. The initial
conversion ratio is 100 shares of common stock per share of Series A Preferred
Stock, based on an initial conversion price of $10.00. The conversion price
will be adjusted for issuances of common stock dividends or other
distributions, stock splits, reclassifications, combinations, consolidations or
other similar events. The conversion price will be adjusted by multiplying the
then current conversion price by a fraction, the numerator of which shall be
the number of shares of common stock issued and outstanding immediately prior
to the event causing such an adjustment, and the denominator of which shall be
the number of shares of common stock issued and outstanding immediately after
such an event. Moreover, if the common stock issuable upon the conversion of
the Series A Preferred Stock is changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than an event requiring an adjustment to
the conversion price) then each holder of Series A Preferred Stock shall have
the right to convert his or her Series A Preferred Stock into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change as if he or she had
converted his or her shares of Series A Preferred Stock immediately prior to
such recapitalization, reclassification or change.
We will reserve and keep available out of our authorized but unissued
shares of common stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of our shares of common
stock as shall be sufficient to effect the conversion of all outstanding shares
of the Series A Preferred Stock. If at any time there are not a sufficient
number of shares of common stock to effect the conversion of all of the then
outstanding shares of the Series A Preferred Stock, we will take such corporate
action as may be necessary to increase the number of shares of common stock to
be sufficient for such purpose. Conversions must also follow certain procedures
set forth in our Articles of Incorporation.
WARRANTS
In the aggregate, we sold 8,100,000 warrants, exercisable in aggregate
for 8,100,000 shares of our common stock. We have authorized and reserved for
issuance 8,100,000 shares of common stock in connection with the warrants. Each
warrant is exercisable for one share of common stock at an exercise price of
$.01 until 5:00 P.M., New York, New York time on November 30, 2016. The number
of shares for which each warrant is exercisable is subject to adjustment for:
- dividends of our common stock or any class of our stock that
has the right to participate in any distribution of our
assets or earnings without limit, which includes the Series A
Preferred Stock ("Adjustment Common Stock") on, capital stock
distributions on, subdivisions of, combinations of, and
reclassifications of Adjustment Common Stock;
- distributions of any rights, options or warrants to all
holders of Adjustment Common Stock, entitling holders to
purchase shares of Adjustment Common Stock or securities
convertible or exchangeable for Adjustment Common Stock (or
options or rights with respect to such securities) at a price
per share less than the then current market price per share;
- distributions to all holders of Adjustment Common Stock of
any of our assets, debt securities, rights or warrants to
purchase our debt securities, preferred stock, assets or
other securities;
- issuance of shares of Adjustment Common Stock to Fox Paine &
Company, LLC or its affiliates for a consideration per share
less than the then current market price per share on the date
the offering price is fixed (excluding the issuances of
Adjustment Common Stock upon exercise of these warrants, any
other convertible securities, and any options or other
warrants outstanding on the date these warrants were issued
and Adjustment Common Stock issued in a bona fide
underwritten public offering); and
- issuance of securities convertible into or exchangeable for
Adjustment Common Stock to Fox Paine & Company, LLC and its
affiliates for a consideration per share of Adjustment Common
Stock initially deliverable upon conversion or exchange of
such securities less than the current market price per share
on the date of issuance of such securities (excluding
convertible securities issued in a bona fide underwritten
public offering).
The adjustment must also follow certain procedures set forth in the warrant
agreement for the warrants.
At our request, in the event of certain underwritten initial public
offerings or public offerings of shares of common stock of at least $50.0
million, holders of warrants must exercise the warrants upon the consummation
of such an offering or at some other mutually agreed upon date on or before the
date of the consummation of the public offering.
We will reserve and keep available out of our authorized but unissued
shares of common stock, solely for the purpose of satisfying our obligation to
issue shares of common stock upon exercise of the warrants, the maximum number
of shares of common stock that may be then deliverable upon the exercise of all
outstanding warrants.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEAR ENDED
-------------------------------------------------------------------
OCTOBER 28, OCTOBER 29, OCTOBER 31, NOVEMBER 1 NOVEMBER 2,
2001 2000 1999 1998 1997
----------- ----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net sales $ 500,841 $ 499,193 $ 508,654 $ 522,516 $ 529,552
Cost of sales 391,107 410,470 366,778 381,638 397,691
--------- --------- --------- --------- ---------
Gross profit 109,734 88,723 141,876 140,878 131,861
Selling, general and administrative expenses 107,219 125,576 93,694 94,410 90,101
Restructuring charges and transition expenses (1) 5,571 13,514 4,637 -- --
Goodwill impairment charge (2) -- 28,012 -- -- --
Losses on assets to be sold (3) 13,091 30,002 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from operations (16,147) (108,381) 43,545 46,468 41,760
Interest expense, net (53,785) (47,038) (27,789) (13,420) (22,145)
Other income (expense), net (3,700) (7,186) (555) 1,042 2,751
Recapitalization expenses (4) -- (18,556) -- -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income tax (73,632) (181,161) 15,201 34,090 22,366
Income taxes 1,033 (11,304) 7,175 14,454 9,485
--------- --------- --------- --------- ---------
Income (loss) from continuing operations (74,665) (169,857) 8,026 19,636 12,881
Income from discontinued operations, net of tax(5) -- 87 6,038 -- --
Extraordinary item, net of tax (6) -- (17,144) -- -- --
Cumulative effect of change in accounting
principle (7) (355) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (75,020) $(186,914) $ 14,064 $ 19,636 $ 12,881
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 16,102 $ 44,803 $ 348,315 $ 108,918 $ 99,815
Total assets 310,880 349,323 711,593 468,051 424,046
Total debt 414,530 379,017 361,749 121,683 221,085
Total shareholders' equity (deficit) (204,335) (131,675) 285,117 272,909 137,928
OTHER FINANCIAL DATA:
Net cash provided by (used in) operating
activities (4,373) 21,513 42,340 55,542 49,577
Net cash provided by (used in) investing
activities (5,815) 246,477 (271,791) (67,954) (3,199)
Net cash provided by (used in) financing 10,858 (270,397) 229,470 13,371 (48,807)
Depreciation and amortization 15,986 22,888 22,526 18,379 16,665
Capital expenditures (8) 5,788 7,914 25,757 23,441 6,829
Ratio of earnings to fixed charges (9) n/a n/a 1.5x 3.3x 2.0x
14
- ----------
(1) Restructuring charges and transition expense of $5,571 incurred in
fiscal 2001 consisted primarily of severance costs. Restructuring
charges and transition expenses of $13,514 incurred in fiscal year
2000 include $9,886 for the restructuring and reduction in workforce
at five of our manufacturing plants, comprised primarily of plant
closure expense and severance, and $3,628 restructure charges
associated with the closing of one of our glove plants initiated in
fiscal 1999, comprised primarily of plant closure expenses.
Restructure charges and transition expenses of $4,637 incurred in
fiscal year 1999 include $2,016 transition expenses for sales force
restructuring, comprised primarily of severance costs and training
expenses, and $2,621 restructure charges associated with the closing
of one of our glove plants, comprised primarily of severance costs and
benefits.
(2) In fiscal year 2000, we reduced the value of the goodwill related to
the purchase of the Sterile Concepts custom procedure tray business in
1996. These charges were made in accordance with 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).
(3) In fiscal years 2001 and 2000, we recorded charges of $13,091 and
$30,002, respectively. These charges were made in accordance with
SFAS No. 121.
(4) Effective November 12, 1999, we consummated a recapitalization, and
fees of $18,556 associated with the recapitalization were expensed in
fiscal 2000.
(5) Discontinued operations include the results of Circon Corporation for
the period from the date of its acquisition, January 6, 1999, through
the recapitalization, November 12, 1999.
(6) As part of the recapitalization, we completed a tender offer to acquire
our 10-1/2% Senior Subordinated Notes. We paid a premium of $11,197,
wrote off $7,100 of financing fees and received a tax benefit of $1,153
related to the tender for these notes.
(7) The implementation of FASB Statement No. 133 was accounted for as a
change in accounting principle and the cumulative effect upon adoption
was a loss on our derivative instrument of $355.
(8) Capital expenditures exclude expenditures for acquisitions, net of
divestitures.
(9) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges less capitalized interest) by fixed charges (interest
expense plus capitalized interest and the portion of operating lease
rental expense that represents the interest factor). Our deficiency in
earnings necessary to cover fixed charges was $58,513 and $48,432 for
fiscal years 2001 and 2000, respectively.
15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On November 12, 1999, we consummated a series of transactions,
including the following that resulted in a recapitalization of the company:
- all of our public shareholders were paid cash for their shares
of our stock and our stock ceased trading on the New York
Stock Exchange;
- we repaid significantly all of our outstanding debt;
- eight individuals who were then serving as officers and
directors retained their shares of our common stock, and they
and a group of new investors invested $136.2 million in cash
in additional shares of our common stock;
- we borrowed $261.6 million under new senior secured credit
facilities;
- we received $50.0 million from the issuance of $98.5 million
principal amount at maturity of senior unsecured discount
notes due 2010 and warrants to purchase shares of our common
stock, and $110.0 million from the issuance of $144.6 million
principal amount at maturity of senior subordinated discount
notes due 2009 and warrants to purchase shares of our common
stock; and
- we received $228.0 million in cash from the sale of Circon
Corporation to Circon Holdings and the repayment of debt owed
to us by Circon Corporation.
In the fourth quarter of fiscal 2001, we had no unused capacity under
our existing revolving credit facility and determined that the cash flows from
operations were insufficient to fund our working capital, capital expenditures,
research and development, and strategic capital projects. To provide additional
liquidity to meet such needs, we obtained a $9.9 million bridge loan in October
2001, and in November and December 2001 issued preferred stock and warrants to
purchase common stock in exchange for $50.0 million, and entered into a waiver
and amendment to our bank credit facilities which increased our revolver
capacity by $17.0 million (as described below under the heading "Second
Amendment to the Credit Facilities and Waiver; Bridge Loan; Equity Financing.")
We continue to pursue our corporate strategy, initiated in fiscal 2000,
focusing on internal growth and profitability. This focus is designed to enhance
a solid operating platform and position us to capitalize on future
growth/acquisition opportunities to become the industry leader in satisfying our
customers' needs and providing industry leading customer service levels. We have
identified several strategic capital projects, the first of which is the
implementation of Enterprise Resource Planning and Customer Relationship
Management systems. The implementation of these new systems commenced late in
the fourth quarter of fiscal 2001 and will serve as the foundation for other
strategic initiatives.
In fiscal year 2001, we recorded a net loss of $75.0 million. The net
loss was primarily attributable to a $20.8 million charge for non-cash interest
expense and to charges relating to non-recurring items totaling $41.4 million.
The non-recurring charges were primarily attributable to: charges associated
with our operations improvement initiatives, the write down of assets held for
sale in accordance with SFAS No. 121, restructuring charges, and due to higher
than normal customer retention incentives, freight costs, professional fees and
insurance costs.
16
HEALTH CARE REFORM; BUYING GROUPS.
In recent years, widespread efforts have been made in both the public
and private sectors to control healthcare costs, including the prices of
products such as those we sell, in the United States and abroad. One result of
this focus on cost containment has been a growing trend for hospitals and
surgery centers and other healthcare providers to coordinate their purchases of
medical products through buying groups in order to obtain price concessions and
control costs. In response to this trend, we have entered into contracts with
many buying groups making available to their members specified products at
agreed upon prices. A majority of our U.S. hospital and surgery center customers
are members of buying groups. We believe that our ability to enter into more of
such arrangements will be important to our future success. However, there can be
no assurance that we will be able to obtain new contracts from major buying
groups. In addition, because these contracts with buying groups involve price
concessions from us, it is important that these contracts result in high sales
volumes from members of the buying groups in order to offset the negative impact
of lower per unit prices at lower margins. Although buying groups strongly
encourage their members to purchase products under these contracts, compliance
by different members of the buying groups may vary. Accordingly, there can be no
assurance that there will be high sales volumes under these contracts. Our
failure to enter into new contracts with buying groups in the future or to
achieve high sales volumes under our contracts could have a material adverse
effect on our business, financial condition or results of operations.
We also believe that it is likely that efforts by governmental and
private payers to contain costs through managed care and other efforts and to
reform health systems will continue and that such efforts may have an adverse
effect on the pricing and demand for our products. There can be no assurance
that current or future reform initiatives will not have a material adverse
effect on our business, financial condition or results or operations. See
"Business -- Industry" and "Business -- Sales, Marketing and Distribution."
INTERNATIONAL SALES.
For the fiscal year ended October 28, 2001, approximately 12.6% of our
net sales were to customers outside the United States, primarily in Europe. One
of our growth strategies is to increase the percentage of our sales of products
to international markets, primarily in Europe.
In international markets, where the movement towards healthcare reform
and the development of managed care are generally less advanced than in the
United States, we have experienced downward pressure on product pricing and
other effects of healthcare reform similar to those we have experienced in the
United States. We expect that continued development of healthcare reform and
managed care in our primary international markets will result in further
downward pressure on product prices.
17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our
statement of operations line items and the percentage of net sales that each
amount represents. You should read the information below in conjunction with
"Selected Consolidated Financial Data," the historical consolidated financial
statements and the accompanying notes included elsewhere in this annual report.
FISCAL YEAR ENDED
---------------------------------------------------------------------------
OCTOBER 28, 2001 OCTOBER 29, 2000 OCTOBER 31, 1999
---------------------- ---------------------- ----------------------
FINANCIAL % OF FINANCIAL % OF FINANCIAL % OF
RESULTS NET SALES RESULTS NET SALES RESULTS NET SALES
------- --------- ------- --------- ------- ---------
(DOLLARS IN MILLIONS)
Net sales $ 500.8 100.0% $ 499.2 100.0% $ 508.7 100.0%
Cost of sales 391.1 78.1% 410.5 82.2% 366.8 72.1%
-------- ----- -------- ----- -------- -----
Gross profit 109.7 21.9% 88.7 17.8% 141.9 27.9%
Selling, general and
administrative expenses 107.2 21.5% 125.6 25.2% 93.7 18.4%
Restructuring charges and
transition expenses 5.6 1.1% 13.5 2.7% 4.6 0.9%
Goodwill impairment charge -- -- 28.0 5.6% -- --
Losses on assets to be sold 13.1 2.6% 30.0 6.0% -- --
-------- ----- -------- ----- -------- -----
Income (loss) from operations (16.2) (3.3)% (108.4) (21.7)% 43.6 8.6%
Interest expense, net (53.7) (10.7)% (47.0) (9.4)% (27.8) (5.5)%
Other income (expense), net (3.7) (0.7)% (7.2) (1.1)% (.6) (.1)%
Recapitalization expenses -- -- (18.5) (3.7)% -- --
-------- ----- -------- ----- -------- -----
Income (loss) from continuing
operations before income taxes (73.6) (14.7)% (181.1) (36.3)% 15.2 3.0%
Income taxes 1.0 0.2 (11.3) (2.3)% 7.2 1.4%
-------- ----- -------- ----- -------- -----
Income (loss) from
continuing operations (74.6) (14.9)% (169.8) (34.0)% 8.0 1.6%
Income from discontinued
operations, net of tax -- -- 0.1 -- 6.1 1.2%
Extraordinary item, net of tax -- -- (17.2) (3.4)% -- --
-------- ----- -------- ----- -------- -----
Cumulative effect of change in
accounting principle (0.4) (0.1)%
-------- -----
Net income (loss) $ (75.0) (15.0)% $ (186.9) (37.4)% $ 14.1 2.8%
======== ===== ======== ===== ======== =====
- ----------
FISCAL YEAR ENDED OCTOBER 28, 2001 COMPARED TO FISCAL YEAR ENDED OCTOBER 29,
2000
NET SALES - Net sales for the fiscal year 2001 were $500.8 million
compared to $499.2 million for fiscal year 2000. The 0.33% increase in sales for
fiscal year 2001 over fiscal year 2000 is the result of an increase in custom
procedure tray sales from $298.8 million in fiscal year 2000 to $304.2 million
in fiscal year 2001. The increase in custom procedure tray sales was
attributable to sales conversions under a large group purchasing organization
contract obtained in fiscal year 2000. The increase in custom procedure tray
sales was offset by: 1) a reduction in medical glove sales from $87.2 million
in fiscal year 2000 to $84.6 million in fiscal year 2001 and 2) a reduction in
other sales from $113.2 million in fiscal year 2000 to $112.0 million in fiscal
year 2001. The decline in medical glove sales was primarily caused by a
decrease in original equipment manufacturer sales.
GROSS PROFIT - Gross profit was $109.7 or 21.9% of net sales in fiscal
year 2001 compared to $88.7 million or 17.8% on net sales in fiscal year 2000.
The increase in gross profit was primarily attributable to a reduction in
unusual charges from $34.8 million in fiscal year 2000 to $10.2 million in
fiscal 2001. In fiscal year 2000 unusual charges were primarily attributable
to: underutilized capacity, temporary plant closures, plant consolidations,
inventory reduction programs, excess plant capacity and a strike at our
Canadian glove facility. In fiscal 2001 unusual charges were primarily
attributable to our operations improvement initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses were $107.2 million or 21.5% of net sales in fiscal year
2001 compared to $125.6 million or 25.2% on net sales for fiscal year 2000. The
decrease in operating expense was primarily attributable to a reduction in
unusual charges from $27.3 million in fiscal year 2000 to $10.6 million in
fiscal 2001. In fiscal year 2000, unusual charges were primarily attributable
to: rapid conversion incentives, severance, consulting fees and professional
fees. In fiscal 2001, unusual charges were primarily attributable to higher than
normal: customer retention incentives, freight costs, professional fees and
insurance costs. In connection with the resignation of Akbar Naderi, the Company
has recorded a liability of approximately $1.0 million.
RESTRUCTURE CHARGES AND TRANSITION EXPENSES - In fiscal year 2001, we
recorded charges of $5.6 million in severance related to the planned closing of
a facility. In fiscal year 2000, we recorded charges of $5.5 million in
severance costs and $8.0 million of other transition expenses related to the
closing of six facilities.
18
GOODWILL IMPAIRMENT CHARGES - In fiscal years 2001 and 2000, we
recorded charges of $0 million and $28.0 million, respectively. These charges
were made in accordance with SFAS No. 121.
LOSSES ON ASSETS TO BE SOLD - In fiscal years 2001 and 2000, we
recorded charges of $13.1 million and $30.0 million respectively on equipment
manufacturing facilities and an administration facility that we intend to remove
from service. These charges were made in accordance with SFAS No. 121.
INCOME (LOSS) FROM OPERATIONS - Loss from operations for fiscal year
2001 was $16.2 million, compared to a loss of $108.4 million for fiscal year
2000. Unusual charges of $39.5 million and $133.7 million were recorded in
fiscal years 2001 and 2000, respectively.
INTEREST EXPENSE - Interest expense increased to $53.7 million for
fiscal year 2001 from $47.0 million in fiscal year 2000. The increased interest
expense is primarily a function of a charge incurred to record our derivative
securities at fair value. Interest expense included non cash charges of $20.8
million and $13.6 million in fiscal years 2001 and 2000, respectively. The non
cash charge to interest expense related to debt accretion, amortization expense
on finance fees and charges associated with marking the Company's derivative
securities to fair value.
OTHER INCOME (EXPENSE) - Other income (expense) for fiscal year 2001
was ($3.7) million compared to ($7.2) million in fiscal year 2000. In fiscal
year 2000 these charges were primarily attributable to the write down of notes
and investments deemed uncollectible. In fiscal 2001 these charges were
primarily attributable to the realization of a loss on the impairment of an
investment security and transaction charges related to the second amendment to
our credit facilities.
RECAPITALIZATION EXPENSES - Recapitalization expenses of $0 and $18.5
million were recorded in fiscal years 2001 and 2000, respectively. These
expenses are attributable to the recapitalization that was completed on November
12, 1999. The recapitalization expenses include approximately $14.0 million of
professional fees.
INCOME TAXES - Our effective rate for fiscal year 2001 was 1% verses a
tax benefit of 6% fiscal 2000. The tax benefit rate for fiscal 2001 and 2000 is
lower than the statutory rate substantially due to recording a valuation
allowance on future tax benefits. We have determined that it is more likely than
not that future operations will not generate sufficient taxable income to
realize tax loss carryovers and other deferred tax assets.
EXTRAORDINARY ITEM - In connection with the recapitalization, we
consummated a tender offer for our 10-1/2% senior subordinated notes.
Accordingly, the $17.2 million of tender premium and deferred debt issuance
costs related to these notes were written off as an extraordinary loss in fiscal
year 2000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - We implemented
FASB Statement No. 133 in fiscal year 2001. The cumulative effect of adopting
this accounting standard was a charge to income of $355,000 to reflect a
derivative instrument at its fair value at October 30, 2001.
NET LOSS - As a result of the foregoing, we reported a loss of $75.0
for fiscal year 2001 verses a loss of $186.9 million for fiscal year 2000.
FISCAL YEAR ENDED OCTOBER 29, 2000 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1999
NET SALES - Net sales for the fiscal year 2000 were $499.2 million
compared to $508.7 million for fiscal year 1999. The 1.9% decline in sales for
fiscal year 2000 over fiscal year 1999 is the result of a decline in medical
glove sales from $106.8 in fiscal year 1999 to $87.2 in fiscal year 2000. The
decline in medical glove sales was primarily caused by a decrease in original
equipment manufacturer sales. The decline in medical glove sales was offset by
an increase in sales of all other products from $401.9 million in fiscal year
1999 to $412.0 million in fiscal year 2000.
GROSS PROFIT - Gross profit was $88.7 million or 17.8% of net sales in
fiscal year 2000 versus $141.9 million or 27.9% of net sales reported in fiscal
year 1999. The decline in gross profit was attributable to increased market
pressures on pricing, a strike at our Canadian glove facility, and by start-up
expenses of programs implemented to improve operational efficiencies and asset
utilization. Lower original equipment manufacturer glove sales, and pricing
pressure across all product lines, resulted in a $17.8 million reduction in
gross profit. Gross profit for fiscal year ended 2000 was also negatively
impacted by $34.8 million of unusual costs attributable to: underutilized
capacity, temporary plant closures, inventory reduction programs, excess plant
capacity, and a strike at our Canadian glove facility.
19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses were $125.6 million or 25.2% of net sales for fiscal
year 2000 versus $93.7 million or 18.4% of net sales for fiscal year 1999. The
increase in operating expenses year over year is primarily attributable to
unusual costs of $27.3 million relating to rapid conversion incentives,
severance and consulting and professional fees. The remainder of the increase
was the result of higher administrative fees paid to group purchasing
organizations, higher delivery costs caused by expedited shipments, a fuel price
surcharge and the strike at our Canadian glove facility. The higher group fees
were the result of a new contract that should contribute to increased sales over
the life of the contract.
RESTRUCTURE CHARGES AND TRANSITION EXPENSES - In fiscal year 2000, we
recorded charges of $5.5 million in severance costs and $8.0 million of other
transition expenses related to the closing of six facilities.
GOODWILL IMPAIRMENT CHARGES - In fiscal year 2000 we recorded charges
of $28.0 million. These charges were made in accordance with SFAS No. 121.
LOSSES ON ASSETS TO BE SOLD - In fiscal year 2000 we recorded charges
of $30.0 million. These charges were made in accordance with SFAS No. 121.
INCOME (LOSS) FROM OPERATIONS - Loss from operations for fiscal 2000
was $108.4 million, compared to $43.6 million profit for fiscal year 1999. The
$108.4 million loss included $133.7 million of unusual charges primarily
attributable to restructuring costs, the write down of inventory for liquidation
and the writedown of assets in accordance with SFAS No. 121. The remaining
difference between operating income for fiscal year 2000 and 1999 is
attributable to the expiration of an original equipment manufacturer contract
for the production of examination gloves and market driven pricing pressure.
INTEREST EXPENSE - Interest expense increased to $47.0 million for
fiscal year 2000 from $27.8 million in fiscal year 1999 as a result of increased
debt incurred in the recapitalization. $13.6 million of our interest expense
related to non cash charges for debt accretion and amortization expense on
finance fees.
OTHER INCOME (EXPENSE) - Other expense for fiscal year 2000 was $7.2
million verses $0.6 million in fiscal year 1999. These charges were primarily
attributable to the write down of notes and investments deemed uncollectible.
RECAPITALIZATION EXPENSES - Recapitalization expenses of $18.6 million
were recorded in fiscal year 2000 due to the recapitalization on November 12,
1999. The recapitalization expenses include approximately $14.0 million of
professional fees.
INCOME TAXES - Our effective rate for fiscal year 2000 was a tax
benefit of 6% versus the tax provision rate of 47.2% for fiscal 1999. The tax
benefit rate for fiscal 2000 is lower than the statutory rate substantially due
to recording a valuation allowance on future tax benefits. The Company has
determined that it is more likely than not that future operations will not
generate sufficient taxable income to realize tax loss carryovers and other
deferred tax assets. The tax provision rate for fiscal year 1999 is higher than
the statutory rate due to nondeductible goodwill amortization resulting from
acquisitions.
DISCONTINUED OPERATION - In conjunction with the recapitalization, all
of the outstanding stock of Circon was sold to Circon holdings in exchange for
$208.0 million in cash and the repayment of $20.0 million of debt owed to us by
Circon. Accordingly, Circon's operations have been reflected as discontinued
operations in our consolidating statements of operations. In fiscal year 2000,
we recorded a gain of $87,000 on the sale of Circon.
EXTRAORDINARY ITEM - In connection with the recapitalization, we
consummated a tender offer for our 10-1/2% senior subordinated notes.
Accordingly, the $18.3 million of tender premium and deferred debt issuance
costs related to these notes were written off as an extraordinary loss in fiscal
year 2000.
NET INCOME (LOSS) - As a result of the foregoing, we reported a loss of
$186.9 million for fiscal year 2000 versus net income of $14.1 million for
fiscal year 1999.
20
LIQUIDITY AND CAPITAL RESOURCES
Historical
Net cash provided (used) by operating activities was ($4.4) million,
$21.5 million and $42.3 million in fiscal years 2001, 2000 and 1999,
respectively. Net cash from operating activities was favorably impacted in
fiscal 2001 due to a decreases in accounts receivable and other receivables and
an increase in accounts payable offset by increases in inventory and a decrease
in accrued liabilities. Net cash from operating activities was favorably
impacted in fiscal year 2000 due to decreases in inventory and accounts
receivable, increases in accounts payable and accrued expenses. Additionally in
fiscal year 2000, income from operating activities was impacted by non-cash
charges relating to the impairment writedown of certain fixed and intangible
assets. Net cash from operating activities was favorably impacted in fiscal year
1999 due to a decrease in accounts receivable offset by an increase in inventory
and decreases in accounts payable and accrued expenses.
Cash flows provided by (used in) investing activities were ($5.8)
million, $246.5 million and ($271.8) million in fiscal years 2001, 2000 and
1999, respectively. Capital expenditures used primarily for the routine
replacement of capital equipment totaled $5.8 million and $7.9 million in fiscal
year 2001 and fiscal 2000, respectively. The acquisition of Circon used $247.1
million of investing sources in fiscal year 1999 and the sale of Circon as part
of the recapitalization provided $228.0 million in fiscal year 2000. The sale of
one of our glove plants in June 2000 provided net proceeds of $19.9 million in
fiscal year 2000 and the sale of various fixed assets provided net proceeds of
$6.1 million in fiscal year 2000. Capital expenditures totaled $25.8 million in
fiscal year 1999 due primarily to our investment in glove manufacturing capacity
expansion.
Cash flows provided by (used in) financing activities were $10.9
million, ($270.4) million and $229.5 million in fiscal years 2001, 2000 and
1999, respectively. In fiscal 2001, we received $13.6 million from the issuance
of short-term notes, which includes $9.9 million from a bridge loan, net
borrowings under the revolving credit facility were $23.0 million and $10.3
million of principal payments were made on the term loans. In fiscal year 2000,
we received the following proceeds as a result of the recapitalization: $50.0
million from the issuance of senior discount notes, $110.0 million from the
issuance of senior subordinated discount notes and $260.0 million from a new
credit facility. Then, as part of the recapitalization, these funds were used to
pay the following debts during fiscal year 2000: $100.0 million for our 10-1/2%
senior subordinated notes, $254.0 million for the outstanding balance on our
previous credit facility, $21.3 million for debt offering costs and $36.9
million for debt tender and recapitalization expenses. In addition, the net
impact from the repurchase of outstanding stock and options and proceeds from
the issuance of new common stock in accordance with the provisions of the
recapitalization was $232.0 million in fiscal year 2000. Also during fiscal year
2000, we repaid $51.5 million of debt under our existing credit facility. We
entered into a new credit facility in connection with the acquisition of Circon
in January 1999. Net borrowings under the revolving credit facility totaled
$55.2 million and net borrowings under the term loan totaled $185.0 million
during fiscal year 1999.
At October 28, 2001, our balance sheet included net goodwill of $106.8
million. The majority of this balance represents goodwill from the acquisitions
of Winfield Medical and Sterile Concepts. We acquired Winfield Medical in June
1998. Unamortized goodwill from the Winfield acquisition totaled $21.1 million
at October 28, 2001, which represents 13.4% of net goodwill as of that date. In
July 1996, we acquired Sterile Concepts. Unamortized goodwill from the Sterile
Concepts acquisition totaled $64.2 million at October 28, 2001, and represented
40.7% of net goodwill as of that date. The remaining $72.1 million of
unamortized goodwill at October 28, 2001, relates to various other acquisitions
made between 1992 and 1999. During fiscal 2000, we recognized an impairment on
Sterile Concepts goodwill of $28.0 million. This write-off is recorded as
Goodwill Impairment Charge on the consolidated statement of operations. All
components of goodwill are being amortized on a straight line basis over the
applicable useful life. Useful lives have been estimated at 30 years for
Winfield Medical, 40 years for Sterile Concepts and 5 to 20 years for the
remaining goodwill components. Total amortization expense for fiscal years 2001
and 2000 was $4.3 million and $5.2 million, respectively. Management believes
that there is no persuasive evidence that any material portion of this
intangible asset will dissipate over a period shorter than the determined useful
life.
Interest payments under our bank credit facilities and our senior
subordinated discount notes, working capital and capital expenditures represent
our significant liquidity requirements. Future, but as yet unidentified,
acquisition opportunities may also represent potentially significant liquidity
requirements.
21
Bank Credit Facilities
Our current bank credit facilities were initiated in connection with
our recapitalization in November 1999. They originally provided:
- An initial $50.0 million revolving credit facility, which will
terminate six years from the date of the initial borrowings
under the new credit facilities;
- An initial fully drawn $80.0 million tranche A term loan with
a maturity of six years;
- An initial fully drawn $90.0 million tranche B term loan with
a maturity of seven-and-one-half years; and
- An initial fully drawn $90.0 million tranche C term loan with
a maturity of eight-and-one-half years.
First Amendment of Credit Facilities and Waiver
On October 27, 2000, we made a permanent paydown on our credit facility
and received an amendment and waiver related to certain terms within the credit
facility. The paydown was broken down as follows:
- A $20.0 million reduction of the revolving credit facility.
There was no balance outstanding on October 29, 2000.
- $12.6 million was repaid on tranche A term loan in addition to
the mandatory repayment of $10.0 million. The balance
outstanding on October 29, 2000 was $57.3 million.
- $14.2 million was repaid on tranche B term loan in addition to
the mandatory repayment of $250,000. The balance outstanding
on October 29, 2000 was $75.6 million.
- $14.2 million was repaid on tranche C term loan in addition to
the mandatory repayment of $250,000. The balance outstanding
on October 29, 2000 was $75.6 million.
Within the amendment and waiver the lenders agreed to (1) amend the
definition of the term "Applicable Rate" on tranche A loans, tranche B loans,
tranche C loans and revolving loans to include an additional 0.50% until the
total adjusted leverage ratio was less than 4.50 to 1.00 and the senior
adjusted leverage ratio was less than 2.95 to 1.00, (2) amend the definition of
the term "Consolidated EBITDA" to include an adjustment for our Company's
facility rationalization expenses up to but not exceeding $10.3 million in
fiscal 2001, (3) amend the definition of the term "Consolidated EBITDA" to
provide for an annualized calculation for the purpose of certain covenants for
the test periods ending January 31, 2001, April 30, 2001, July 31, 2001 and
October 31, 2001, (4) amend the definition of the term "Consolidated EBITDA" to
include the incremental and recurring quarterly cost savings that we reasonably
expect to rationalize in each subsequent fiscal quarter, subject to certain
limitations, (5) limit permitted acquisitions to $10.0 million until Maxxim
Group was in compliance with the interest coverage ratio, the adjusted leverage
ratio and the senior adjusted leverage ratio, and (6) waive any default arising
from the failure of Maxxim Group to comply with the following covenants: (a)
interest coverage ratio of 1.55 to 1.00, (b) total adjusted leverage ratio of
6.20 to 1.00, and (c) senior adjusted leverage ratio of 4.10 to 1.00 for the
fiscal year ended October 29, 2000.
At October 28, 2001:
- we had fully utilized our $30.0 million revolving credit
facility, through direct borrowings, letters of credit and
swingline loans;
- $47.5 million was outstanding under the tranche A term loan;
- $75.3 million was outstanding under the tranche B term loan;
and
- $75.3 million was outstanding under the tranche C term loan.
22
Second Amendment to the Credit Facilities and Waiver; Short-term Loans; Equity
Financing
In October 2001, we determined that our cash flow from operations was
insufficient to fund our working capital, capital expenditures, research and
development, and strategic capital products. To obtain additional liquidity to
meet such needs, we contemplated entering into transactions that involved
issuing preferred stock or debt securities in exchange for cash or other
consideration as well as amendments to our bank credit facilities.
On October 26, 2001, we borrowed $9.9 million from a financial
institution on a short-term basis to provide interim liquidity until additional
long-term financing was received. The promissory note was due on the earlier of
45 days from the date of issuance and the effective date of an amendment to our
bank credit facilities pursuant to which Fox Paine Capital Partners, L.P.
contributed funds in an amount not less than $9.9 million to us as an equity
contribution.
Prior to November 9, 2001, we entered into an amendment to our credit
facilities which provided for, among other things, an increase of $17.0 million
in the amount available to be borrowed under the credit facilities. The
amendment also provided that it would become effective upon the satisfaction of
certain conditions, including the approval by a special committee of our Board
of Directors and an equity contribution to the Company in an amount of at least
$23.5 million. A more complete description of the amendment to the credit
facilities is set out below.
On November 9, 2001, our Board established an independent Special
Committee and authorized and directed the Special Committee to (1) consider the
advisability of a potential equity issuance, (2) make such determinations,
including with respect to potential equity issuance as it deemed necessary
or advisable under any applicable laws and agreements, (3) negotiate an equity
issuance on our behalf, including but not limited to, executing any documents,
certificates or agreements in connection with an equity issuance, (4) report to
our Board its findings and recommendations with respect to potential equity
issuances, and (5) take any actions relating to or arising out of the above.
The Special Committee retained legal and financial advisors to assist
it in the evaluation of any potential equity issuances. On November 19, Fox
Paine Capital Fund submitted a proposal to the Special Committee that outlined a
potential purchase by Fox Paine Capital Fund of units, each comprised of one
share of Series A Participating Preferred Stock and warrants to purchase 162
shares of our common stock for $.01 per share. During the weeks of November 19
and November 25, the Special Committee met with its legal and financial advisors
to evaluate the proposal and the agreements and documents related thereto. On
November 29, 2001, our Board met to discuss the proposal. The Special Committee
concluded that the offer and sale of the units was fair to us and recommended
that the Board approve the offer and sale of the units, which it did. It also
approved and authorized the amendment to the credit facilities.
On November 30, 2001, Fox Paine Capital Fund, FPC Investors and Fox
Paine Medic New Equity Corp., a wholly owned subsidiary of Fox Paine Capital
Fund, entered into a Stock Purchase Agreement, pursuant to which Fox Paine
Capital Fund and FPC Investors collectively purchased 23,500 units for $23.5
million. Also, under the Stock Purchase Agreement, Fox Paine Medic New Equity
Corp. agreed to purchase any units that were not purchased by other offerees.
Thereafter, we offered each of our existing shareholders and warrant holders the
right to purchase their pro rata share of the 50,000 shares of preferred stock
and associated warrants. Those units that were not purchased by our existing
shareholders and warrant holders were also offered to select potential
investors. On or prior to December 31, 2001, Fox Paine Medic New Equity Corp.,
certain of our existing warrant holders and new investors, collectively,
purchased 26,500 units for $26.5 million. For a description of the preferred
stock and the warrants, see "Item 5. Market For the Registrant's Common Equity
and Related Stockholder Matters" above.
We used the proceeds from the sale of the preferred stock and warrants
to repay the $9.9 million short-term loan, to pay down our revolving bank credit
facility, to pay fees and expenses relating to the offering and to provide
approximately $10.0 million cash for working capital.
On December 6, 2001, the amendment to our credit facilities became
effective as of November 14, 2001. The amendment provided for, among other
things, an additional $17.0 million revolving line of credit which we can use
for general corporate purposes when the existing $30.0 million revolving credit
facility is fully borrowed. Borrowings under this new line of credit bear
interest at a rate per annum equal (at our option) to: (1) Adjusted LIBOR plus
4.75% or (2) the Alternate Base Rate plus 3.75%. The commitment fee rate on the
new facility is 1.25%, payable quarterly on the average daily unused amount
during the quarter. This new facility terminates in November 2003 (subject to a
one-year extension at our option, provided that no defaults exist at such time
and we pay a fee equal to one percent of the lenders' commitments under this
revolving credit facility at the time of extension).
The amendment increased the interest rates and commitment fee rates
applicable to the various types of loans under the credit facility. For loans
under the existing $30.0 million revolving facility and the tranche A loan, the
rates increased to between 3.00% and 3.75% over the Adjusted LIBOR rate and
between 2.00% and 2.75% over the Alternate Base Rate, and between .50% and .75%
for the commitment fee rate, in each case, depending upon our leverage. For the
tranche B loan, the
23
rates increased to 4.25% over the Adjusted LIBOR rate and 3.25% over the
Alternate Base Rate. For the tranche C loan, the rates increased to 4.50% over
the Adjusted LIBOR rate and 3.50% over the Alternate Base Rate. Amendments were
made to the definitions of the terms "Applicable Rate," "Tranche B Rate" and
"Tranche C Rate."
The amendment also (1) amended the definition of the term "Consolidated Cash
Interest Expense" for periods through June 30, 2002; (2) amended the definition
of the term "Consolidated Cash Interest Expense" to provide for the addition of
certain fixed sums to the amount otherwise determined by that defined term for
the periods through June 30, 2002, to allow us to incur certain one-time
expenses in connection with certain strategic initiatives; (3) amended the
definition of the term "Consolidated EBITDA" to provide for the addition of
certain fixed sums to the amount otherwise determined by that defined term for
the periods through December 31, 2003, to allow us to incur certain one-time
expenses in connection with certain strategic initiatives; (4) amended the
definition of "Prepayment Event" to reduce the amount of the proceeds from asset
sales, other than certain sales made in the ordinary course of business, that we
may retain versus the amount that we must use to make prepayments under the
credit facilities, or otherwise designate for reinvestment, until the later of
the date the new $17.0 million revolving credit facility is paid and terminated
or December 31, 2003; (5) provides that in the event we accumulate more than
$2.0 million of cash and cash items, we must use the excess to pay down any
outstanding amounts under the new $17.0 million credit facility; (6) provides
that we may not make any prepayments on the existing $30.0 million revolving
facility while any amount is outstanding under the new $17.0 million revolving
credit facility, and that we may not make any prepayments on any of the term
loans until the new $17.0 million revolving credit facility is fully paid down
and terminated; (7) reduced the dollar amount that we may spend on the
acquisition of other businesses until the new $17.0 million revolving credit
facility is paid and terminated; (8) revised the financial covenants relating
to our Interest Coverage Ratio, Total Adjusted Leverage Ratio, and Senior
Adjusted Leverage Ratio; (9) reduced the dollar amounts that we may spend on
capital expenditures; (9) waived any failures to comply with the financial
covenants relating to our Interest Coverage Ratio, Total Adjusted Leverage
Ratio, and Senior Adjusted Leverage Ratio during the year ending October 31,
2001; and (10) made certain other modifications necessary for us to be able to
issue the preferred stock and warrants.
The bank credit facilities and the terms of our senior subordinated
discount notes impose certain restrictions on us and our subsidiaries, including
restrictions on our ability to incur additional indebtedness, issue preferred
stock, pay dividends and make certain distributions, make investments, sell
assets, create liens, enter into certain transactions with affiliates and engage
in certain other activities. In addition, the bank credit facilities require us
to maintain certain financial ratios. The bank credit facilities are secured by
substantially all of our assets, including real and personal property,
inventory, accounts receivable and other intangibles, in each case subject to
certain limited exceptions.
Conclusion
We estimate that capital expenditures for fiscal year 2002 will be
$15.0 million.
Our ability to satisfy our debt obligations and to pay principal and
interest on debt, fund working capital and make anticipated capital expenditures
will depend on our future performance, which is subject to general economic,
financial and other factors, some of which are beyond our control. We believe
that based on current levels of operations and anticipated growth, cash flow
from operations, together with borrowings under the revolving credit facility,
will be adequate for the foreseeable future to make required payments of
principal and interest on our debt, to fund working capital, and to make
expected capital expenditures. There can be no assurance, however, that our
business will generate sufficient cash flow from operations or that future
borrowings will be available under the revolving credit facility in an amount
sufficient to enable us to service our debt or to fund other liquidity needs.
INFLATION
We believe that inflation has not had a material effect on our results
of operations for the past three years. Historically, we believe that we have
been able to minimize the effect of inflation by increasing the selling prices
of our products, improving our manufacturing efficiency and increasing our
employee productivity.
24
FORWARD-LOOKING STATEMENTS
This report contains forward looking statements. Forward looking
statements are statements of our expectations, estimates, projections and
beliefs and are based on assumptions made by and information currently available
to us regarding our business and the industry in which we operate.
Forward-looking statements describe our expectations today of what we believe is
most likely to occur or reasonably achievable in the future, but such statements
do not predict or assure any future occurrence and may turn out to be wrong.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. The words "believe," "anticipate,"
"intend," "expect," "estimate," "project", "predict", "hope" and "should",
variations of such words, and similar expressions, among others, are intended to
identify forward-looking statements.
Forward looking statements are subject to potential risks and
uncertainties that could cause actual results to differ materially from
historical results or those currently anticipated. The potential risks and
uncertainties that could affect forward looking statements include, but are not
limited to:
- adverse developments in, or changes to, the laws and
regulations governing our business (particularly regulations
promulgated by the U.S. Food and Drug Administration);
- adverse developments in the international markets in which we
operate, and we may not be successful in anticipating and
managing the risks associated with our international
operations;
- our products in development may not be introduced successfully
and on schedule;
- we may not be able to respond effectively to cost containment
efforts and other significant trends affecting healthcare
providers and healthcare buying groups;
- demand for our products may not follow recent growth trends;
- our senior management's obligation to manage Circon
Corporation (our former subsidiary that we sold as part of the
recapitalization but that is commonly owned and managed) as
well as Maxxim may prove unduly burdensome or adversely divert
management attention away from our business;
- our competitors may introduce new products that will
substantially reduce our sales position in our most
significant product groups;
- any product liability claims or other litigation to which we
are now subject or to which we may become subject in the
future may result in materially adverse judgments against us;
- our substantial debt and restrictive covenants in our credit
agreements and debt instruments may limit our financial and
operating flexibility and adversely affect our ability to
compete, which may make it more difficult for us to meet our
debt obligations in the future; and
- we may not be successful in retaining employees who are
integral to the operation of our business.
We caution that undue reliance should not be placed on our
forward-looking statements, which speak only as of the date of this document. We
hereby disclaim any obligation to update information contained in any
forward-looking statement.
25
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for using
the purchase method, thus eliminating the use of the pooling-of-interests
accounting for business combinations. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach, whereby
goodwill is assessed annually for impairment and more frequent assessments are
conducted if circumstances indicate a possible impairment. Additionally, SFAS
No. 141 will require all acquired intangible assets be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Whereas SFAS
No. 141 is effective for all business combinations initiated after June 2001,
SFAS No. 142 requires companies to continue to amortize goodwill existing at
June 30, 2001 through the end of the fiscal year beginning after December 15,
2001, ceasing goodwill amortization on the beginning of that fiscal year.
Goodwill amortization charges for the year ending October 28, 2001 were
$4,266,000. We are currently evaluating other impacts of adopting SFAS No. 142
and has not yet quantified the impact on our financial position.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement is
effective for fiscal years beginning after June 15, 2002. We have not yet
evaluated the impacts of adopting SFAS 143 on our financial position.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 supersedes
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. We have not yet determined the impact, if
any, this new standard will have on our financial position.
The Emerging Issues Task Force (EITF) of the FASB recently addressed
several issues related to the income statement classification of certain sales
incentives and marketing promotion programs. Consensuses reached on EITF Issue
No. 00-14, "Accounting for Coupons, Rebates and Discounts," and EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration from a Vendor
to a Retailer," require that certain consumer and trade promotion expenses, such
as consumer coupon redemption expense, off-invoice allowances and various
marketing performance funds currently reported in selling, marketing, and
administrative expense be recorded as a reduction of net sales. We do not
believe that these changes will have any significant effect on our financial
position.
ITEM 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss
arising from adverse changes in market prices, interest rates and foreign
currency exchange rates.
INTEREST RATE RISK -- We are subject to market risk exposure related to
changes in interest rates on the new credit facilities. Interest on borrowings
under the new credit facilities are at a fixed percentage point spread from
either (1) the greater of prime, base CD or federal funds rates or (2) LIBOR. We
are able to, at our option, fix the interest rate for LIBOR for periods ranging
from one to six months. We have entered into, and are required to maintain for
at least three years, one or more interest rate protection agreements in order
to fix or limit our interest costs with respect to at least 50% of the
outstanding term loans under the new credit facilities. In accordance with the
obligations of our credit facility, we and the Chase Manhattan Bank entered
into an arrangement to cap our floating interest rate at 8.0% on an agreed upon
notional principal amount of $130,000,000, in April 2000.
FOREIGN CURRENCY EXCHANGE RATE RISK -- Generally we generate net sales
and expenses in the local currency where our products are sold and thus are not
currently subject to significant currency exchange risk. In the future, it is
possible that a greater portion of our net sales outside of North America may
not be denominated in the same local currency as the related expenses and thus
we may be subject to currency exchange risks in connection therewith.
INTANGIBLE ASSET RISK -- Our balance sheet includes intangible assets.
We assess the recoverability of intangible assets by determining whether the
amortization of the asset balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of asset impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting our average cost of
funds. In fiscal 2000 we recorded goodwill and other intangible asset
impairments of $33.5 million. We do not believe that any impairment of
intangible assets existed as of October 28, 2001.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
26
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 28, 2001 AND OCTOBER 29, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
2001 2000
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,052 $ 1,287
Accounts receivable, net of allowance for doubtful accounts of
$3,877 and $3,526, respectively 42,552 46,256
Inventory, net 72,058 66,913
Other receivables 3,061 15,024
Prepaid expenses and other 4,032 5,906
Assets held for sale 12,299 18,388
--------- ----------
Total current assets 136,054 153,774
Property and equipment 92,543 103,952
Less: accumulated depreciation (48,075) (47,206)
--------- ----------
44,468 56,746
Goodwill, net of accumulated amortization of $50,806 and $46,508,
respectively 106,817 110,969
Other assets, net 23,541 27,834
--------- ----------
Total assets $ 310,880 $ 349,323
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 10,258 $ 10,688
Current maturities of capital lease obligations 512 432
Short term obligations 13,894 280
Accounts payable 42,930 47,505
Accrued liabilities 52,358 49,501
--------- ----------
Total current liabilities 119,952 108,406
Long-term debt, net of current maturities 210,984 200,182
Senior subordinated discount notes 113,556 110,123
Senior discount notes 62,179 53,579
10-1/2% Senior subordinated notes -- 5
Capital lease obligations, net of current maturities 3,063 3,617
Other long-term obligations 84 111
Deferred tax liability 987 565
--------- ----------
Total liabilities 510,805 476,588
Shares with put rights ($.001 par value common stock, 882,019 shares
issued and outstanding) 4,410 4,410
Commitments and contingencies
Shareholders' equity (deficit):
Preferred Stock, $1.00 par value, 10,000,000 shares authorized,
none issued or outstanding -- --
Common Stock, $.001 par value, 150,000,000 shares authorized,
29,483,142 and 29,283,142 shares issued and outstanding, respectively 29 29
Additional paid-in capital (3,731) (4,731)
Accumulated deficit (182,984) (107,964)
Subscriptions receivable (3,474) (2,974)
Accumulated other comprehensive loss (14,175) (16,035)
--------- ----------
Total (accumulated deficit) shareholders' equity (204,335) (131,675)
--------- ----------
Total liabilities and shareholders' equity (deficit) $ 310,880 $ 349,323
========= ==========
See accompanying notes to Consolidated Financial Statements.
27
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED OCTOBER 28, 2001, OCTOBER 29, 2000 AND OCTOBER 31, 1999
(IN THOUSANDS)
2001 2000 1999
--------- --------- ---------
Net sales $ 500,841 $ 499,193 $ 508,654
Cost of sales 391,107 410,470 366,778
--------- --------- ---------
Gross profit 109,734 88,723 141,876
--------- --------- ---------
Operating expenses:
Marketing and selling 82,890 87,402 71,070
General and administrative 24,329 38,174 22,624
Restructuring charges and transition expenses 5,571 13,514 4,637
Goodwill impairment charge -- 28,012 --
Losses on assets to be sold 13,091 30,002 --
--------- --------- ---------
125,881 197,104 98,331
--------- --------- ---------
Income (loss) from operations (16,147) (108,381) 43,545
Interest expense (53,785) (47,038) (27,789)
Other income (expense), net (3,700) (7,186) (555)
Recapitalization expenses -- (18,556) --
--------- --------- ---------
Income (loss) from continuing operations before income
taxes and extraordinary item (73,632) (181,161) 15,201
Income tax (benefit) / provision 1,033 (11,304) 7,175
--------- --------- ---------
Income (loss) from continuing operations before
extraordinary item (74,665) (169,857) 8,026
Income from discontinued operations,
net of tax of $0, $56 and $6,326, respectively -- 87 6,038
--------- --------- ---------
Income (loss) before extraordinary item (74,665) (169,770) 14,064
Extraordinary item - loss related to early
retirement of debt, net of tax benefit of $ 1,152 -- (17,144) --
--------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle (74,665) (186,914) 14,064
Cumulative effect of change in accounting principle (355) -- --
--------- --------- ---------
Net income (loss) $ (75,020) $(186,914) $ 14,064
========= ========= =========
See accompanying notes to Consolidated Financial Statements.
28
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
FISCAL YEARS ENDED OCTOBER 28, 2001, OCTOBER 29, 2000 AND OCTOBER 31, 1999
(IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
COMMON STOCK PAID-IN (ACCUMULATED SUBSCRIPTIONS COMPREHENSIVE
SHARES PAR VALUE CAPITAL DEFICIT) RECEIVABLE INCOME (LOSS) TOTAL
--------- --------- ---------- ------------ ------------- -------------- ----------
BALANCES AT NOVEMBER 1, 1998 74,042 74 $ 219,208 $ 64,886 $ (5,200) $ (6,059) $ 272,909
Payment received on officer loan -- -- 40 -- -- -- 40
Stock options compensation -- -- 211 -- -- -- 211
Stock options exercised, including
federal income tax benefit of $227 208 -- 711 -- -- -- 711
Comprehensive income:
Net income -- -- -- 14,064 -- -- 14,064
Other comprehensive loss, net of tax
Net unrealized loss on investment
securities -- -- -- -- -- (1,657) (1,657)
Translation adjustment -- -- -- -- -- (1,161) (1,161)
----------
Total comprehensive income 11,246
-------- ---------- --------- --------- --------- --------- ----------
BALANCES AT OCTOBER 31, 1999 74,250 74 220,170 78,950 (5,200) (8,877) 285,117
Payment / cancellation received on
subscriptions receivable -- -- -- -- 5,200 -- 5,200
Stock and options repurchased /
cancelled (71,483) (71) (364,301) -- (2,580) -- (366,952)
Issuance of common stock 26,516 26 132,563 -- (394) -- 132,195
Issuance of warrants -- -- 6,837 -- -- -- 6,837
Comprehensive loss:
Net loss -- -- -- (186,914) -- -- (186,914)
Other comprehensive loss, net of tax
Net unrealized gain on investment
securities -- -- -- -- -- 229 229
Translation adjustment -- -- -- -- -- (7,387) (7,387)
----------
Total comprehensive loss (194,072)
-------- ---------- --------- --------- --------- --------- ----------
BALANCE AT OCTOBER 29, 2000 29,283 29 (4,731) (107,964) (2,974) (16,035) (131,675)
Issuance of common stock 200 -- 1,000 -- (500) -- 500
Comprehensive loss:
Net loss -- -- -- (75,020) -- -- (75,020)
Other comprehensive loss, net of tax
Realization of impairment loss
on investment securities -- -- -- --
(See Note 1) -- 632 632
Translation adjustment -- -- -- -- -- 1,228 1,228
----------
Total comprehensive loss (73,160)
-------- ---------- --------- --------- --------- --------- ----------
BALANCE AT OCTOBER 28, 2001 29,483 $ 29 $ (3,731) $(182,984) $ (3,474) $ (14,175) $ (204,335)
======== ========== ========= ========= ========= ========= ==========
See accompanying notes to Consolidated Financial Statements.
29
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED OCTOBER 28, 2001, OCTOBER 29, 2000 AND OCTOBER 31, 1999
(IN THOUSANDS)
2001 2000 1999
----------- ----------- ----------
Cash flows from operating activities:
Net income (loss) $(75,020) $(186,914) $ 14,064
Adjustment to reconcile net income to net cash provided by operating
activities:
Income (loss) from discontinued operations, net of tax -- 87 (6,038)
Debt tender and recapitalization expenses -- 36,888 --
Deferred income tax (benefit) expense 404 (1,433) 2,496
Write-off of debt offering costs -- 7,100 --
Impairment charges 13,091 58,014 --
Amortization of financing fees 3,720 3,070 1,148
Accretion of notes payable 11,387 10,535 --
Depreciation and amortization 15,986 22,888 22,526
Compensation expense for outstanding stock options -- -- 211
Loss on investment 872 -- --
Loss (gain) on sale of fixed assets 829 (383) (167)
Loss on sale of product line -- -- 112
Loss (gain) on fair value of investment in derivative securities 5,647 (2,007) --
Loss on sale of investment in derivative securities 152 -- --
Cumulative effect of change in accounting principle 355 -- --
Changes in current assets and liabilities, net of effects of asset
acquisitions and dispositions and business combinations:
Decrease in accounts receivable, net 4,175 19,538 8,905
Decrease (increase) in other receivable 11,963 (15,024) --
Decrease (increase) in inventory, net (4,767) 30,437 (19,891)
(Increase) decrease in prepaid expenses and other (38) 2,754 462
Increase (decrease) in accounts payable 7,483 8,521 (4,444)
Increase (decrease) in accrued liabilities (612) 27,442 (3,809)
--------- --------- ---------
Net cash (used in) provided by continuing operations (4,373) 21,513 15,575
Net cash provided by discontinued operations -- -- 26,765
--------- --------- ---------
Net cash provided by operating activities (4,373) 21,513 42,340
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of investment in derivative securities 250 -- --
Proceeds from sale of Circon -- 228,000 --
Proceeds from asset sales -- 26,036 338
Proceeds from product line sale -- -- 1,635
Proceeds from sale of investment securities 27 1,226 --
Payments received on notes 196 1,379 --
Payment for contract rights (500) (2,250
Purchase of investment securities -- -- (400)
Purchase of Circon, net of cash acquired -- -- (247,067)
Purchase of property and equipment of discontinued operations -- -- (540)
Purchase of property and equipment, net of asset acquisitions
and business combinations (5,788) (7,914) (25,757)
--------- --------- ---------
Net cash (used in) provided by investing activities (5,815) 246,477 (271,791)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from the issuance of senior subordinated discount notes -- 110,004 --
Repurchase of 10 1/2% senior subordinated notes (5) (99,995) --
Net proceeds from the issuance of senior discount notes -- 50,000 --
Net proceeds from issuance of capital stock 500 -- --
Recapitalization of Maxxim -- (231,967) --
Debt tender and recapitalization expenses -- (36,888) (2,844)
Repayment of bonds (2,370) -- --
Increase in short-term borrowings 13,634 -- --
Payments on long-term borrowings (10,258) (305,500) (15,405)
Increase in long-term borrowings -- 260,000 200,000
Net (payments) borrowing on revolving line of credit 23,000 -- 55,200
Net borrowing (payments) on capital lease obligations (471) (473) (566)
Net payments on other long-term obligations (295) (466) (2,012)
Payment of debt offering costs (970) (21,330) (5,584)
(Decrease) increase in bank overdraft (11,917) 6,831 168
Proceeds from exercise of stock options -- -- 751
Other, net 40 (613) (238)
--------- --------- ---------
Net cash (used in) provided by financing activities 10,888 (270,397) 229,470
--------- --------- ---------
Effect of foreign currency translation adjustment 65 (346) (104)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents 765 (2,753) (85)
Cash and cash equivalents at beginning of year 1,287 4,040 4,125
--------- --------- ---------
Cash and cash equivalents at end of year $ 2,052 $ 1,287 $ 4,040
========= ========= =========
30
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FISCAL YEARS ENDED OCTOBER 28, 2001, OCTOBER 29, 2000 AND OCTOBER 31, 1999
(IN THOUSANDS)
Supplemental cash flow disclosures:
Interest paid during the period $ 34,187 $ 30,378 $ 17,236
Income taxes paid during the period -- 1,365 5,677
Noncash investing and financing activities:
Note receivable from sale of product line $ -- $ -- $ 1,500
Note receivable from sale of assets -- 167 195
Subscriptions receivable from senior management for stock purchase 500 394 --
Net unrealized gain (loss) on investment -- (632) (1,657
See accompanying notes to Consolidated Financial Statements.
31
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Maxxim Medical, Inc. ("Maxxim"), a Texas corporation, and its subsidiaries
(collectively, "the Company") develops, manufactures, and markets specialty
medical products.
BASIS OF PRESENTATION
On November 12, 1999, Maxxim was recapitalized in a going private
transaction (see Note 3). As part of the recapitalization, Maxxim contributed to
Maxxim Medical Group, Inc. ("Maxxim Group"), a newly formed wholly owned
subsidiary of Maxxim, all of Maxxim's assets and liabilities other than those
related to its previous credit facility. Current financial information includes
the accounts of Maxxim, Maxxim Group and Maxxim Group's wholly owned
subsidiaries.
Effective November 1, 2000, we announced a 5.2 for 1 stock split in the
form of stock dividend of 4.2 shares of common stock on each share of common
stock issued and outstanding on such effective date. These financial statements
have been adjusted to reflect this stock split for all periods presented.
Certain reclassifications have been made to the fiscal year 2000
consolidated financial statements to conform with the fiscal year 2001
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
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 were 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.
Prior to October 28, 2001, the Company held corporate equity securities
which were reflected in the consolidated balance sheet in prepaid expenses and
other current assets. In October 2001, the Company recorded a loss on the
investment in those corporate equity securities because of an other than
temporary decline in the market value of such securities resulting from the
issuer's filing of Chapter 7 bankruptcy proceedings.
At October 29, 2000, the cost, gross unrealized holding losses and fair
value of available-for-sale equity securities were $899,000, $632,000, and
$267,000, respectively. Proceeds from the sale of investment securities
available-for-sale were $27,000, $1,239,000 and $0 in 2001, 2000 and 1999,
respectively. In fiscal 2001, the Company wrote off the investment in corporate
equity securities due to the issuer's bankruptcy. The recognized loss in fiscal
2001 totaled $872,000. There were no gross realized gains included in income in
2001, 2000 and 1999. In adjusting the Company's investment securities to fair
value, unrealized gains of $229,000 and unrealized losses of $1,657,000, net of
tax, were recognized at October 29, 2000 and October 31, 1999, respectively.
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.
32
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVENTORY
Inventory is priced at the lower of cost or market. In determining market
value, allowances for excess and obsolete items are provided. Cost is determined
using the average cost method.
Inventory included the following as of:
OCTOBER 28, OCTOBER 29,
2001 2000
----------- ------------
(IN THOUSANDS)
Raw materials $ 36,224 $ 32,667
Work in progress 8,361 9,301
Finished goods 35,745 41,063
Allowance for excess and obsolete inventory (8,272) (16,118)
-------- --------
$ 72,058 $ 66,913
======== ========
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. Property and equipment included the
following as of:
OCTOBER 28, OCTOBER 29,
USEFUL LIFE 2001 2000
----------- ----------- -----------
(IN THOUSANDS)
Land $ 1,097 $ 1,824
Buildings and improvements 5-25 years 19,968 22,964
Machinery and equipment 2-10 years 60,411 70,206
Furniture and fixtures 3-5 years 11,067 8,958
Accumulated depreciation (48,075) (47,206)
-------- --------
$ 44,468 $ 56,746
======== ========
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
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 from
the Company's previous acquisitions is approximately $157,623,000 of which
approximately $106,817,000 remains unamortized as of October 28, 2001.
Amortization periods for previous goodwill amounts range from 5 to 40 years. The
Company evaluates its goodwill for impairment on comparison of carrying value
against undiscounted future pre-tax cash flows. If an impairment is identified,
the Company adjusts the asset's carrying amount to the value of future
discounted cash flows.
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 recognized net of the expected rebate.
33
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
The Company is continually conducting research and developing new products
utilizing a team approach that involves its engineering, manufacturing and
marketing resources. Although the Company has developed a number of its own
products, most of its research and development efforts have historically been
directed towards product improvement and enhancement of previously developed or
acquired products. Company research and development expenses were approximately
$2,523,000, $5,517,000 and $6,056,000, in fiscal 2001, 2000 and 1999,
respectively.
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 (loss) for the years
ended October 28, 2001, October 29, 2000 and, October 31, 1999 would have been
impacted as discussed in Note 10.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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
The Company's fiscal year ends on the Sunday following the last Thursday in
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.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), consisting of net income (loss), unrealized
holding gains and losses on available-for-sale securities, and foreign currency
translation adjustments is presented in the consolidated statements of
shareholders' equity (deficit) and comprehensive income.
34
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of accumulated other comprehensive income (loss) are as
follows:
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY HOLDING COMPREHENSIVE
TRANSLATION GAINS (LOSSES) LOSS
(IN THOUSANDS)
Balance at November 1, 1998 $ (6,855) $ 796 $ (6,059)
Fiscal year 1999 change (1,161) (1,657) (2,818)
-------- --------- --------
Balance at October 31, 1999 (8,016) (861) (8,877)
Fiscal year 2000 change (7,387) 229 (7,158)
-------- --------- --------
Balance at October 29, 2000 (15,403) (632) (16,035)
Fiscal year 2001 change 1,228 632 1,860
-------- --------- --------
Balance at October 28, 2001 $(14,175) $ -- $(14,175)
======== ========= ========
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 be accounted for using
the purchase method, thus eliminating the use of the pooling-of-interests
accounting for business combinations. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach, whereby
goodwill is assessed annually for impairment and more frequent assessments are
conducted if circumstances indicate a possible impairment. Additionally, SFAS
No. 141 will require all acquired intangible assets be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Whereas SFAS
No. 141 is effective for all business combinations initiated after June 2001,
SFAS No. 142 requires companies to continue to amortize goodwill existing at
June 30, 2001 through the end of the fiscal year beginning after December 15,
2001, ceasing goodwill amortization on the beginning of that fiscal year.
Goodwill amortization charges for the year ending October 28, 2001 were
$4,266,000. The Company is currently evaluating other impacts of adopting SFAS
No. 142 and has not yet quantified the impact on its financial position.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations". This statement is effective
for fiscal years beginning after June 15, 2002. The Company has not yet
evaluated the impacts of adopting SFAS 143 on its financial position.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Statement No. 144 supersedes Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company has not yet determined the impact, if any, this
new standard will have on its financial position.
The Emerging Issues Task Force (EITF) of the FASB recently addressed
several issued related to the income statement classification of certain sales
incentives and marketing promotion programs. Consensuses reached on EITF Issue
No. 00-14, "Accounting for Coupons, Rebates and Discounts," and EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration from a Vendor
to a Retailer," require that certain consumer and trade promotion expenses,
such as consumer coupon redemption expense, off-invoice allowances and various
marketing performance funds currently reported in selling, marketing, and
administrative expense be recorded as a reduction of net sales. The Company
does not believe that these changes will have any significant effect on the
Company's financial position.
(2) BUSINESS COMBINATIONS, SIGNIFICANT ASSET ACQUISITIONS, DISPOSITIONS AND
DISCONTINUED OPERATIONS
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. In fiscal 2000, the Company sold these shares of An-Con Genetics to
Circon Corporation at their net book value.
35
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DISCONTINUED OPERATIONS
Effective January 6, 1999, the Company successfully completed a tender
offer for Circon Corporation ("Circon"). Upon the completion of a cash-out
merger between Circon and a subsidiary of Maxxim on January 8, 1999, Maxxim
completed its acquisition of Circon for approximately $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. The
assets acquired in the Circon acquisition consisted 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 $141,300,000 of
intangible assets were recorded in connection with the transaction
(approximately $13,500,000 related to patents and $127,800,000 related to
goodwill). Patents were being amortized over 15 years and goodwill was being
amortized over 30 years, using the straight-line method in each case.
In connection with the recapitalization (see Note 3), on November 12, 1999,
the Company sold all of the common stock of Circon to Circon Holdings
Corporation in exchange for the payment of $208 million in cash and the
repayment of $20 million of debt owed by Circon to the Company. The Company
recorded a $87,000 gain, net of taxes, on the sale of Circon in the first
quarter of fiscal year 2000.
Circon's activities during fiscal year 1999 have been accounted for as
discontinued operations. Net sales and income from Circon's operations in fiscal
year 1999 are as follows (note that the results of discontinued operations do
not reflect any interest expense or general corporate overhead allocated by the
Company):
FISCAL YEAR ENDED
OCTOBER 31, 1999
------------------
(IN THOUSANDS)
Net sales $135,942
Income from operations 11,588
Income taxes 5,903
Income from discontinued operations 6,038
(3) RECAPITALIZATION
On June 13, 1999, the Company and Fox Paine Medic Acquisition Corporation,
a Texas corporation newly formed by Fox Paine Capital Fund, L.P., entered into a
merger agreement providing for the recapitalization of Maxxim. The transactions
contemplated by the merger agreement, including the recapitalization, were
consummated on November 12, 1999. The recapitalization involved, among other
transactions, (1) the sale to Circon Holdings Corporation, a newly formed Texas
corporation which is owned by the current shareholders of Maxxim, of all of the
capital stock of Circon in exchange for $208.0 million in cash and the
repayment of $20 million of intercompany indebtedness owed by Circon to Maxxim,
as a result of which Circon is separately capitalized, is pursuing separate
business strategies and is operated separately from Maxxim and (2) the
contribution to Maxxim Medical Group, Inc., a newly formed wholly owned
subsidiary of Maxxim, of all of Maxxim's assets and liabilities, other than
those relating to Maxxim's credit facility in existence prior to the
consummation of the recapitalization, which was repaid and terminated as part
of the recapitalization. Maxxim expects to conduct substantially all its
business and operations through subsidiaries of Maxxim Group and any future
subsidiaries it may form. The recapitalization required total funding of
approximately $799,600,000. Sources of funding are as follows:
Borrowings under new senior credit facility $261,600,000
Senior subordinated discount notes 110,000,000
Senior discount notes 50,000,000
Proceeds from sale of Circon 228,000,000
Contributed equity 150,000,000
-------------
$799,600,000
==============
36
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Transaction fees and expenses related to the recapitalization totaled
approximately $54,200,000. Financing fees of approximately $24,200,000 have been
capitalized and are being amortized over the life of the applicable debt.
Additionally, the transaction fees included the $11,200,000 premium paid on the
tender of Maxxim's 10-1/2% senior subordinated notes. This tender premium,
together with the remaining unamortized debt issuance costs have been included
in the extraordinary loss related to the early retirement of debt. Maxxim
recognized one-time expenses of $18,556,000 related to the recapitalization.
These one-time expenses include professional fees of $14,028,000.
CONTRIBUTED EQUITY
Immediately prior to the recapitalization, which included the merger of Fox
Paine Medic Acquisition Corporation with and into Maxxim, Maxxim had 74,250,498
shares of common stock outstanding. In the merger, all of the outstanding shares
of Maxxim common stock, other than 2,765,641 shares held by the ten continuing
shareholders, were converted into the right to receive $5.00 per share.
Immediately prior to the merger, present and former directors, officers and
employees of Maxxim held options to purchase 7,703,592 shares of Maxxim common
stock at a weighted average exercise price of $2.83. As part of the
recapitalization, options to purchase 5,299,278 shares of Maxxim common stock
were canceled in exchange for a cash payment equal to the difference between the
$5.00 merger price and the exercise price per share under the relevant option.
The remaining 2,404,314 options held by the management investors were canceled
without any cash consideration.
As a result of the merger, the 26,360,001 outstanding shares of Fox Paine
Medic common stock were converted into the same number of shares of common stock
of Maxxim, and the cash investment of $131.8 million by the new investors in Fox
Paine Medic became an asset of Maxxim. In addition, the eight continuing
shareholders who were members of Maxxim's senior management used the after-tax
proceeds from the cash-out of their stock options to purchase 882,019 additional
shares of Maxxim common stock immediately after the merger, at a price of $5.00
per share.
Upon completion of the recapitalization, Maxxim had 30,007,661 shares of
common stock outstanding. In the fourth quarter of fiscal 2000, Maxxim issued
157,500 additional common shares for an investment of $787,500. In the fourth
quarter of fiscal 2001, Maxxim issued 200,000 additional common shares for an
investment of $1,000,000. Common stock outstanding at October 28, 2001 totaled
30,365,161 shares.
(4) DEBT AND OTHER LONG-TERM OBLIGATIONS
CREDIT FACILITY
In connection with the recapitalization, Maxxim repaid all amounts
outstanding under its previous credit facility. Maxxim Group entered into a new
$310,000,000 senior secured credit facility ("Credit Facility") with several
lending institutions on November 12, 1999.
Financing for the recapitalization required the full use of the term loans
($260,000,000) and approximately $1,600,000 of the revolver. The term loan A
facility was initially repayable in six annual principal payments commencing
October 31, 2000 with payments ranging from $10,000,000 to $13,000,000. This
facility initially bore interest at a rate per annum equal to, at Maxxim Group's
option: (1) an adjusted London interbank offered rate ("Adjusted LIBOR") plus
2.75% or (2) a rate equal to the greater of the administrative agent's prime
rate, a certificate of deposit rate plus 1% and the Federal Funds effective rate
plus 1/2 of 1% (the "Alternate Base Rate") plus 1.75%, in each case subject to
certain adjustments based on Maxxim Group's leverage. The term loan B facility
was initially repayable in eight principal payments over seven and one-half
years, with the first payment of $250,000 due on October 31, 2000, five payments
of $210,000 due annually commencing October 31, 2001, a payment of $33,700,000
due on October 31, 2006, and a final payment of $40,800,000 payable at maturity
on May 12, 2007. The term loan B facility initially bore interest at a rate per
annum equal to, at Maxxim Group's option: (1) Adjusted LIBOR plus 3.25% or (2)
the Alternate Base Rate plus 2.25%. The term loan C facility was initially
repayable in nine principal payments over eight and one-half years, with the
first payment of $250,000 due on October 31, 2000, six payments of $210,000 due
annually commencing October 31, 2001, a payment of $25,300,000 due on October
31, 2007, and a final payment of $49,000,000 payable at maturity on May 12,
2008. The term loan C facility initially bore interest at a rate per annum equal
to, at Maxxim Group's option: (1) Adjusted LIBOR plus 3.50% or (2) the Alternate
Base Rate plus 2.50%. The revolving credit facility is a six-year facility, and
outstanding balances thereunder initially bore interest at a rate per annum
equal to, at Maxxim Group's option: (1) Adjusted LIBOR plus 2.75% or (2) the
Alternate Base Rate plus 1.75%, in each case, subject to
37
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
certain adjustments based on the Company's leverage. All outstanding loans under
the revolving credit facility will be repayable at maturity (November 12, 2005).
On October 27, 2000, Maxxim Group entered into the first amendment and
waiver related to the Credit Facilities. In consideration of a fee to be paid to
each consenting lender, repayment by Maxxim Group of all Swingline loans
outstanding, a voluntary Term Loan prepayment by Maxxim Group of $41,000,000,
the current fiscal year's Term Loan amortization payment of $10,500,000 and a
revolving commitment reduction of $20,000,000, the lenders agreed to (1) amend
the definition of the term "Applicable Rate" on tranche A loans, tranche B
loans, tranche C loans and revolving loans to include an additional 0.50% until
the total adjusted leverage ratio was less than 4.50 to 1.00 and the senior
adjusted leverage ratio was less than 2.95 to 1.00, (2) amend the definition of
the term "Consolidated EBITDA" to include an adjustment for the Company's
facility rationalization expenses up to but not exceeding $10,300,000 in fiscal
2001, (3) amend the definition of the term "Consolidated EBITDA" to provide for
an annualized calculation for the purpose of certain covenants for the test
periods ending January 31, 2001, April 30, 2001, July 31, 2001 and October 31,
2001, (4) amend the definition of the term "Consolidated EBITDA" to include the
incremental and recurring quarterly cost savings that we reasonably expect to
rationalize in each subsequent fiscal quarter; subject to certain limitations,
(5) limit permitted acquisitions to $10,000,000 until Maxxim Group was in
compliance with the interest coverage ratio, the adjusted leverage ratio and the
senior adjusted leverage ratio, and (6) waive any default arising from the
failure of Maxxim Group to comply with the following covenants: (a) interest
coverage ratio of 1.55 to 1.00, (b) total adjusted leverage ratio of 6.20 to
1.00, and (c) senior adjusted leverage ratio of 4.10 to 1.00 for the fiscal year
ended October 29, 2000.
Effective as of November 14, 2001, Maxxim Group entered into the second
amendment and waiver to the Credit Facilities. The amendment (1) provided for an
additional $17 million revolving line of credit which the Company can use for
general corporate purposes when the existing $30 million revolving credit
facility is fully borrowed; (2) increased the interest rates and commitment
fee rates applicable to the various types of loans under the credit facility,
(3) amended the definitions of the terms "Applicable Rate," "Tranche B Rate" and
"Tranche C Rate."; (4) amended the definition of the term "Consolidated Cash
Interest Expense" for periods through June 30, 2002; (5) amended the definition
of the term "Consolidated EBITDA" to provide for the addition of certain fixed
sums to the amount otherwise determined by that defined term for the periods
through December 31, 2003; (6) amended the definition of "Prepayment Event" to
reduce the amount of the proceeds from asset sales, other than certain sales
made in the ordinary course of business, that the Company may retain versus the
amount that the Company must use to make prepayments under the credit
facilities or otherwise designate for reinvestment, until the later of the date
the new $17.0 million revolving credit facility is paid and terminated or
December 31, 2003; (7) revised the financial covenants relating to the Interest
Coverage Ratio, Total Adjusted Leverage Ratio, and Senior Adjusted Leverage
Ratio; (8) reduced the dollar amounts that the Company may spend on capital
expenditures; (9) waived any failures to comply with the financial covenants
relating to the Company's Interest Coverage Ratio, Total Adjusted Leverage
Ratio, and Senior Adjusted Leverage Ratio during the year ended October 31,
2001; and (10) made certain other modifications necessary for the Company to be
able to issue certain shares of preferred stock and warrants as described in
Note 20.
As of October 28, 2001, the total term loans outstanding under the credit
facility were $198,242,000 and borrowings under the revolving credit facility
totaled $23,000,000 and $7,000,000 under the revolver was committed to letters
of credit.
INDUSTRIAL REVENUE BONDS
In 1991, the Bucks County Pennsylvania Industrial Development Authority
issued industrial revenue bonds to finance the purchase of land and facilities
in Bucks County, Pennsylvania. These bonds were issued with a 15 year maturity
and require monthly interest and annual principal payments. These bonds were
subject to weekly repricing at an interest rate based on the remarketing agents'
professional judgment and prevailing market conditions at the time. These bonds
were assumed by the Company in the acquisition of Circon and were not included
in the sale of Circon discussed in Note 2. In the fourth quarter of fiscal 2001,
the Company sold the property and retired the debt.
38
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-TERM DEBT
The following summarizes the Company's long-term debt as of:
OCTOBER 28, OCTOBER 29,
2001 2000
(IN THOUSANDS)
--------- ---------
Industrial revenue bonds $ -- $ 2,370
Revolving line of credit 23,000 --
Term loan under Credit Facility 198,242 208,500
--------- ---------
Total long term debt 221,242 210,870
Less - Current maturities (10,258) (10,688)
--------- ---------
$ 210,984 $ 200,182
========= =========
SENIOR SUBORDINATED DISCOUNT NOTES
In connection with the recapitalization, Maxxim Group issued Senior
Subordinated Discount Notes due 2009 ("Discount Notes") with an aggregate
principal amount at maturity of $144,552,000 ($110,004,072 aggregate discounted
amount at issuance). The Discount Notes mature on November 15, 2009, unless
previously redeemed by Maxxim Group. The Discount Notes were sold at a discount
of $34,547,928 from their aggregate face value, which amount is being accreted
over the 10 year life of the Discount Notes. With each $1,000 face amount of
Discount Notes issued, Maxxim issued one warrant to purchase 4.2775 shares of
its common stock on or before November 12, 2004, at a price per share of $0.01.
Each warrant was valued at $21.38 and the total fair value of the warrants was
recorded as a discount which is being amortized over the life of the
Discount Notes. The net book value of the Discount Notes was $113,556,000 at
October 28, 2001. Cash interest of 11% is payable on the discounted value of the
Discount Notes as of the issue date, on May 15 and November 15, commencing May
15, 2000. The obligations under the Discount Notes are guaranteed by Maxxim and
all of Maxxim Group's U.S. subsidiaries.
Except as set forth in the following paragraph, Maxxim Group may not redeem
the Discount Notes at its option prior to November 15, 2004. On or after
November 15, 2004, Maxxim Group may redeem, in whole or in part, at the
redemption prices (expressed as a percentage of accreted value) set forth below
plus accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on November 15 of the years
indicated below:
YEAR PERCENTAGE
November 15, 2004 106.875%
November 15, 2005 104.583%
November 15, 2006 102.292%
November 15, 2007 and thereafter 100.000%
At any time prior to November 15, 2002, Maxxim Group may redeem up to 35%
of the original aggregate principal amount of the Discount Notes at maturity
plus accrued and unpaid interest thereon to the applicable redemption date with
the net cash proceeds of certain equity offerings at a redemption price equal to
113-3/4% of the accreted value thereof so long as at least 65% of the original
aggregate principal amount at maturity of the Discount Notes remains outstanding
after each such redemption and any such redemption is made within 90 days of the
consummation of such equity offering.
39
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MAXXIM SENIOR DISCOUNT NOTES
In connection with the recapitalization, Maxxim issued $98,500,000
principal amount at maturity of senior unsecured discount notes ("Maxxim
Notes"). The Maxxim Notes were sold at a $48,500,000 discount from their face
value, resulting in accreted interest on the accreted value at a semi-annual
rate of 7.0% until November 15, 2004. The Maxxim Notes will mature 11 years from
the date of issuance and beginning November 15, 2004, will pay interest in cash
at a rate of 14.0% per year on the accreted value of the Maxxim Notes as of the
issue date, payable semi-annually. For the first five years from the issue date,
accreted interest will be added to the outstanding principal amount of the
Maxxim Notes and will not be payable in cash. After five years from the issuance
date, cash interest will be payable in cash unless cash interest cannot be paid
without violating certain terms of Maxxim Group's senior or senior subordinated
debt, in which case Maxxim may issue additional Maxxim Notes in payment of such
interest. The Maxxim Notes were not registered for sale under the Securities Act
and are not eligible for offer or sale in the United States absent registration
or an exemption from the registration process. In addition, the purchasers of
the Maxxim Notes received warrants to purchase 749,486 shares of Maxxim's common
stock at a purchase price of $0.01 per share. The market value of the warrants
was $3,746,000. The net book value of the Maxxim Notes was $62,179,000 at
October 28, 2001.
10-1/2% SENIOR SUBORDINATED NOTES
In July 1996, the Company issued $100,000,000 of 10-1/2% Senior
Subordinated Notes ("10-1/2% Notes"). The 10-1/2% Notes mature on August 1,
2006, unless previously redeemed by the Company. Interest on the 10-1/2% Notes
is payable semi-annually on February 1 and August 1, commencing on February 1,
1997.
Completion of the recapitalization (see Note 3) would have violated
certain covenants contained in the indenture governing the 10-1/2% Notes.
Accordingly, on September 30, 1999, the Company commenced a debt tender offer to
acquire all of the 10-1/2% Notes and a related consent solicitation to eliminate
substantially all of the restrictive covenants in the indenture. Holders of more
than 99.9% of the principal amount of the 10-1/2% Notes consented to the
amendments and tendered their notes. The Company's obligations under the
indenture governing the remaining $5,000 of the 10-1/2% Notes was assumed by
Maxxim Group, and such notes, as amended through the consent solicitation
process, became the obligations of Maxxim Group. Maxxim remained liable, along
with Maxxim Group, for payments of principal, premium and interest on the
remaining $5,000 of 10-1/2% Notes and each of the subsidiaries of Group has
guaranteed the 10-1/2% Notes, in each case on a senior subordinated basis. In
the fourth quarter of fiscal 2001, Maxxim redeemed the remaining $5,000 of the
10-1/2% Notes.
SHORT-TERM LOAN
On October 26, 2001, the Company borrowed $9,850,000 from a financial
institution on a short-term basis to provide interim liquidity until additional
long-term financing was received. The promissory note was due on the earlier of
45 days from the date of issuance and the effective date of an amendment to our
bank credit facilities pursuant to which Fox Paine Capital Partners, L.P.
contributed funds in an amount not less than $9,850,000 to the Company as an
equity contribution.
SHORT-TERM OBLIGATIONS
The following summarizes the Company's other short-term obligations as of:
OCTOBER 28, OCTOBER 29,
2001 2000
---------- -----------
(IN THOUSANDS)
Bridge loan $ 9,850 $ --
Other obligations 4,044 280
---------- -----------
Total short term obligations $ 13,894 $ 280
========== ===========
40
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 long-term
obligations are as follows:
FISCAL YEARS (IN THOUSANDS)
------------
2002 $ 24,151
2003 11,909
2004 13,548
2005 36,580
2006 33,898
Thereafter 358,186
----------
$ 478,272
==========
(5) FINANCIAL INSTRUMENTS
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. Maxxim has adopted SFAS No. 133 and recorded a charge of
$355,000 for the cumulative effect of the change in accounting method in the
first quarter of fiscal 2001.
In January 1999, the Company entered into swap agreements with three banks
participating in the Company's then existing credit agreement. The total
notional value of the swaps are $125,000,000. In the first quarter of fiscal
2001, the Company terminated one of the swap agreements, with a notional value
of $25,000,000, for a payment of $250,000. The agreement fixed a portion of the
Company's non-indexed part of the interest rate at 5.08% and 5.02%, as long as
LIBOR does not exceed 6.75%.
The Company used the interest rate swaps to manage the interest risk
associated with its borrowings and to manage the Company's allocation of fixed
and variable rate debt associated with the credit facility in existence prior to
the recapitalization. These swap agreements were continued by the Company
subsequent to termination of the Company's previous credit facility. The swaps
were redesignated as speculative positions for accounting purposes and have been
recorded at their market value in the financial statements. The Company includes
gains and losses associated with recording these instruments at fair value as a
component of interest expense. During fiscal year 2001, the Company recorded
$5,444,000 of interest expense relating to these swaps.
Pursuant to the Credit Facilities, Maxxim Group and the Chase Manhattan Bank
entered into a hedging arrangement to cap Maxxim Group's floating interest rate
at 8.0% on an agreed upon notional principal amount of $130,000,000, in April
2000. The Company has designated this instrument as a cash flow hedge and
recorded the instrument at fair value in its financial statements as of October
30, 2000. Accordingly, as disclosed above, the Company recorded a $355,000
transition entry to record the instrument at fair value upon the adoption of
SFAS No. 133. Subsequent adjustments to the fair value of this instrument of
$208,000 have been recorded as a component of interest expense during fiscal
year 2001.
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
and cap were as follows:
OCTOBER 28, 2001 OCTOBER 29, 2000
---------------------------- ---------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
-------------- ----------- --------------- ----------
(IN THOUSANDS)
Interest rate cap $ -- $ -- $ 576 $ 221
Swap agreement, paying fixed (3,822) (3,822) 2,007 2,007
Long-term debt (including
current maturities) (414,530) (414,530) (379,017) (379,017)
Fair values for the Company's debt was determined from quoted market prices
or estimated discounted cash flows.
41
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) 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 as of:
OCTOBER 28, OCTOBER 29,
2001 2000
---------- -----------
(IN THOUSANDS)
Land $ 271 $ 271
Buildings 1,956 1,930
Machinery and equipment 6,631 6,592
Accumulated depreciation (3,629) (2,524)
---------- -----------
$ 5,229 $ 6,269
========== ===========
Future minimum lease payments for assets under capital leases at October
28, 2001 are as follows:
FISCAL YEARS (IN THOUSANDS)
------------
2002 $ 835
2003 835
2004 817
2005 782
2006 355
Thereafter 1,292
------
Total minimum lease payments 4,916
Less- amount representing interest 1,341
------
Present value of net minimum lease payments 3,575
Less current maturities 512
------
$3,063
======
OPERATING LEASES
The Company is obligated under various operating leases. Rent expense under
these operating leases for fiscal years 2001, 2000 and 1999 was approximately
$3,637,000, $3,506,000 and $3,529,000, respectively. Minimum future rental
payments at October 28, 2001 are as follows:
FISCAL YEARS (IN THOUSANDS)
------------
2002 $ 4,286
2003 3,757
2004 3,008
2005 2,152
2006 1,133
Thereafter 7,155
--------
$21,491
========
42
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CLAIMS AND LITIGATION
The Company is currently, and is from time to time, subject to claims and
lawsuits arising in the ordinary course of business, including those relating to
product liability, safety and health and employment matters. In some of such
actions, plaintiffs request punitive or other damages or nonmonetary relief
which if granted, materially affect the conduct of the Company's business.
Although the Company maintains insurance that it believes to be reasonable and
appropriate, the amount and scope of any coverage may be inadequate to protect
the Company in the event of a substantial adverse judgment. In management's
opinion, taking third party indemnities into consideration, these various
asserted claims and litigation in which the Company is currently involved are
not reasonably likely to have a material adverse effect on the Company's
business, results of operations or financial position. However, no assurance
can be given as to the ultimate outcome with respect to such claims and
litigation.
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 latex glove operations acquired in June
1995 as well as certain glove products distributed by the Company since 1989.
The Company believes that most of such claims relate to gloves sold or shipped
prior to June 1995, and that such prior obligation has been assumed by the
prior owner. The Company is not entitled to indemnification from the prior
owner for gloves that were manufactured, sold or shipped in or from one of
their plants or our plants after June 1995. The Company intends to vigorously
defend against such claims. The Company is aware that an increasing number of
lawsuits have been brought against latex glove manufacturers with respect to
such adverse reactions. There can be no assurance that the Company will prevail
in any such lawsuits, that the prior owner will continue to indemnify the
Company or that the Company will not incur costs or liabilities relating to
such claims that will result in a material adverse effect on our business,
financial condition or results of operations.
A complaint was filed on June 25, 1999 in state court in Pinellas County,
Florida, naming the Company, its former directors and Fox Paine & Company, LLC
as defendants. The case was styled Burnetti v. Maxxim Medical, Inc. et al. No.
99-4347-CI-15 (6th Judl. Circ., Pinellas Cty., Fla.). The complaint was brought
on behalf of a purported class of the Company's former public shareholders and
alleged that the consideration paid in the merger was unfair and inadequate, and
that the Company's former directors breached their fiduciary duties by failing
to obtain the best price for the Company's stock in the merger. As remedies, the
complaint sought, among other things, equitable relief and damages in an
unspecified amount. A settlement was reached among the parties and the case was
dismissed by the court on July 25, 2001. Pursuant to the settlement agreement,
nothing was paid to the plaintiffs, but plaintiff's counsel was paid fees
in the amount of $500,000.
On September 28, 1999, a complaint was filed in state court in Henderson
County, Texas naming the Company and its former directors as defendants. This
case is styled Krim v. Maxxim Medical, Inc., et al., No. 99-143 (3rd Judl.
Dist., Henderson Cty., Tex.). The complaint was brought on behalf of a purported
class of the Company's former public shareholders and alleged, among other
things, that the consideration paid in the merger was unfair and inadequate and
that the Company's former directors breached their fiduciary duties by failing
to obtain the best price for the Company's stock in the merger. As remedies, the
complaint sought, among other things, equitable relief and damages in an
unspecified amount. This case has been dismissed without any payment by the
Company, with an Order of Nonsuit with Prejudice being issued by the court on
September 19, 2001.
The Company and certain of our directors and their affiliates are
defendants in two lawsuits brought by certain former employees (including one of
our directors) in state court in Florida, in September 2000 and October 2001,
respectively. The plaintiffs therein allege various common law and statutory
causes of action arising out of the termination of their employment following
the Company's November 1999 recapitalization. Pursuant to a March 2001 order of
the Florida court (with respect to the September 2000 plaintiffs) and to an
agreement among the parties (with respect to the October 2001 plaintiffs),
these claims, as well as certain counterclaims by the Company, are the subject
of arbitration proceedings before the American Arbitration Association in New
York City. The Company has denied all material allegations related to these
claims.
A related lawsuit based on the same events and against the same parties
was brought in state court in Texas by another one of the Company's directors.
That lawsuit was dismissed for lack of personal jurisdiction over defendants
other than the Company in August 2001, and was voluntarily dismissed with
respect to the Company by the plaintiff in September 2001. In November 2001,
the same plaintiff filed a substantially identical complaint in state court in
Florida. The Company denies all material allegations of this lawsuit and,
pursuant to an agreement among the parties, expects to answer or move in
response to the Florida complaint on January 31, 2002.
In the ordinary course of business, the Company has been named in various
other lawsuits. While the final resolution of any matters 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.
43
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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,
2002.
(7) INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Current domestic $ -- $(10,786) $ 4,692
Current foreign 629 915 (13)
-------- -------- --------
$ 629 $ (9,871) $ 4,679
-------- -------- --------
Deferred domestic $ -- $ 273 $ 2,555
Deferred foreign 404 (1,706) (59)
-------- -------- --------
404 (1,433) 2,496
-------- -------- --------
Income taxes from continuing operations $ 1,033 $(11,304) $ 7,175
Income taxes from discontinued operations
and extraordinary item -- (1,096) 6,326
-------- -------- --------
Total $ 1,033 $(12,400) $ 13,501
======== ======== ========
Income tax expense (benefit) relating to income from continuing operations
and before extraordinary items differed from the amounts computed by applying
the statutory U.S. federal income tax rate as a result of the following:
FISCAL YEARS ENDED
----------------------------------------
OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2000 1999
---------- ---------- ----------
Statutory rate (35)% (35)% 35%
Amortization of goodwill 5 2 8
State taxes, net of federal benefit (3) (3) 3
Recapitalization expenditures -- 2 --
Other, net 2 1 1
Valuation allowance 32 27 --
---------- ---------- ----------
Effective rate 1% (6)% 47%
========== ========== ==========
44
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The net effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below at:
OCTOBER 28, OCTOBER 29,
2001 2000
---------- ----------
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Accounts receivable, principally due to allowance for doubtful accounts $ 3,079 $ 3,472
Inventory, principally due to reserve for obsolescence and costs capitalized
for tax purposes 3,333 5,924
Accruals and provisions not currently deductible 6,435 9,300
Unrealized loss on investment securities 1,452 246
---------- ---------
Current deferred tax asset 14,299 18,942
Valuation allowance (14,281) (18,942)
---------- ----------
Net current deferred tax asset $ 18 $ --
========== =========
Noncurrent deferred tax assets (liabilities):
Unrealized loss on currency translation of foreign subsidiaries $ 5,528 $ 6,007
Net operating loss carryforwards 46,168 27,367
Debt discount 5,010 --
Book over tax amortization 2,265 983
Differences between book and tax basis of property and equipment 5,981 5,658
Federal alternative minimum tax credit carryover 938 938
---------- ---------
Noncurrent deferred tax asset (liability) 65,890 40,953
Valuation allowance (66,877) (41,518)
---------- ---------
Net noncurrent deferred tax liability $ (987) $ (565)
========== =========
The Company recorded valuation allowances of $29,698 and $60,400 for
fiscal years ended October 28, 2001 and October 29, 2000, respectively. The
valuation allowances were based on management's conclusion that it is more
likely than not that future operations will not generate sufficient taxable
income to realize the deferred tax assets during the carryforward period for
these tax attributes.
45
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) ACCRUED LIABILITIES
Accrued liabilities include the following as of:
OCTOBER 28, OCTOBER 29,
2001 2000
---------- ----------
(IN THOUSANDS)
Health insurance and benefit accrual $ 7,335 $ 8,064
Accrued taxes payable 5,332 2,784
Fees payable to hospital buying groups 5,520 7,055
Accrued payroll and commissions 2,701 6,978
Accrued interest payable 7,253 7,978
Accrued professional fees 2,327 2,645
Restructuring accrual 6,488 4,144
Accrued insurance 3,155 3,847
Financial instruments 3,822 --
Other 8,425 6,006
------- -------
$52,358 $49,501
======= =======
(9) OTHER ASSETS
Other assets, net of accumulated amortization, include the following as of:
OCTOBER 28, OCTOBER 29,
2001 2000
---------- ----------
(IN THOUSANDS)
Patents $ 3,530 $ 4,118
Debt offering costs 18,426 21,105
Non-compete agreements 495 596
Notes receivable 136 338
Other 954 1,677
------- -------
$23,541 $27,834
======= =======
(10) STOCK OPTION AGREEMENTS
Commencing with November 1, 1989, it had been the practice of the board of
directors to grant stock options to certain employees of the Company from time
to time. The Company had 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) vested over five
years. The shares purchasable by non-employee directors under such stock option
agreements (subject to continued director service to the Company) vested over a
period of one to three years.
In connection with the recapitalization (see Note 3), the Company
terminated its employee and director stock option plans. In the
recapitalization, 2,404,314 options of eight members of the Company's senior
management were cancelled and replaced with options of Circon Holdings
Corporation. The remaining 5,299,278 options were cancelled and each holder
received a cash payment for each share subject to an option equal to the excess
of $5.00 over the exercise price of the option less applicable withholding
taxes. The difference between the $5.00 cash price and the option exercise price
was charged to operations upon consummation of the recapitalization in the first
quarter of fiscal year 2000. The eight continuing shareholders who were members
of Maxxim's then senior management were granted 6,098,950 new options to acquire
shares of Maxxim common stock at an exercise price of $5.00 per share. Set forth
below is certain information regarding such issuances, exercises and
cancellations of options in each of the indicated fiscal years:
46
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
------------ -------
Balance at November 1, 1998 6,458,816 $ 2.56
Fiscal 1999:
Granted 1,599,260 $ 4.00
Exercised (208,624) 2.33
Cancelled (145,860) 4.35
-----------
Balance at October 31, 1999 7,703,592 $ 2.83
Fiscal 2000:
Granted 7,068,953 $ 5.00
Cancelled (11,413,563) 3.54
-----------
Balance at October 29, 2000 3,358,982 $ 5.00
Fiscal 2001:
Granted 2,000,000 $ 5.00
Cancelled (2,193,561) 5.00
-----------
Balance at October 28, 2001 3,165,421 $ 5.00
===========
The 3,165,421 options outstanding as of October 28, 2001 had an exercise
price and weighted average exercise price of $5.00 and a weighted average
remaining contract life of 6.5 years. At October 28, 2001, options to purchase
988,704 shares, were exercisable with an exercise price and weighted average
exercise price of $5.00.
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 for the years
ended October 28, 2001, October 29, 2000 and October 31, 1999 would have been
reduced as follows:
FISCAL YEARS ENDED
-----------------------------------------------------------------------------------
OCTOBER 28, 2001 OCTOBER 29, 2000 OCTOBER 31, 1999
------------------------- ------------------------- -------------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA AS REPORTED PROFORMA
----------- ---------- ----------- ---------- ----------- ----------
(IN THOUSANDS)
Net income (loss) $ (75,020) $ (79,291) $(186,914) $(192,402) $ 14,064 $ 12,980
The weighted average fair value of options granted in 2001, 2000 and 1999
was $2.14, $2.98 and $2.69, 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 0% for
fiscal years 2001 and 2000 and 53% for fiscal year 1999 and an estimated option
term of 10 years for the current year's grant, in prior years estimated option
terms ranged from 2 to 10 years. The effect of applying SFAS No. 123 as
calculated above may not be representative of the effects on reported net
income for future years.
(11) BUSINESS SEGMENTS, GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
The Company's business is organized, managed and internally reported as a
single segment comprised of medical products used in surgical and other medical
procedures. The Company believes its various product lines have similar
economic, operating and other related characteristics.
Sales information in the table below is presented on the basis the Company
uses to manage its business. Export sales are reported within the geographic
area where the final sales to customers are made.
47
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNITED REST OF TOTAL
STATES EUROPE WORLD COMPANY
-------- -------- ------- ---------
(IN THOUSANDS)
2001 $437,597 $ 39,425 $23,819 $500,841
2000 433,413 41,856 23,924 499,193
1999 446,536 38,909 23,209 508,654
Export sales to rest of world are primarily sales to Canada, South America and
the Pacific Rim. There were no significant investments in long-lived assets
located outside the United States at October 28, 2001 and October 29, 2000.
The Company distributes primarily through major distributors in the United
States. Those distributors typically serve under a purchase order or supply
agreement between the end-user and the Company. Sales through Owens & Minor,
Inc., and General Medical Corp., the Company's largest distributors, were 38.2%
and 9.9% of the Company's net sales in the United States in fiscal year 2001,
respectively, 29.2% and 11.2% of the Company's net sales in the United States
in fiscal year 2000, respectively, and 26.6% and 10.4% of the Company's net
sales in the United States in fiscal year 1999, respectively. For the year
ended October 28, 2001, no other single distributor accounted for more than 10%
of the Company's total net sales in the United States.
(12) 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
$935,000, $1,048,000 and $1,189,000 for the 2001, 2000 and 1999 plan years,
respectively.
(13) DEFERRED COMPENSATION
During 1998, the Company established a non-qualified deferred compensation
plan for key employees of the Company. Under the program, participants may elect
to reduce their compensation and to have elective deferrals 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. Employer contributions were $0, $190,100 and $162,300 in
fiscal 2001, 2000 and 1999, respectively. In fiscal year 2000 the Company
terminated this plan and all such amounts associated with this plan have been
distributed.
(14) RELATED-PARTY TRANSACTIONS
LOANS TO RELATED PARTIES
In connection with the recapitalization, the continuing shareholders
received loans in the aggregate amount of $2,580,000 for the purchase of Maxxim
common stock which are reflected as subscriptions receivable in the accompanying
balance sheet. Also in connection with the recapitalization, the continuing
shareholders received loans from Maxxim totaling $1,559,000 in an amount
sufficient to cover the taxes due on the cash received from the conversion of
the 2,056,413 shares used to purchase Circon Holdings shares.
Under the terms of the Company's former Chief Executive Officer's ("CEO")
employment agreement, the former CEO could borrow up to an aggregate of $500,000
for the principal purpose of payment of federal income tax payments associated
with the exercise of stock options to purchase shares of the Company's common
stock. Each loan was non-interest bearing, unsecured and repayable in ten equal
annual installments on the third through the twelfth anniversaries of the dates
of such loans. The total amount outstanding under this loan agreement was
$500,000 at October 28, 2001. The former CEO is delinquent in payment of his
fiscal 2001 and 2000 repayment obligations under the loans.
In conjunction with the relocation of the Company's former Chief Operations
Officer ("COO") from Houston, Texas to the Company's corporate headquarters in
Clearwater, Florida, the former COO received a loan in the amount of $320,000.
This loan is non-interest bearing, unsecured and repayable upon the earlier of
the sale of his prior residence or December 31, 2000. The former COO is
delinquent in payment of his obligation under this loan.
48
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On May 31, 2000, Maxxim loaned $270,000 to its former Corporate Controller.
This loan, represented by a promissory note, is non-interest bearing, unsecured
and repayable on June 3, 2006.
Under the terms of the Company's former Vice Chairman and President's
("President") employment agreement, the former President borrowed $318,750 for
the purchase of Maxxim's common stock effective August 7, 2000. This loan is
secured by a pledge of Maxxim's common stock, is repayable on the ninth
anniversary of the note, bears interest at a rate of 10% annually and is
reflected as subscriptions receivable in the accompanying balance sheet.
Under the terms of the Company's Vice Chairman and Chief Financial
Officer's ("CFO") employment agreement, the CFO borrowed $75,000 for the
purchase of Maxxim's common stock effective July 13, 2000. This loan is secured
by a pledge of Maxxim's common stock, is repayable on the second anniversary of
the note, bears interest at a rate of 10% annually and is reflected as
subscriptions receivable in the accompanying balance sheet. The CFO additionally
received an advance of future bonuses in the amount of $175,000 in fiscal 2000.
Under the terms of the Company's Vice Chairman and Chief Executive
Officer's ("CEO") employment agreement, the CEO borrowed $500,000 for the
purchase of Maxxim's common stock effective October 26, 2001. This loan is
secured by a pledge of Maxxim's common stock, is repayable on the second
anniversary of the note, bears interest at a rate of 10% annually and is
reflected as subscriptions receivable in the accompanying balance sheet.
MANAGEMENT AND ADVISORY SERVICES PROVIDED BY FOX PAINE
In connection with the recapitalization (see Note 3), Maxxim and Maxxim
Group entered into a management services agreement with an affiliate of Fox
Paine pursuant to which such affiliate will provide certain financial and
strategic consulting and advisory services to Maxxim and Maxxim Group. In
exchange for these services, the Fox Paine affiliate is entitled to receive a
fee which is included in other expense in the consolidated statements of
operations. Such fee shall be equal to 1% of the annual adjusted consolidated
EBITDA, as defined, of Maxxim for the prior fiscal year. For the fiscal year
ended October 28, 2001 and October 29, 2000, other expense included $550,000 and
$500,000, respectively, for the management and advisory services fee.
Additionally, in the first quarter of fiscal year 2000, Maxxim paid to such
affiliate transaction fees of approximately $9,814,000 plus reimbursement of its
expenses in connection with the recapitalization.
SERVICES AGREEMENT
As part of the recapitalization, (see Note 3), Maxxim, Maxxim Group, Circon
Holdings and Circon have entered into a services agreement that provides for
Maxxim and Maxxim Group to provide services to Circon Holdings and Circon,
including services and advice provided by management employees as well as
general corporate overhead services. In exchange for these services, Circon
Holdings and Circon will reimburse Maxxim and Maxxim Group for all direct
expenses or out of pocket fees directly attributable to the services provided to
Circon Holdings and Circon. For services without expenses or fees directly
attributable to Circon Holdings and Circon, the actual cost of such services
will be allocated between Maxxim and Maxxim Group, on the one hand, and Circon
Holdings and Circon, on the other hand, pro rata based on net sales. The
payment for services in fiscal years 2001 and 2000 were $0 and $0.
(15) MANAGEMENT STOCK PURCHASE PLAN
In May 1997, the Company issued 2,080,000 shares of common stock pursuant
to a Senior Management Stock Purchase Plan at $2.50 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 were recorded as subscriptions receivable and were included in the
shareholders' equity section of the Consolidated Balance Sheets at October 31,
1999. Payment of these notes also was secured by the pledge of the 2,080,000
shares of common stock.
49
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with the recapitalization (see Note 3), $702,000 of the note
principal was repaid. The remaining $4,498,000 due from the managers who
continued as shareholders of the Company after the recapitalization was divided
between the Company and Circon Holdings. The old notes were canceled and
replaced with new notes containing substantially identical terms, except as
described below. New notes in an aggregate amount of $1,918,215 were transferred
to Circon Holdings, to reflect the fact that some of each manager's shares of
common stock that were subject to the notes were exchanged for shares of Circon
Holdings common stock in the recapitalization. The new notes differ from the old
notes in that they provide for a maturity date of November 12, 2009, with
mandatory prepayments using the after-tax proceeds of any sales of the common
stock of the Company or Circon Holdings, or options to purchase such shares,
made after the completion of the recapitalization. The old notes also contained
a provision requiring the repayment upon the termination of the manager's
employment with the Company, which is not in the new notes. In addition, the
Stock Purchase Plan was amended to remove the provision that required the holder
to forfeit to the Company 50% of the profit from the sale of the shares that are
subject to the promissory note. The remaining notes of $2,580,000 are reflected
as subscriptions receivable in the accompanying balance sheet. (See Note 14)
(16) FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Consolidating financial information regarding the Company, guarantor
subsidiaries and non-guarantor subsidiaries as of and for each of the fiscal
years ended October 28, 2001, October 29, 2000 and October 31, 1999 is presented
below for purposes of complying with the reporting requirements of the guarantor
subsidiaries. Separate financial statements and other disclosures concerning
each guarantor subsidiary have not been presented because management has
determined that such information is not material to investors. The guarantor
subsidiaries are wholly-owned subsidiaries of Maxxim that have fully and
unconditionally guaranteed the Senior Subordinated Discount Notes due 2009
issued in connection with the recapitalization (See Note 3).
50
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATED BALANCE SHEET
OCTOBER 28, 2001
(IN THOUSANDS)
OCTOBER 28, 2001
----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,941 $ 111 $ 2,052 $ -- $ 2,052
Accounts receivable, net 32,726 9,826 42,552 -- 42,552
Inventory, net 59,893 12,165 72,058 -- 72,058
Other receivables 3,061 -- 3,061 -- 3,061
Prepaid expenses and other 3,240 792 4,032 -- 4,032
Assets to be held for sale 10,459 1,840 12,299 -- 12,299
------------ ------------ ------------ ------------ ------------
Total current assets 111,320 24,734 136,054 -- 136,054
Property and equipment 55,181 37,362 92,543 -- 92,543
Less: accumulated depreciation (31,842) (16,233) (48,075) -- (48,075)
------------ ------------ ------------ ------------ ------------
23,339 21,129 44,468 -- 44,468
Goodwill, net 106,132 685 106,817 -- 106,817
Other assets, net 20,993 506 21,499 2,042 23,541
------------ ------------ ------------ ------------ ------------
Total assets $ 261,784 $ 47,054 $ 308,838 $ 2,042 $ 310,880
============ ============ ============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,258 $ -- $ 10,258 $ -- $ 10,258
Current maturities of capital leases 512 -- 512 -- 512
Current maturities of other obligations 13,646 248 13,894 -- 13,894
Accounts payable 34,825 8,105 42,930 -- 42,930
Accrued liabilities 41,518 10,840 52,358 -- 52,358
------------ ------------ ------------ ------------ ------------
Total current liabilities 100,759 19,193 119,952 -- 119,952
Intercompany (receivable) payable (29,999) 29,999 -- -- --
Long-term debt, net of current maturities 210,984 -- 210,984 -- 210,984
Senior subordinated discount notes 113,556 -- 113,556 -- 113,556
Senior discount notes -- -- -- 62,179 62,179
Capital lease, net of current maturities 3,063 -- 3,063 -- 3,063
Other obligations, net of current maturities 84 -- 84 -- 84
Deferred tax liabilities -- 987 987 -- 987
------------ ------------ ------------ ------------ ------------
Total liabilities 398,447 50,179 448,626 62,179 510,805
Shares with put rights -- -- -- 4,410 4,410
Commitments and contingencies
Shareholders' equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- 29 29
Additional paid-in capital -- -- -- (3,731) (3,731)
Accumulated deficit -- -- -- (182,984) (182,984)
Subscriptions receivable -- -- -- (3,474) (3,474)
Accumulated other comprehensive loss -- -- -- (14,175) (14,175)
------------ ------------ ------------ ------------ ------------
Total shareholders' equity -- -- -- (204,335) (204,335)
(Investment in)/net equity of
Guarantor subsidiaries (139,788) -- (139,788) 139,788 --
(Investment in)/net equity of
Non-guarantor subsidiaries 3,125 (3,125) -- -- --
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 261,784 $ 47,054 $ 308,838 $ 2,042 $ 310,880
============ ============ ============ ============ ============
51
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATED BALANCE SHEET
OCTOBER 29, 2000
(IN THOUSANDS)
OCTOBER 29, 2000
---------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 171 $ 1,116 $ 1,287 $ -- $ 1,287
Accounts receivable, net 38,454 7,802 46,256 -- 46,256
Inventory, net 55,697 11,216 66,913 -- 66,913
Other receivables 10,746 -- 10,746 4,278 15,024
Prepaid expenses and other 4,859 1,047 5,906 -- 5,906
Assets to be held for sale 18,388 18,388 -- 18,388
------------ ------------ ------------ ------------ ------------
Total current assets 128,315 21,181 149,496 4,278 153,774
Property and equipment 52,699 51,253 103,952 -- 103,952
Less: accumulated depreciation (27,971) (19,235) (47,206) -- (47,206)
------------ ------------ ------------ ------------ ------------
24,728 32,018 56,746 -- 56,746
Goodwill, net 110,067 902 110,969 -- 110,969
Other assets, net 24,983 605 25,588 2,246 27,834
------------ ------------ ------------ ------------ ------------
Total assets $ 288,093 $ 54,706 $ 342,799 $ 6,524 $ 349,323
============ ============ ============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,688 $ -- $ 10,688 $ -- $ 10,688
Current maturities of capital leases 432 -- 432 432
Current maturities of other obligations 280 -- 280 -- 280
Accounts payable 41,676 5,829 47,505 -- 47,505
Accrued liabilities 48,243 1,258 49,501 -- 49,501
------------ ------------ ------------ ------------ ------------
Total current liabilities 101,319 7,087 108,406 -- 108,406
Intercompany (receivable) payable (35,221) 35,221 -- -- --
Long-term debt, net of current maturities 200,182 -- 200,182 -- 200,182
Senior subordinated discount notes 110,123 -- 110,123 -- 110,123
Senior discount notes -- -- -- 53,579 53,579
10-1/2% Senior subordinated notes 5 -- 5 -- 5
Capital lease, net of current maturities 3,617 -- 3,617 3,617
Other obligations, net of current maturities 111 -- 111 -- 111
Deferred tax liability -- 565 565 -- 565
------------ ------------ ------------ ------------ ------------
Total liabilities 380,136 42,873 423,009 53,579 476,588
Shares with put rights -- -- -- 4,410 4,410
Commitments and contingencies
Shareholders' equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- 29 29
Additional paid-in capital -- -- -- (4,731) (4,731)
Accumulated deficit -- -- -- (107,964) (107,964)
Subscriptions receivable -- -- -- (2,974) (2,974)
Accumulated other comprehensive loss -- -- -- (16,035) (16,035)
------------ ------------ ------------ ------------ ------------
Total shareholders' equity -- -- -- (131,675) (131,675)
(Investment in)/net equity of
Guarantor subsidiaries (80,210) -- (80,210) 80,210 --
(Investment in)/net equity of
Non-guarantor subsidiaries (11,833) 11,833 -- -- --
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 288,093 $ 54,706 $ 342,799 $ 6,524 $ 349,323
============ ============ ============ ============ ============
52
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 28, 2001
(IN THOUSANDS)
YEAR ENDED OCTOBER 28, 2001
------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL GUARANTOR TOTAL
------------ ------------- ----------- ------------ --------- ------------
Net sales $ 453,289 $ 68,401 $ (20,849) $ 500,841 $ -- $ 500,841
Cost of sales 354,762 57,194 (20,849) 391,107 -- 391,107
--------- --------- --------- --------- --------- ---------
Gross profit 98,527 11,207 -- 109,734 -- 109,734
--------- --------- --------- --------- --------- ---------
Operating expenses:
Marketing and selling 73,732 9,158 -- 82,890 -- 82,890
General and administrative 22,308 2,021 -- 24,329 -- 24,329
Restructuring charges and
transition expenses (751) 6,322 -- 5,571 -- 5,571
Losses on assets to be sold 7,100 5,991 -- 13,091 -- 13,091
--------- --------- --------- --------- --------- ---------
102,389 23,492 -- 125,881 -- 125,881
--------- --------- --------- --------- --------- ---------
Income (loss) from operations (3,862) (12,285) -- (16,147) -- (16,147)
Interest (expense), net (43,034) (1,946) -- (44,980) (8,805) (53,785)
Other income/(expense), net (3,588) (112) -- (3,700) -- (3,700)
--------- --------- --------- --------- --------- ---------
Loss before income taxes (50,484) (14,343) -- (64,827) (8,805) (73,632)
Income taxes -- 1,033 -- 1,033 -- 1,033
--------- --------- --------- --------- --------- ---------
Loss before cumulative effect of
change in accounting principle (50,484) (15,376) -- (65,860) (8,805) (74,665)
Cumulative effect of change in
accounting principle (355) -- -- (355) -- (355)
--------- --------- --------- --------- --------- ---------
Net loss $ (50,839) $ (15,376) $ -- $ (66,215) $ (8,805) $ (75,020)
========= ========= ========= ========= ========= =========
53
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 29, 2000
(IN THOUSANDS)
YEAR ENDED OCTOBER 29, 2000
------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL GUARANTOR TOTAL
------------ ------------- ----------- ------------ --------- ------------
Net sales $ 452,737 $ 79,017 $ (32,561) $ 499,193 $ -- $ 499,193
Cost of sales 370,982 72,049 (32,561) 410,470 -- 410,470
--------- --------- --------- --------- --------- ---------
Gross profit 81,755 6,968 -- 88,723 -- 88,723
--------- --------- --------- --------- --------- ---------
Operating expenses:
Marketing and selling 77,228 10,174 -- 87,402 87,402
General and administrative 35,687 2,487 -- 38,174 -- 38,174
Restructuring charges and
transition expenses 13,514 -- -- 13,514 -- 13,514
Goodwill impairment charge 28,012 -- -- 28,012 -- 28,012
Losses on assets to be sold 30,002 -- -- 30,002 -- 30,002
--------- --------- --------- --------- --------- ---------
184,443 12,661 -- 197,104 -- 197,104
--------- --------- --------- --------- --------- ---------
Loss from operations (102,688) (5,693) -- (108,381) -- (108,381)
Interest (expense), net (37,222) (2,276) -- (39,498) (7,540) (47,038)
Other income/(expense), net (6,549) (637) -- (7,186) -- (7,186)
Recapitalization expenses (18,556) -- -- (18,556) -- (18,556)
--------- --------- --------- --------- --------- ---------
Loss before income taxes (165,015) (8,606) -- (173,621) (7,540) (181,161)
Income taxes (10,061) (791) -- (10,852) (452) (11,304)
--------- --------- --------- --------- --------- ---------
Loss from continuing
Operations (154,954) (7,815) -- (162,769) (7,088) (169,857)
Income from discontinued
operations, net 87 -- -- 87 -- 87
--------- --------- --------- --------- --------- ---------
Loss before extraordinary item (154,867) (7,815) -- (162,682) (7,088) (169,770)
Extraordinary item - loss on
early retirement of debt, net (15,928) -- -- (15,928) (1,216) (17,144)
--------- --------- --------- --------- --------- ---------
Net loss $(170,795) $ (7,815) $ -- $(178,610) $ (8,304) $(186,914)
========= ========= ========= ========= ========= =========
54
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
YEAR ENDED OCTOBER 31, 1999
------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
------------ ------------- ----------- ------------
Net sales $ 457,244 $ 88,980 $ (37,570) $ 508,654
Cost of sales 330,625 73,723 (37,570) 366,778
--------- --------- --------- ---------
Gross profit 126,619 15,257 -- 141,876
--------- --------- --------- ---------
Operating expenses:
Marketing and selling 61,084 9,986 -- 71,070
General and administrative 19,618 3,006 22,624
Restructure charges and transition expenses 4,637 -- -- 4,637
--------- --------- --------- ---------
85,339 12,992 -- 98,331
--------- --------- --------- ---------
Income from operations 41,280 2,265 -- 43,545
Interest (expense), net (25,629) (2,160) -- (27,789)
Other income /(expense), net (129) (426) -- (555)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 15,522 (321) -- 15,201
Income taxes 7,255 (80) -- 7,175
--------- --------- --------- ---------
Income (loss) from continuing operations 8,267 (241) 8,026
Income from discontinued operations, net of tax -- 6,038 6,038
--------- --------- --------- ---------
Net income $ 8,267 $ 5,797 $ -- $ 14,064
========= ========= ========= =========
55
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENT OF CASH FLOWS
FOR FISCAL YEAR ENDED OCTOBER 28, 2001
(IN THOUSANDS)
YEAR ENDED OCTOBER 28, 2001
--------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
------------ ------------- ------------ --------- ------------
Cash flows from operating activities:
Net loss $(50,839) $(15,376) $(66,215) $(8,805) $(75,020)
Adjustment to reconcile net loss to net
Cash provided by operating activities:
Deferred income tax (benefit) - 404 404 404
Loss on sale of fixed assets 829 - 829 829
Loss on sale of swap 152 - 152 152
Loss on investment 872 - 872 872
Amortization of financing fees 3,380 - 3,380 340 3,720
Accretion of notes payable 3,127 - 3,127 8,260 11,387
Depreciation and amortization 10,350 5,431 15,781 205 15,986
Impairment Charges 7,100 5,991 13,091 - 13,091
Loss on fair value of derivative securities 5,647 - 5,647 - 5,647
Cumulative effect of accounting change 355 - 355 355
Change in operating assets and liabilities 13,353 4,851 18,204 - 18,204
------------ ------------- ------------ --------- ------------
Net cash (used in) provided by operating (5,674) 1,301 (4,373) - (4,373)
------------ ------------- ------------ --------- ------------
Cash flows from investing activities:
Proceeds from sale of investment in derivative
securities 250 - 250 - 250
Proceeds from sale of investment securities 27 - 27 - 27
Payment received on notes 197 - 196 - 196
Payment for contract rights (500) - (500) (500)
Purchase of property, equipment
and other assets, net (3,721) (2,067) (5,788) - (5,788)
------------ ------------- ------------ --------- ------------
Net cash provided by investing activities (3,748) (2,067) (5,815) - (5,815)
------------ ------------- ------------ --------- ------------
Cash flows from financing activities:
Repurchase of 10-1/2% notes (5) - (5) - (5)
Net proceeds from issuance of stock 500 - 500 - 500
Repayment of bonds (2,370) - (2,370) - (2,370)
Increase in shortterm borrowings 13,634 - 13,634 - 13,634
Payment on long-term borrowings (10,258) - (10,258) - (10,258)
Net borrowings on revolving line of credit 23,000 - 23,000 - 23,000
Payment of debt offering costs (970) - (970) - (970)
Payments on capital leases (471) - (471) - (471)
Payments on long-term obligations (295) - (295) - (295)
Decrease in bank overdraft (11,917) - (11,917) - (11,917)
Other, net 344 (304) 40 - 40
------------ ------------- ------------ --------- ------------
Net cash (used in) provided by financing 11,192 (304) 10,888 - 10,888
------------ ------------- ------------ --------- ------------
Effect of foreign currency
translation adjustment - 65 65 - 65
------------ ------------- ------------ --------- ------------
Net increase (decrease) in cash and cash
Equivalents 1,770 (1,005) 765 - 765
Cash and cash equivalents at
beginning of period 171 1,116 1,287 - 1,287
------------ ------------- ------------ --------- ------------
Cash and cash equivalents at
end of period $ 1,941 $ 111 $ 2,052 $ - $ 2,052
============ ============= ============ ========= ============
56
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENT OF CASH FLOWS
FOR FISCAL YEAR ENDED OCTOBER 29, 2000
(IN THOUSANDS)
YEAR ENDED OCTOBER 29, 2000
---------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
------------ ------------- ------------ --------- ------------
Cash flows from operating activities:
Net loss $(170,196) $ (8,414) $(178,610) $ (8,304) $(186,914)
Adjustment to reconcile net loss to net
Cash provided by operating activities:
Income from discontinued operations -- 87 87 -- 87
Debt tender and recapitalization expense 36,888 -- 36,888 -- 36,888
Deferred income tax (benefit) (1,364) (69) (1,433) -- (1,433)
Write-off of debt offering costs 2,057 -- 2,057 5,043 7,100
Impairment charges 58,014 -- 58,014 -- 58,014
(Gain) loss on sale of fixed assets (814) 431 (383) -- (383)
Amortization of financing fees 3,070 -- 3,070 -- 3,070
Accretion of notes payable 3,210 -- 3,210 7,325 10,535
Depreciation and amortization 18,146 4,742 22,888 -- 22,888
Gain on fair value of investment in
Derivative securities (2,007) -- (2,007) -- (2,007)
Change in operating assets and liabilities 82,238 629 82,867 (9,199) 73,668
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating 29,242 (2,594) 26,648 (5,135) 21,513
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of Circon 228,000 -- 228,000 -- 228,000
Proceeds from sale of assets 23,907 2,129 26,036 -- 26,036
Proceeds from sale of investment securities 1,226 1,226 1,226
Payment received on notes 1,379 -- 1,379 -- 1,379
Payment for contract rights (2,250) -- (2,250) -- (2,250)
Purchase of property, equipment
and other assets, net (6,047) (1,867) (7,914) -- (7,914)
--------- --------- --------- --------- ---------
Net cash provided by investing activities 246,215 262 246,477 -- 246,477
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net proceeds from the issuance of
senior subordinated discount notes 110,004 -- 110,004 -- 110,004
Repurchase of 10-1/2% senior
subordinated notes (99,995) -- (99,995) -- (99,995)
Net proceeds from the issuance of
senior discount notes -- -- -- 50,000 50,000
Recapitalization of Maxxim (443,563) -- (443,563) 211,596 (231,967)
Debt tender and recapitalization expenses (36,888) -- (36,888) -- (36,888)
Increase in long-term borrowings 260,000 260,000 -- 260,000
Repayment on long-term borrowings (51,500) -- (51,500) (254,000) (305,500)
Payment of debt offering costs (18,869) -- (18,869) (2,461) (21,330)
Payments on capital leases and other
long-term obligations (939) -- (939) -- (939)
Increase in bank overdraft 6,831 -- 6,831 -- 6,831
Other, net (383) (230) (613) -- (613)
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing (275,302) (230) (275,532) 5,135 (270,397)
--------- --------- --------- --------- ---------
Effect of foreign currency
Translation adjustment (458) 112 (346) -- (346)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
Equivalents (303) (2,450) (2,753) -- (2,753)
Cash and cash equivalents at
beginning of period 474 3,566 4,040 -- 4,040
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period $ 171 $ 1,116 $ 1,287 $ -- $ 1,287
========= ========= ========= ========= =========
57
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENT OF CASH FLOWS
FOR FISCAL YEARS ENDED OCTOBER 31, 1999
(IN THOUSANDS)
YEAR ENDED OCTOBER 31, 1999
---------------------------
GUARANTOR NON-GUARANTOR
--------- -------------
Cash flows from operating activities:
Net income $ 8,267 $ 5,797
Adjustment to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations, net of tax -- (6,038)
Deferred income tax expense 3,674 (1,178)
Amortization of financing fees 1,148 --
Depreciation and amortization 17,060 5,466
Compensation expense for outstanding stock options 211 --
Gain on sale of building (167) --
Loss on sale of product line 112 --
Changes in current assets and liabilities, net of
effects of asset acquisitions and dispositions
and business combinations:
(Increase) decrease in accounts receivable, net 21,226 (12,321)
Increase in inventory, net (13,645) (6,246)
Decrease in prepaid expenses and other 341 121
Decrease in accounts payable (4,308) (136)
(Decrease) increase in accrued liabilities (4,820) 1,011
--------- ---------
Net cash provided by continuing operations 29,099 (13,524)
Net cash provided by discontinued operations -- 26,765
--------- ---------
Net cash provided by operating activities 29,099 13,241
--------- ---------
Cash flows from investing activities:
Proceeds from building sale 338 --
Proceeds from product line sale 1,635 --
Purchase of investment securities (400) --
Purchase of Circon, net of cash acquired (247,067) --
Purchase of property and equipment of discontinued operations -- (540)
Purchase of property and equipment, net of asset
acquisitions and business combinations (10,968) (14,789)
--------- ---------
Net cash used in investing activities (256,462) (15,329)
--------- ---------
Cash flows from financing activities:
Payments on long-term borrowings (15,405) --
Increase in long-term borrowings 200,000 --
Net borrowing (payments) on revolving line of credit 55,200 --
Net borrowing (payments) on capital lease obligations (566) --
Net payments on other long-term obligations (4,382) 2,370
Recapitalization costs (2,844) --
Payment of debt offering costs (5,584) --
Increase. in bank overdraft 168 --
Proceeds from exercise of stock options 751 --
Other, net (243) 5
--------- ---------
Net cash provided by financing activities 227,095 2,375
--------- ---------
Effect of foreign currency translation adjustment -- (104)
--------- ---------
Net increase (decrease) in cash and cash equivalents (268) 183
Cash and cash equivalents at beginning of year 742 3,383
--------- ---------
Cash and cash equivalents at end of year $ 474 $ 3,566
========= =========
58
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 28, 2001
Net sales $ 123,498 $ 134,299 $ 124,365 $ 118,679
Gross profit 29,678 32,116 28,883 19,057
Net loss (7,102) (5,009) (6,112) (56,797)
YEAR ENDED OCTOBER 29, 2000
Net sales $ 122,828 $ 130,760 $ 129,883 $ 115,722
Gross profit 29,986 29,539 28,091 1,107
Loss from continuing operations (20,365) (7,287) (6,678) (135,527)
Income from discontinued operations 87 -- -- --
Extraordinary item (11,160) -- -- (5,984)
Net loss (31,438) (7,287) (6,678) (141,511)
(18) RESTRUCTURING CHARGES AND TRANSITION EXPENSES
In the fourth quarter of fiscal 1999, the Company announced the closing of
one of its glove plants. The Company recorded charges of $2,621,000 in the
fourth quarter of fiscal 1999, $840,000 in the first quarter of fiscal 2000,
$833,000 in the second quarter of fiscal 2000, $935,000 in the third quarter of
fiscal 2000 and $1,020,000 in the fourth quarter of fiscal 2000 related to this
decision. Additionally, in the fourth quarter of fiscal 2000, the Company
announced the restructuring and reduction in workforce of five of its other
manufacturing plants. We recorded charges of $9,886,000 in the fourth quarter
of fiscal 2000 related to this decision consisting of $3,717,000 in severance
liabilities and $6,169,000 in other obligations in connection with these
closures. The Company estimated a reduction of approximately 1,141 employees in
connection with the restructuring. Through October 28, 2001, the Company has
separated approximately 480 employees relating to the restructuring charges
taken in fiscal 2000. In the fourth quarter of fiscal 2001, the Company decided
to close another facility. The Company recorded charges of $5,571,000 in the
fourth quarter of fiscal 2001 related to the decision to close this facility.
The remaining severance benefits of $5,117,000 will be paid in accordance with
the plan provisions.
BEGINNING ENDING
BALANCE FISCAL 2000 FISCAL 2000 BALANCE
OCTOBER 31, RECORDED PAYMENTS & OCTOBER 29,
1999 EXPENSES ADJUSTMENTS 2000
----------- ----------- ----------- -----------
(IN THOUSANDS)
Severance $ 1,121 $ 4,859 $ 3,769 $ 2,211
Termination benefits 343 647 580 410
Plant closure expenses 199 8,008 6,684 1,523
------- ------- ------- -------
$ 1,663 $13,514 $11,033 $ 4,144
======= ======= ======= =======
BEGINNING ENDING
BALANCE FISCAL 2001 FISCAL 2001 BALANCE
OCTOBER 29, RECORDED PAYMENTS & OCTOBER 28,
2000 EXPENSES ADJUSTMENTS 2001
----------- ----------- ----------- -----------
(IN THOUSANDS)
Severance $ 2,211 $ 4,587 $ 1,681 $ 5,117
Termination benefits 410 898 133 1,175
Plant closure expenses 1,523 86 1,413 196
------- ------- ------- -------
$ 4,144 $ 5,571 $ 3,227 $ 6,488
======= ======= ======= =======
59
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(19) IMPAIRMENT OF LONG LIVED ASSETS
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) 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 value of future discounted cash flows of the assets. The estimated
loss on assets to be disposed of is measured by comparison of the carrying
amount of the asset to estimated sales proceeds less other incremental direct
costs to transact the sale of the asset.
In connection with the restructuring of the Company, management decided to
close five of its facilities with a net carrying value of approximately
$48,400,000. These facilities are in the process of being closed and are
expected to be disposed of by the end of fiscal year 2002. Based on a
determination of estimated net sales proceeds, the Company recorded a loss
impairment of $30,002,000 related to machinery, equipment and other fixed assets
in fiscal year 2000.
In fiscal 2000, the Company identified goodwill impairment of $28,012,000
related to an acquired business. This impairment reflects the reduction in the
value of the goodwill related to the purchase of the Sterile Concepts custom
procedure tray business in 1996. At October 29, 2000, the undiscounted value of
future cash flows were estimated to be lower than the unamortized goodwill
balance primarily due to competitive pricing pressures and increased buying
group fees related to this business.
(20) SUBSEQUENT EVENTS
In the first quarter of 2002, the Company consummated the sale of 50,000 units
("Units"), each Unit being comprised of one share of its Series A Participating
Preferred Stock, par value $1.00 per share, and 162 warrants to purchase, for
$.01 per share, one share of its common stock per warrant. The aggregate
offering price and proceeds to the Company from the sale were $50 million in
cash. The sale was effected in two closings. Pursuant to the Stock Purchase
Agreement by and among the Company, Maxxim Medical Group, Inc. (a wholly owned
subsidiary of the Company), Fox Paine Capital Fund, L.P., FPC Investors, L.P.,
and Fox Paine Medic New Equity Corp., Fox Paine Capital Fund, L.P. and FPC
Investors, L.P. collectively purchased 23,500 Unites for $23,500,000 on
November 30, 2001. Following that closing, the Company offered each of its
existing shareholders and warrant holders the right to purchase their pro rata
share of the 50,000 Units on the same terms as those in Stock Purchase
Agreement, based on such holder's pro rata ownership of the Company's common
stock, on an as-converted basis. Those Units that were not purchased by the
Company's existing shareholders and warrant holders were also offered to select
potential investors. Under the Stock Purchase Agreement, Fox Paine Medic New
Equity Corp. agreed to purchase any Units not subscribed for by the other
offerees at the section closing, which occurred on December 31, 2001. On or
prior to December 31, 2001, 26,500 Units were sold to Fox Paine Medic New
Equity Corp., certain of the Company's existing warrant holders and new
investors, collectively, for $26.5 million.
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Maxxim Medical, Inc.:
We have audited the accompanying consolidated balance sheets of Maxxim
Medical, Inc. and subsidiaries (a Texas corporation) as of October 28, 2001 and
October 29, 2000 and the consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the years then ended. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Maxxim Medical, Inc. and
subsidiaries as of October 28, 2001 and October 29, 2000, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
As explained in Note 5 to the financial statements, effective October 30,
2000, the Company changed its method of accounting for financial instruments.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 (a)(2) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
information in this schedule relating to fiscal years 2001 and 2000 has been
subject to the auditing procedures applied in our audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
New York, New York
December 21, 2001
61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Maxxim Medical, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and comprehensive loss and cash flows of Maxxim Medical,
Inc. and subsidiaries for the year ended October 31, 1999. In connection with
our audit of these financial statements, we have also audited the financial
statement schedule for the year ended October 31, 1999, as listed in Item 14(a)
(2). These consolidated financial statements and the 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Maxxim Medical, Inc. and subsidiaries for the year ended October 31,
1999, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement schedule
for the year ended October 31, 1999, 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, 2000
62
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
In accordance with the shareholders agreement among our shareholders, our
shareholders that were shareholders prior to the recapitalization and that
continued to be shareholders afterwards have the right to designate up to three
members of our board of directors, elected by plurality vote of the shares held
by the continuing shareholders, and Fox Paine has the right to designate up to
four or more members of our board of directors.
The following table sets forth the names, ages and positions of the
individuals who serve as our executive officers and directors. Our directors are
elected annually at our annual meeting of shareholders, and serve until they
resign or are removed or until their successors are elected and qualified.
Subject to our obligations under the employment agreements described under "Item
13. Certain Relationships and Related Party Transactions," our officers are
appointed annually by the board of directors and serve until their removal by
the board, or their earlier resignation or death.
NAME AGE POSITION
- ---- --- --------
Saul A. Fox 48 Chairman
Russell D. Hays 57 Vice Chairman and Chief Executive Officer
Mark S. Sellers 50 Vice Chairman and Chief Financial Officer
Paulee C. Day 32 Corporate Vice President, General Counsel, Corporate Secretary and Regulatory Officer
Suzanne R. Garon 49 Executive Vice President, Human Resources
Anthony V. Greco 45 Corporate Vice President, Controller and Assistant Secretary
Richard S. Martin 37 Corporate Vice President Finance and Tax, Treasurer and Assistant Secretary
Paul Mooney 44 President, Surgical Products Group
Anthony Parziale 43 Corporate Vice President, Information Systems and Chief Technology Officer
Philip Seetin 44 Senior Vice President, Administration and Human Resources
Charles Taylor 51 Corporate Vice President, Financial Planning and Analysis
W. Dexter Paine 41 Director
Jason B. Hurwitz 29 Director
James R. Kroner 40 Director
Greg Barrett 48 Director
Thomas Mercer 58 Director
Marc Abramowitz 48 Director
Kenneth W. Davidson 54 Director
Ernest J. Henley, Ph. D. 75 Director
SAUL A. FOX has served as a director since November 1999 and Chairman of
the Board since July 2000. Mr. Fox is the founder and has been a managing member
of Fox Paine & Company, LLC and of Fox Paine Capital, LLC since their respective
formations in 1997. Mr. Fox is a director of WJ Communications, Inc., Alaska
Communications Holdings Group, Inc., Alaska Communications Systems Holdings and
Circon Holdings Corporation. Prior to founding Fox Paine, Mr. Fox was a general
partner of Kohlberg Kravis Roberts & Co.
RUSSELL D. HAYS has served as a director, Vice Chairman and Chief Executive
Officer since June 2001. Prior to joining us, Mr. Hays was Chief Executive
Officer of Biosource International from September 2000 to May 2001. Mr. Hays was
Chief Executive Officer of NEN Life Science Products from January 2000 to August
2000. Mr. Hays was President and Chief Executive Officer of ReSound Corporation
from February 1998 to July 1999. From June 1995 to January 1998, Mr. Hays served
as Nellcor Puritan Bennett's Corporate Executive Vice President and President,
Hospital Business. Mr. Hays also serves as a director of Ciron Holdings
Corporation.
63
MARK S. SELLERS has served as a director, Vice Chairman and Chief Financial
Officer since July 2000. Prior to joining us, Mr. Sellers was Vice Chairman and
Chief Financial Officer of Pameco Corporation, Inc. from June 1999 to June 2000.
Mr. Sellers was Chairman, President, Chief Executive Officer and director of
Southwest Supermarkets, L.L.C. from December 1997 to March 1999, and was
Chairman, Chief Executive Officer and director of SGSM L.L.C. from February 1997
to October 1998. From November 1995 through April 1999, Mr. Sellers was
Chairman, President, Chief Executive Officer, Chief Financial Officer and
director of Bay Area Foods Holding Co. and Bay Area Foods, Inc. Mr. Sellers is
currently also director, acting Chief Financial Officer, Assistant Secretary and
Treasurer of Circon Holdings.
PAULEE C. DAY has served as Corporate Vice President, General Counsel,
Secretary and Regulatory Officer since July 2000 and as Vice President and
General Counsel since May 1999. Prior to joining us, Ms. Day was a corporate
attorney with Eckerd Corporation from June 1997 to May 1999 and an attorney with
Trenam Kemker Scharf Barkin Frye O'Neill & Mullis, P.A. from September 1995
through June 1997.
SUZANNE R. GARON has served as Executive Vice President, Human Resources
Holdings since January 1999 and as Vice President since January 1997. Ms. Garon
served as Vice President Human Resources, Case Management from August 1995 until
January 1997.
ANTHONY V. GRECO has served as Corporate Vice President and Controller
since September 2000 and Vice President and Controller, North America since
October 1996. Mr. Greco was appointed Assistant Secretary in January 2001.
RICHARD S. MARTIN has served as Corporate Vice President Finance and Tax
since September 2000. Mr. Martin was appointed Treasurer and Assistant Secretary
in January 2001. Prior to joining us, Mr. Martin was director of mergers and
acquisitions, interim Chief Financial Officer, Vice President, Secretary and
Treasurer of Pameco Corporation, Inc. from September 1998 to September 2000. Mr.
Martin was Manager of Finance at Overseas Partners Capital Corp. from January
1995 to September 1998.
PAUL MOONEY has served as President, Surgical Products Group since
September 2001. Prior to joining us, Mr. Mooney spent 19 years with American
Hospital Supply Corp, Baxter Healthcare, Allegiance Healthcare and Cardinal
Health.
ANTHONY PARZIALE has served as Corporate Vice President Information Systems
and Chief Technology Officer since October 2000. Prior to joining us, Mr.
Parziale was Chief Technology Officer for Folded Edge, Inc. from November 1999
through September 2000 and Director of Information Technology for Cluett,
Peabody & Co. Inc. from April 1995 through November 1999.
PHILIP SEETIN was appointed Senior Vice President of Administration and
Human Resources in August 2001 and has served as Corporate Vice President, Risk
Management, Real Estate and Administration since November 2000. Prior to joining
us, Mr. Seetin was Senior Vice President, Corporate Administration, Pameco
Corporation from August 1999 through May 2000 and Senior Vice President
Corporate Administration, SGSM, L.L.C. & Southwest Supermarkets from October
1996 through May 1999.
CHARLES TAYLOR has served as Corporate Vice President Financial Planning
and Analysis since August 2000. Prior to joining us, Mr. Taylor was an
independent consultant responsible for analysis and development for Pameco
Corporation from August 1999 to May 2000 and Director of Operations and Controls
and Budgeting at Schwegemann Giant Supermarkets from April 1997 to August 1999.
W. DEXTER PAINE, III has served as a director since November 1999. Mr.
Paine is the founder and has been a managing member of Fox Paine & Company, LLC
and of Fox Paine Capital, LLC since their respective formations in 1997. Mr.
Paine is a director of WJ Communications, Inc., Alaska Communications Holdings
Group, Inc., Alaska Communications Systems Holdings and Circon Holdings
Corporation. Prior to founding Fox Paine, Mr. Paine was a general partner of
Kohlberg & Company.
JASON B. HURWITZ has been a director since November 1999. Mr. Hurwitz is
also a director of WJ Communications, Inc. Mr. Hurwitz has been a director of
Circon Holdings since its formation on June 10, 1999. Mr. Hurwitz has been
employed at Fox Paine & Company, LLC since June 1997 and has served as an
associate, Vice President and, currently, a director of Fox Paine & Company,
LLC. Mr. Hurwitz was an associate at McCown De Leeuw & Co. from August 1996 to
June 1997 and was an analyst at James D. Wolfensohn Incorporated from July 1994
to July 1996.
64
JAMES R. KRONER has been a director since February 2000. He currently is a
Managing Director at Fox Paine, a position he has held since February 2000. From
February 1998 to February 2000, Mr. Kroner was a Managing Director in the
investment banking division of JP Morgan & Co., and from December 1997 to
February 1998, he was a Managing Director in the Financial Institutions practice
of Salomon Smith Barney. Prior to December 1997, Mr. Kroner served as Senior
Vice President and Treasurer of American Re Corporation. Mr. Kroner is a
director of WJ Communications, Inc., and Circon Holdings.
GREG BARRETT has served as a director since January 2001. He is currently
Chief Executive Officer, President and member of the board of Circon Holdings, a
position he began in January 2001. Prior to joining Circon Holdings, Mr. Barrett
was employed by Boston Scientific Corporation since 1996 and most recently
served as Group Vice President and President for Boston Scientific Corporation's
Microvasive divisions.
THOMAS MERCER has served as a director since November 2001. Mr.
Mercer's principal employment for more than the past five years has been as a
partner of Ceres Capital Partners, L.P. Mr. Mercer is a director of Lone Star
Technologies, Inc.
MARC ABRAMOWITZ has served as a director since November 2001.
Mr. Abramowitz is a private investor and real estate developer.
KENNETH W. DAVIDSON has served as a director since 1982, and served as
Chairman of the Board of Directors, Chief Executive Officer and President of
Maxxim Holdings from November 1986 through July 2000. Mr. Davison is currently
Chief Executive Officer, President and director of Encore Orthopedics, Inc, a
designer and manufacturer of implantable orthopedic devices. Mr. Davidson also
serves as a director of Circon Holdings.
ERNEST J. HENLEY, PH.D. has served as a director since 1976. Dr. Henley
served as a consultant to Maxxim Holdings from 1976 until May 1996. Dr. Henley's
principal employment for more than the past five years has been as a Professor
of Chemical Engineering at the University of Houston. Dr. Henley also serves as
a director of Circon Holdings.
No family relationships exist between any of our directors and executive
officers.
65
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Generally our directors serve without monetary compensation for their
service. However, in connection with our issuance and sale of preferred stock
and warrants in November and December 2001, Messrs. Abramowitz and Mercer served
as the members of the Special Committee to the Board of Directors, which was
charged with the responsibility to (1) consider the advisability of a potential
equity issuance, (2) make such determinations, including with respect to the
potential equity issuance as it deemed necessary or advisable under any
applicable laws and agreements, (3) negotiate an equity issuance on our behalf,
including but not limited to, executing any documents, certificates or
agreements in connection with an equity issuance, (4) report to our Board its
findings and recommendations with respect to potential equity issuances, and (5)
take any actions relating to or arising out of the above. See "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Second Amendment to the Credit
Facilities and Waiver; Bridge Loan; Equity Financing" for a description of the
issuance and sale of the preferred stock and warrants. For serving on the
Special Committee, they were paid $20,000 each plus $1,000 per day for time
spent in meetings or on Special Committee business. Mr. Abramowitz was paid a
total of $25,000 for his service on the Special Committee and Mr. Mercer was
paid $28,000.
66
COMPENSATION OF EXECUTIVE OFFICERS
The following table is a summary of the compensation paid or accrued by us
in each of the last three fiscal years for services in all capacities to each of
the individuals who qualified as a "named executive officer," as defined in Item
402(a) (3) of Regulation S-K under the Securities Exchange Act, during each such
fiscal year.
Long-Term
Compensation
Awards
Securities
Annual Compensation Other Annual Underlying Other Annual
---------------------------------
Name and Principal Position Year Salary(1) Bonus(1) Compensation(2) Options(#)(3) Compensation(4)
- --------------------------- ---- ---------- -------- --------------- ------------- ---------------
RUSSELL D. HAYS 2001 $357,500 $ -- $ -- 2,000,000 $ --
Vice Chairman and 2000 -- -- -- -- --
Chief Executive Officer 1999 -- -- -- -- --
MARK S. SELLERS 2001 619,646 166,667 7,500 -- --
Vice Chairman and 2000 163,462 -- -- 220,000 --
Chief Financial Officer 1999 -- -- -- -- --
PHILIP SEETIN 2001 134,808 25,904 -- -- 1,669
Senior Vice President 2000 -- -- -- -- --
Administration and 1999 -- -- -- -- --
Human Resources
RICHARD S. MARTIN 2001 125,237 28,750 -- -- 1,482
Vice President Finance 2000 -- -- -- -- --
and Tax 1999 -- -- -- -- --
ANTHONY PARZIALE 2001 120,016 31,442 -- -- 1,489
Vice President 2000 -- -- -- -- --
Information Systems 1999 -- -- -- -- --
AKBAR NADERI 2001 622,690 108,333 31,875 -- --
Former Vice Chairman and 2000 101,442 -- -- 750,000 --
President
(1) Compensation deferred at the election of a named executive officer is
included in the category and year it would have otherwise been reported had
it not been deferred.
(2) Includes both the value of the interest imputed on non-interest bearing
loans and our matching contributions on compensation deferred by the named
executive officers.
(3) Fiscal years 2001 and 2000 includes options granted and effective during
the fiscal year.
(4) Includes contributions made by us to our 401(k) plan on behalf of the
employee. Each eligible employee has the option to contribute up to 15% of
his or her salary, but in no event more than $10,500, and to have such
deferred amounts invested in the 401(k) plan. We may, but are not required
to, make a matching contribution to the 401(k) plan of up to the first 6%
of the salary of such participating employee. All employee contributions
are fully vested. Our contributions vest over a six-year period.
67
Options Granted in Last Fiscal Year
% OF
TOTAL
NUMBER OF OPTIONS MARKET POTENTIAL REALIZABLE VALUE
SECURITIES GRANTED VALUE OF AT ASSUMED ANNUAL RATES
UNDERLYING TO EXERCISE STOCK ON OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE DATE OF FOR OPTION TERM
GRANTED IN FISCAL PRICE GRANT EXPIRATION ---------------------------------
NAME (#) (1) YEAR ($/SH) (2) ($/SH) DATE 5%($) 10%($) 0%($)
- ---- ------- ---- ---------- ------ ---- ----- ------ -----
Russell Hays 2,000,000 100.0% $ 5.00 $ 5.00 06/18/11 $2,762,816 $6,105,100 $ --
Mark Sellers -- -- -- -- -- -- -- --
Philip Seetin -- -- -- -- -- -- -- --
Richard S. Martin -- -- -- -- -- -- -- --
Anthony Parziale -- -- -- -- -- -- -- --
Akbar Naderi -- -- -- -- -- -- -- --
(1) Comprised of options granted effective during the fiscal year ended October
28, 2001, with respect to the respective performances of the named
executive officers.
(2) The options granted are exercisable based on terms established within each
option plan.
The Company has not granted any stock appreciation rights.
Set forth in the following table is summary information regarding the stock
option exercises in fiscal 2001 and the value of all unexercised options as of
the end of fiscal 2001 for each of the executive officers included in the
Summary Compensation Table:
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED VALUE (#) EXERCISABLE / ($) EXERCISABLE /
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ------------- -------------
Russell Hays -- $ -- 0 / 2,000,000 $ 0 / 0
Mark Sellers -- -- 73,260 / 146,740 0 / 0
Philip Seetin -- -- -- --
Richard S. Martin -- -- -- --
Anthony Parziale -- -- -- --
Akbar Naderi -- -- -- --
68
Employment Agreements
In June 2001, June 2000 and July 2000, we entered into employment
agreements with Messrs. Hays, Naderi and Sellers, respectively, as described
below.
The employment agreement with Mr. Hays provides for a term through June
2006. During the employment term, Mr. Hays will serve as vice chairman of the
board of directors and chief executive officer and receive an annual base salary
in the amount of $700,000. In addition, Mr. Hays will be eligible to receive an
annual performance bonus of up to $550,000 based upon the terms and conditions
of a bonus program to be established by our Board of Directors. The agreement
also provides for additional monthly and annual benefits, and contains
confidentiality and non-competition provisions.
Upon the termination of Mr. Hays' employment by us, (other than for cause
(as defined in the agreement), death or disability), or by Mr. Hays for good
reason (as defined in the agreement), Mr. Hays will be entitled to the lesser of
(i) $500,000 to be paid over 12 months if such termination occurs during the
initial 4 years of the term of the agreement or (ii) $41,667 each month for the
remaining term of the agreement.
In addition, pursuant to the terms of his employment agreement, Mr. Hays
received options to purchase 2,000,000 shares of our common stock, at an
exercise price of $5.00 per share, subject to the terms of our 1999 Stock
Incentive Plan. The options vest proportionately over a five year period from
the date of issuance, subject to fully accelerated vesting in the event of a
change of control. Vesting ceases and the term of unvested options lapse upon
termination of employment for any reason. Vested options may be exercised for 90
days following a termination of employment, except upon termination for cause.
Furthermore, as contemplated by the employment agreement, in October 2001,
Mr. Hays made an investment of $1,000,000 for the purchase of 200,000 shares of
our common stock at $5.00 per share. One-half of the aggregate purchase price
was paid in cash and the remaining half paid by delivery of a promissory note.
The payment of the note is non-recourse, other than with respect to the shares
of stock which Mr. Hays purchased, and is secured by a pledge of those shares.
The note provides for interest at the lowest rate allowable by the Internal
Revenue Service which avoids the imputation of interest income, compounded
annually. Interest accrues on the note and is added to principal, which is due
and payable in full on the ninth anniversary of the note. The note also provides
for mandatory prepayment from the proceeds of any sale of Mr. Hays common stock
and/or options.
The employment agreement with Mr. Naderi provides for a term through
October 31, 2004, with automatic one-year renewals unless either party
terminates upon 90 days notice. Mr. Naderi resigned his position as President
and Vice Chairman in June 2001. During Mr. Naderi's employment, Mr. Naderi
served as Vice Chairman of the board of directors and President and received an
annual base salary of $425,000. Mr. Naderi was eligible to receive an annual
performance bonus based upon the terms and conditions of a bonus program to be
established by our board of directors, which program imposed performance goals
related to both us and Circon, provided, however, that Mr. Naderi was guaranteed
an annual bonus of $108,333 for fiscal year 2000 and a minimum bonus of at least
$216,667 for fiscal year 2001. The employment agreement also provided for other
monthly and annual benefits, and contains confidentiality and non-competition
provisions. The agreement also provided that, if requested by us under our
services agreement with Circon, Mr. Naderi would provide requested services to
Circon.
Upon the termination of Mr. Naderi's employment by us (other than for cause
(as defined in the agreement), death or disability), or by Mr. Naderi for good
reason (as defined in the agreement), Mr. Naderi was entitled to monthly
severance payments equal to his then current monthly base salary for a period of
3 years, to be reduced by one month for each month of service, but in no event
shall such severance be less than 18 months.
In addition, under the terms of the employment agreement, Mr. Naderi
received options to purchase 750,000 shares of our common stock at an exercise
price of $5.00 per share, subject to the terms of our 1999 Stock Incentive Plan.
The options were to vest over four years in one-quarter annual increments from
the date of issuance, subject to full-accelerated vesting in the event of a
change of control.
Furthermore, as contemplated by the employment agreement, in October 2000,
Mr. Naderi made an investment of $637,500 for the purchase of 127,500 shares of
our common stock at $5.00 per share. One-half of the purchase price was paid in
cash and the remaining half of the purchase price paid by delivery of a
promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Naderi purchased, and is secured by a
pledge of those shares. The note also provides for 10% interest compounded
annually over its nine-year term, which may be reduced to 6% should the note be
converted to a full recourse obligation. For the first five years of the note,
interest accrues and is added to principal. Thereafter, interest is payable in
annual installments. Principal is due in full on the ninth anniversary of the
note,
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subject to mandatory prepayments equal to 25% of the then outstanding principal
on the sixth, seventh, eighth and ninth anniversaries of the note and from
prepayment from the proceeds of the sale of Mr. Naderi's shares and/or options.
The employment agreement with Mr. Sellers provides for a term through
October 31, 2003, with automatic one-year renewals unless either party
terminates upon 180 days notice. During the employment term, Mr. Sellers will
serve as vice chairman of the board of directors and chief financial officer and
receive an annual base salary in the amount of $500,000. In addition, Mr.
Sellers will be eligible to receive an annual performance bonus of up to
$1,000,000 based upon the terms and conditions of a bonus program to be
established by our Board of Directors, which program may impose performance
goals related to both us and Circon. Mr. Sellers also received a one-time
starting bonus in the amount of $175,000 to be applied against any subsequent
annual bonus payments. The agreement also provides for additional monthly and
annual benefits, and contains confidentiality and non-competition provisions.
The agreement also provides that, if requested by us under our services
agreement with Circon, Mr. Sellers will provide requested services to Circon.
Upon the termination of Mr. Sellers' employment by us (other than for cause
(as defined in the agreement), death or disability), or by Mr. Sellers for good
reason (as defined in the agreement), Mr. Sellers will be entitled to monthly
severance payments equal to his current monthly base salary for a period of 40
months, to be reduced by one month for each month of service.
In addition, pursuant to the terms of his employment agreement, Mr. Sellers
received options to purchase 220,000 shares of our common stock, at an exercise
price of $5.00 per share, subject to the terms of our 1999 Stock Incentive Plan.
The options vest over three years in one-third annual increments from the date
of issuance, subject to fully accelerated vesting in the event of a change of
control or the termination of Mr. Sellers' employment by us without cause, and
pro-rata vesting based on a two-year accelerated schedule upon Mr. Seller's
resignation for good reason.
Furthermore, as contemplated by the employment agreement, in October 2000,
Mr. Sellers made an investment of $150,000 for the purchase of 30,000 shares of
our common stock at $5.00 per share. One-half of the aggregate purchase price
was paid in cash and the remaining half paid by delivery of a promissory note.
The payment of the note is non-recourse, other than with respect to the shares
of stock which Mr. Sellers purchased, and is secured by a pledge of those
shares. The note provides for 10% interest compounded annually, which may be
reduced to 6% should the note be converted to a full recourse obligation.
Interest accrues on the note and is added to principal, which is due and payable
in full on the second anniversary of the note. The note also provides for
mandatory prepayment from the proceeds of any sale of Mr. Seller's common stock
and/or options.
In September 2000 and November 2000, we entered into employment agreements
with Messrs. Martin and Seetin, respectively, as described below.
The employment agreement with Mr. Martin provides for a term through
August 2002. During the employment term, Mr. Martin will serve as vice
president of finance and tax, treasurer and assistant secretary, and receive an
annual base salary in the amount of $120,000. In addition, the employment
agreement provides for a one time bonus of $25,000, payable over the first
twelve months of employment. Mr. Martin also will be eligible to receive an
annual performance bonus of up to 50% of his base salary. The agreement also
provides for additional monthly and annual benefits, and contains
confidentiality and non-competition provisions.
Mr. Martin will also participate in our Key Employee Plan which provides
for a guaranteed retention payment equal to 50% of his base salary at the end
of four years and an additional 50% bonus, earned one-fourth each year based on
company and individual performance.
The employment agreement with Mr. Seetin provides for a term through
November 19, 2002. During the employment term, Mr. Seetin will serve as vice
president of risk management, real estate, loss prevention & safety programs and
facility management, and receive an annual base salary in the amount of
$120,000. In addition, the employment agreement provides for a one time bonus of
$24,000, payable one-half upon commencement of employment and one-half payable
over the first twelve months of employment. Mr. Seetin also will be eligible to
receive an annual performance bonus of up to 50% of his base salary. The
agreement also provides for additional monthly and annual benefits, and contains
confidentiality and non-competition provisions.
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Mr. Seetin will also participate in our Key Employee Plan which provides
for a guaranteed retention payment equal to 50% of his base salary at the end of
four years and an additional 50% bonus, earned one-fourth each year based on
company and individual performance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions concerning our executive officers are made by the
board of directors.
Mr. Davidson was our President and Chief Executive Officer until July 2000.
He also served as a director and president of Circon Holdings Corporation from
the date of the consummation of the recapitalization, November 12, 1999, until
July 2000, when his service as president of Circon Holdings was terminated. He
remains a member of the board of directors of Circon Holdings.
Akbar Naderi was our Vice Chairman and President from June 2000 until June
2001. He also served as a director of Circon Holdings from June 2000 until June
2001.
Russell Hays, who currently serves as Vice Chairman of our board of
directors and as our chief executive officer, also serves on the board of
directors of Circon Holdings. Mark Sellers, who currently serves as vice
chairman of our board of directors and our chief financial officer, also serves
on the board of directors of Circon Holdings and as acting chief financial
officer, assistant secretary and treasurer of Circon Holdings. Greg Barrett, who
currently serves on our board of directors, also serves on the board of
directors and as chief executive officer and president of Circon Holdings. Jason
Hurwitz, who currently serves on our board of directors, also serves on the
board of directors of Circon Holdings and served as an executive officer of
Circon Holdings during part of 2001. Other members of our board of directors who
also serve on the board of directors of Circon Holdings include Saul Fox, Dexter
Paine, James Kroner and Ernest Henley. The board of directors of Circon Holdings
is responsible for making compensation decisions concerning its executive
officers. Both Maxxim and Circon Holdings are controlled by Fox Paine Capital,
LLC. Saul Fox, who currently serves as the chairman of our board of directors,
is a managing member of Fox Paine Capital, LLC. Dexter Paine, who currently
serves on our board of directors, is also a managing member of Fox Paine
Capital, LLC.
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Related Party Transactions with Mr. Hays.
Pursuant to the terms of Mr. Hays' employment agreement, in October 2001,
Mr. Hays made an investment of $1,000,000 for the purchase of 200,000 shares of
our common stock at $5.00 per share. One half of the purchase price was paid in
cash and the remaining half of the purchase price was paid by delivery of a
promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Hays purchased and is secured by a
pledge of those shares. The note provides for interest at the lowest rate
allowable by the Internal Revenue Service which avoids the imputation of
interest income, compounded annually. Interest accrues on the note and is added
to principal, which is due and payable in full on the ninth anniversary of the
note. The note also provides for mandatory prepayment from the proceeds of any
sale of Mr. Hays common stock and/or options. The full amount of the note was
outstanding at October 28, 2001.
Related Party Transactions with Mr. Sellers.
Pursuant to the terms of Mr. Sellers' employment agreement, in October
2000, Mr. Sellers made an investment of $150,000 for the purchase of 30,000
shares of our common stock at $5.00 per share, with one-half of the aggregate
purchase price paid in cash and the remaining half paid by delivery of a
promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Sellers purchased, and is secured by a
pledge of those shares. The note provides for 10% interest compounded annually,
which may be reduced to 6% should the note be converted to a full recourse
obligation. Interest accrues on the note and is added to principal, which is due
and payable in full on the second anniversary of the note. The note also
provides for mandatory prepayment from the proceeds of any sale of Mr. Seller's
common stock and/or options. The full amount of the note was outstanding at
October 28, 2001.
In connection with the relocation of a portion of the Company's
executive management staff from Clearwater, Florida to Waltham, Massachusetts,
we made a loan in the amount of $635,000 to Mr. Sellers on December 28, 2001, to
provide funds for him to purchase a new home in the Boston area prior to the
sale of his present home. The loan is secured by a security interest in both
homes as well as all of the Maxxim stock and stock options held by Mr. Sellers
and certain other securities, and is due upon the earliest of (i) June 28, 2002,
(ii) receipt by him of proceeds from the sale of either home, (iii) the
termination of his employment with us for any reason, or (iv) upon breach by Mr.
Sellers of any provision of the note or the related stock pledge agreement. This
loan will bear interest until paid at the lowest rate allowed under the Internal
Revenue Code which avoids the imputation of income to us for tax purposes.
Related Party Transactions with Mr. Naderi
Pursuant to the terms of Mr. Naderi's employment agreement, in October
2000, Mr. Naderi made an investment of $637,500 for the purchase of 127,500
shares of our common stock at $5.00 per share. One half of the purchase price
was paid in cash and the remaining half of the purchase price paid by delivery
of a promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Naderi purchased, and is secured by a
pledge of those shares. The note also provides for 10% interest compounded
annually over its nine-year term, which may be reduced to 6% should the note be
converted to a full recourse obligation. For the first five years of the note,
interest accrues and is added to principal. Thereafter, interest is payable in
annual installments. Principal is due in full on the ninth anniversary of the
note, subject to mandatory prepayments equal to 25% of the then outstanding
principal on the sixth, seventh, eighth and ninth anniversaries of the note and
from prepayment from the proceeds of the sale of Mr. Naderi's shares and/or
options. The full amount of the note was outstanding at October 28, 2001.
Related Party Transactions with Mr. Davidson.
In May 1997, we issued 2,080,000 shares of our common stock at a price of
$2.50 per share to members of our senior management, including Mr. Davidson,
under our senior management stock purchase plan. These shares were issued in
exchange for non-interest bearing, full recourse promissory notes due May 23,
2000. In connection with the recapitalization, the amounts due under the
promissory notes were divided between us and Circon Holdings to reflect the fact
that some of the shares of our common stock that were subject to the old notes
were exchanged for shares of Circon Holdings common stock in the
recapitalization. The old notes were canceled and replaced with new notes
containing substantially identical terms, except as described below. The new
notes extended the due date until the tenth anniversary of the completion of the
recapitalization. The new notes also provides for mandatory prepayments using
the after-tax proceeds of any sales of shares of our common stock or Circon
Holdings common stock or options to purchase our common stock or Circon Holdings
common stock after the completion of the recapitalization. The old notes
contained a provision requiring repayment of the notes upon the termination of
the employee's employment. The new notes do not. In
72
addition, our stock purchase plan was amended to remove a provision that
required the holder to forfeit to us 50% of the profit from the sale of shares
of our common stock that are subject to the promissory notes. With respect to
Mr. Davidson, the aggregate outstanding principal amount owed by him under his
promissory note was $1,300,000 at the time of the recapitalization. New notes in
the amounts of $745,602 and $554,398, respectively, were issued to us and Circon
Holdings. The full amount of such note was outstanding at October 28, 2001.
We entered into an employment agreement with Mr. Davidson effective
November 1, 1997, which replaced a previous employment agreement effective
November 1, 1994. Among other things, Mr. Davidson's November 1, 1997 employment
agreement required us to make a loan or loans to Mr. Davidson not to exceed an
aggregate of $500,000, including loans made under Mr. Davidson's previous
employment agreement, to enable Mr. Davidson to pay any federal income taxes
associated with the exercise by him of options to purchase shares of our common
stock. Each loan made to Mr. Davidson was to be non-interest bearing, unsecured
and repayable in ten equal annual installments, on the third through twelfth
anniversaries of the date of such loan. The total amount outstanding under all
such loans at October 28, 2001, was $500,000. Mr. Davidson is delinquent in
payment of his fiscal 2001 and 2000 repayment obligations under these loans.
In April 2000, we entered into an agreement with Mr. Davidson requiring us
to make a loan in the amount of $348,000 to cover the taxes due on the cash
received from the conversion of the 535,257 shares of common stock he used to
purchase shares of Circon Holdings common stock in the recapitalization. There
is no cash interest payment on this tax loan. Instead, interest is imputed and
Mr. Davidson received a gross-up payment from us in respect of the taxes due on
that imputed interest. The tax loan is mandatorily repayable from the after-tax
proceeds of future sales of shares of Circon Holdings common stock. The full
amount of this loan was outstanding at October 28, 2001.
Related Party Transactions with Dr. Henley
In April 2000, we entered into an agreement with Dr. Henley requiring us
to make a loan in the amount of $555,000 to cover the taxes due on the cash
received from the conversion of the 554,398 shares of common stock he used to
purchase shares of Circon Holdings common stock in the recapitalization. There
is no cash interest payment on this tax loan. Instead, interest is imputed and
Dr. Henley received a gross-up payment from us in respect of the taxes due on
that imputed interest. The tax loan is mandatorily repayable from the after-tax
proceeds of future sales of shares of Circon Holdings common stock. The full
amount of this loan was outstanding at October 28, 2001.
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ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock and Series A preferred stock as of January 21,
2002 by (1) each person known by us to own beneficially more than 5% of our
common stock and Series A preferred stock; (2) each of our directors named
executive officers and (3) all of our executive officers and directors as a
group. Such information takes into account a stock dividend of 4.2 shares of
common stock for each share of common stock outstanding on November 1, 2000,
except as otherwise indicated in the footnotes below, each beneficial owner has
the sole power to vote and to dispose of all shares held by such owner.
MAXXIM HOLDINGS PERCENT OF MAXXIM HOLDINGS PERCENT OF
COMMON STOCK MAXXIM HOLDINGS PREFERRED STOCK MAXXIM HOLDINGS
BENEFICIALLY COMMON STOCK BENEFICIALLY PREFERRED STOCK
NAME OWNED ** OUTSTANDING OWNED ** OUTSTANDING
---- -------- ----------- ------- -----------
Fox Paine Capital, LLC (1) 36,529,061 87.7% 43,148 83.6%
Fox Paine Capital Fund, L.P. (1) 31,576,582 51.0 42,517 85.0
FPC Investors, L.P. (1) 468,570 1.5 631 1.3
GS Mezzanine Partners, L.P. and GS Mezzanine
Partners Offshore, L.P. (2) 2,901,666 9.0 3,236 6.5
Russell D. Hays 200,000 * -- --
Mark S. Sellers 103,260 (3) * -- --
Richard S. Martin -- -- -- --
Anthony Parziale -- -- -- --
Philip Seetin -- -- -- --
Akbar Naderi (4) 315,000 -- -- --
Kenneth W. Davidson (5) 959,473 3.2 -- --
Ernest J. Henley, Ph.D (6) 745,602 2.5 -- --
Saul A. Fox(1) 468,570 (1) 1.5 631 1.3
W. Dexter Paine, III (1) 468,570 (1) 1.5 631 1.3
Jason B. Hurwitz -- -- -- --
James R. Kroner -- -- -- --
Greg Barrett (7) -- -- -- --
Thomas Mercer -- -- -- --
Marc Abramowitz -- -- -- --
All directors and executive officers
As a group(19 persons) (8) 2,987,432 9.6 631 1.3
- -----------------
* Ownership is less than 1% of common stock outstanding.
** A person is deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days. Under
the beneficial ownership rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed to be
beneficial owner of securities as to which such person has no economic
interest. The address of Fox Paine Capital, LLC, Fox Paine Capital Fund,
L.P., FPC Investors, L.P. and Messrs. Paine, Fox, Hurwitz and Kroner is 950
Tower Lane, Suite 1150, Foster City, CA 94404. The addresses of Messrs.
Hays, Sellers, Martin, Parziale, Seetin, Mercer and Abramowitz is 950
Winter Street, Suite 2900, Waltham, Massachusetts, 02451.
(1) Fox Paine Capital, LLC is (a) General Partner of (1) Fox Paine Capital
Fund, L.P. and (2) FPC Investors, L.P. and (b) the sole manager of (1)
Maxxim Coinvestment Fund I, LLC, Maxxim Coinvestment Fund II, LLC, Maxxim
Coinvestment Fund III, LLC, Maxxim Coinvestment Fund IV, LLC and Maxxim
Coinvestment Fund V, LLC, only one of which funds owns in excess of 5% of
the outstanding shares of Maxxim Holdings common stock and preferred stock
and possesses voting and investment power over all shares held by each of
such entities. Fox Paine Capital, LLC is not the record owner of any shares
of Maxxim Holdings common stock . Messrs. Fox and Paine are the members of
Fox Paine Capital, LLC and share voting power of Fox Paine Capital, LLC.
None of the shares shown as beneficially owned by either Messrs. Fox or
Paine are owned of record by such individuals. Each of such individuals
disclaims beneficial ownership of such shares except to the extent of his
indirect pecuniary interest therein. Includes 6,989,976 shares purchaseable
under currently exercisable warrants and 4,314,800 shares issuable upon
conversion of Series A preferred stock.
(2) The general partner of each of GS Mezzanine Partners, L.P. and GS Mezzanine
Partners Offshore, L.P. is an indirect wholly-owned subsidiary of the
Goldman Sachs Group. Includes 1,442,349 shares purchasable under currently
exercisable warrants and 323,600 shares issuable upon conversion of Series
A preferred stock. The address of GS Mezzanine Partners, L.P. is 85
Broad Street, New York, New York 10004.
(3) Includes 73,260 shares purchasable under currently exercisable options.
(4) The address of Mr. Naderi is 602 North Cannon Drive, Beverly Hills,
California 90210.
74
(5) The address of Mr. Davidson is 24107 Hwy 71 West, Spicewood, Texas 78669.
(6) The address of Dr. Henley is 49 Briar Hollow Lane #1902, Houston, Texas
77027.
(7) The address of Mr. Barrett is 492 Old Connecticut Path, Framingham,
Massachusetts 01701
(8) Includes shares deemed to be beneficially owned by Messrs. Fox and Paine as
a result of their relationships with and to Fox Paine. Excluding such
shares, all directors and executive officers as a group beneficially own
2,380,936 shares of common stock representing 7.8% of our outstanding
common stock.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SHAREHOLDER REDEMPTION RIGHTS
The minority shareholders who were members of prior management, including
Mr. Davidson, have the right to sell any shares of our common stock that are
acquired upon the exercise of stock options, provided that the shares have been
held for at least six months, back to us at fair market value upon death or
disability or termination of employment by such management investors for good
reason or by us without cause. The minority shareholders' liquidity rights
described above will end upon completion of an initial public offering of our
shares of common stock and, in any event, are subject to our available cash
flow, debt restrictions and any legal restrictions on distributions of cash. If
payments related to these rights are not made immediately, the payments will
remain our continuing obligation and will be made, with interest, before the
payment of any dividends or distributions to other shareholders.
MANAGEMENT AND ADVISORY SERVICES PROVIDED BY FOX PAINE
In connection with the recapitalization, we entered into a management
services agreement with an affiliate of Fox Paine pursuant to which such
affiliate will provide certain financial and strategic consulting and advisory
services to us. In exchange for these services, the Fox Paine affiliate is
entitled to a fee based on the services provided, equal to 1% of our annual
adjusted EBITDA for the prior fiscal year. For the fiscal year ended October 28,
2001, we paid $748,000 under this agreement.
CIRCON SERVICES AGREEMENT
In connection with the recapitalization, we entered into a services
agreement with Circon Holdings and Circon requires us to provide services to
Circon Holdings and Circon, including services and advice provided by our
management employees as well as general corporate overhead services. In exchange
for these services, Circon Holdings and Circon reimburse us for all direct
expenses and out of pocket fees directly attributable to the services provided
to Circon Holdings and Circon. For services without expenses or fees directly
attributable to Circon Holdings and Circon, the actual cost of such services are
allocated between us, on the one hand, and Circon Holdings and Circon, on the
other hand, pro rata based on net sales. For the fiscal year ended October 28,
2001, we received $0 under this agreement.
LOANS
Mr. Hays.
Pursuant to the terms of Mr. Hays' employment agreement, in October 2001,
Mr. Hays made an investment of $1,000,000 for the purchase of 200,000 shares of
our common stock at $5.00 per share. One half of the purchase price was paid in
cash and the remaining half of the purchase price was paid by delivery of a
promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Hays purchased and is secured by a
pledge of those shares. The note provides for interest at the lowest rate
allowable by the Internal Revenue Service which avoids the imputation of
interest income, compounded annually. Interest accrues on the note and is added
to principal, which is due and payable in full on the ninth anniversary of the
note. The note also provides for mandatory prepayment from the proceeds of any
sale of Mr. Hays common stock and/or options. The full amount of the note was
outstanding at October 28, 2001.
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Mr. Sellers.
Pursuant to the terms of Mr. Sellers' employment agreement, in October
2000, Mr. Sellers made an investment of $150,000 for the purchase of 30,000
shares of our common stock at $5.00 per share, with one-half of the aggregate
purchase price paid in cash and the remaining half paid by delivery of a
promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Sellers purchased, and is secured by a
pledge of those shares. The note provides for 10% interest compounded annually,
which may be reduced to 6% should the note be converted to a full recourse
obligation. Interest accrues on the note and is added to principal, which is due
and payable in full on the second anniversary of the note. The note also
provides for mandatory prepayment from the proceeds of any sale of Mr. Seller's
common stock and/or options. The full amount of the note was outstanding at
October 28, 2001.
In connection with the relocation of a portion of the Company's executive
management staff from Clearwater, Florida to Boston, Massachusetts, we made a
loan in the amount of $635,000 to Mr. Sellers on December 28, 2001, to provide
funds for him to purchase a new home in the Boston area prior to the sale of his
present home. The loan is secured by a security interest in both homes as well
as all of the Maxxim stock and stock options held by Mr. Sellers and certain
other securities, and is due upon the earliest of (i) June 28, 2002, (ii)
receipt by him of proceeds from the sale of either home, (iii) the termination
of his employment with us for any reason, or (iv) upon breach by Mr. Sellers of
any provision of the note or the related stock pledge agreement. This loan will
bear interest until paid at the lowest rate allowed under the Internal Revenue
Code which avoids the imputation of income to us for tax purposes.
Mr. Naderi.
Pursuant to the terms of Mr. Naderi's employment agreement, in October
2000, Mr. Naderi made an investment of $637,500 for the purchase of 127,500
shares of our common stock at $5.00 per share. One half of the purchase price
was paid in cash and the remaining half of the purchase price paid by delivery
of a promissory note. The payment of the note is non-recourse, other than with
respect to the shares of stock which Mr. Naderi purchased, and is secured by a
pledge of those shares. The note also provides for 10% interest compounded
annually over its nine-year term, which may be reduced to 6% should the note be
converted to a full recourse obligation. For the first five years of the note,
interest accrues and is added to principal. Thereafter, interest is payable in
annual installments. Principal is due in full on the ninth anniversary of the
note, subject to mandatory prepayments equal to 25% of the then outstanding
principal on the sixth, seventh, eighth and ninth anniversaries of the note and
from prepayment from the proceeds of the sale of Mr. Naderi's shares and/or
options. The full amount of the note was outstanding at October 28, 2001.
Mr. Davidson.
In May 1997, we issued 2,080,000 shares of our common stock at a price of
$2.50 per share to members of our senior management, including Mr. Davidson,
under our senior management stock purchase plan. These shares were issued in
exchange for non-interest bearing, full recourse promissory notes due May 23,
2000. In connection with the recapitalization, the amounts due under the
promissory notes were divided between us and Circon Holdings to reflect the fact
that some of the shares of our common stock that were subject to the old notes
were exchanged for shares of Circon Holdings common stock in the
recapitalization. The old notes were canceled and replaced with new notes
containing substantially identical terms, except as described below. The new
notes extended the due date until the tenth anniversary of the completion of the
recapitalization. The new notes also provides for mandatory prepayments using
the after-tax proceeds of any sales of shares of our common stock or Circon
Holdings common stock or options to purchase our common stock or Circon Holdings
common stock after the completion of the recapitalization. The old notes
contained a provision requiring repayment of the notes upon the termination of
the employee's employment. The new notes do not. In addition, our stock purchase
plan was amended to remove a provision that required the holder to forfeit to us
50% of the profit from the sale of shares of our common stock that are subject
to the promissory notes. With respect to Mr. Davidson, the aggregate outstanding
principal amount owed by him under his promissory note was $1,300,000 at the
time of the recapitalization. New notes in the amounts of $745,602 and $554,398,
respectively, were issued to us and Circon Holdings. The full amount of the note
due to us was outstanding at October 28, 2001.
We entered into an employment agreement with Mr. Davidson effective
November 1, 1997, which replaced a previous employment agreement effective
November 1, 1994. Among other things, Mr. Davidson's November 1, 1997 employment
agreement required us to make a loan or loans to Mr. Davidson not to exceed an
aggregate of $500,000, including loans made under Mr. Davidson's previous
employment agreement, to enable Mr. Davidson to pay any federal income taxes
associated with the exercise by him of options to purchase shares of our common
stock. Each loan made to Mr. Davidson was to be non-interest bearing, unsecured
and repayable in ten equal annual installments, on the third
76
through twelfth anniversaries of the date of such loan. The total amount
outstanding under all such loans at October 28, 2001, was $500,000. Mr. Davidson
is delinquent in payment of his fiscal 2001 and 2000 repayment obligations under
these loans.
In April 2000, we entered into an agreement with Mr. Davidson requiring us
to make a loan in the amount of $348,000 to cover the taxes due on the cash
received from the conversion of the 535,257 shares of common stock he used to
purchase shares of Circon Holdings common stock in the recapitalization. There
is no cash interest payment on this tax loan. Instead, interest is imputed and
Mr. Davidson received a gross-up payment from us in respect of the taxes due on
that imputed interest. The tax loan is mandatorily repayable from the after-tax
proceeds of future sales of shares of Circon Holdings common stock. The full
amount of this loan was outstanding at October 28, 2001.
DR. HENLEY
In April 2000, we entered into an agreement with Dr. Henley requiring us
to make a loan in the amount of $555,000 to cover the taxes due on the cash
received from the conversion of the 554,398 shares of common stock he used to
purchase shares of Circon Holdings common stock in the recapitalization. There
is no cash interest payment on this tax loan. Instead, interest is imputed and
Dr. Henley received a gross-up payment from us in respect of the taxes due on
that imputed interest. The tax loan is mandatorily repayable from the after-tax
proceeds of future sales of shares of Circon Holdings common stock. The full
amount of this loan was outstanding at October 28, 2001.
SALE OF PREFERRED STOCK AND WARRANTS
In November and December 2001, we sold 50,000 units ("Units"), each Unit
being comprised of one share of our Series A Participating Preferred Stock, par
value $1.00 per share, and 162 warrants to purchase, for $.01 per share, one
share of our common stock per warrant. The aggregate offering price and proceeds
to us from the sale were $50 million in cash. The sale was effected in two
closings. Pursuant to the Stock Purchase Agreement by and among us, Maxxim
Medical Group, Inc. (our wholly owned subsidiary), Fox Paine Capital Fund, L.P.,
FPC Investors, L.P., and Fox Paine medic New Equity Corp., Fox Paine Capital
Fund, L.P. and FPC Investors, L.P. collectively purchased 23,500 Units for
$23,500,000 on November 30, 2001. Following that closing, we offered each of our
existing shareholders and warrant holders the right to purchase their pro rata
share of the 50,000 Units on the same terms as those in the Stock Purchase
Agreement, based on such holder's pro rata ownership of our common stock, on an
as-converted basis. Those Units that were not purchased by our existing
shareholders and warrant holders were also offered to select potential
investors. Under the Stock Purchase Agreement, Fox Paine Medic New Equity Corp.
agreed to purchase any Units not subscribed for by the other offerees at the
second closing, which occurred on December 31, 2001. On or prior to December 31,
2001, 26,500 Units were sold to Fox Paine Medic New Equity Corp., certain of our
existing warrant holders and new investors, collectively, for $26.5 million.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements:
Page
----
Consolidated Balance Sheet of the Company as of October 28, 2001 and
October 29, 2000 28
Consolidated Statements of Operations of the Company for the years ended
October 28, 2001, October 29, 2000 and October 31, 1999 29
Consolidated Statements of Shareholders' Equity (Accumulated Deficit) and
Comprehensive Income (Loss) of the Company for the years ended
October 28, 2001, October 29, 2000 and October 31, 1999 30
Consolidated Statements of Cash Flows of the Company for the years ended
October 28, 2001, October 29, 2000 and October 31, 1999 31
Notes to Consolidated Statements of the Company 33
Independent Auditor Reports on Consolidated Financial Statements and 62
Financial Statements Schedule of the Company
(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
- ------ ----------------------
2 - Agreement and Plan of Merger by and between Registrant and Fox Paine
Medic Acquisition Corp., dated June 13, 1999 as filed with the
Commission on October 5, 1999 as Appendix A to Registrant's proxy
statement.
3.1 - Certificate of Incorporation of the Registrant, as filed with the
Commission on December 14, 2001 as exhibit 3.1 to Form 8-K.
77
3.2 - Bylaws of the Registrant.
4.1 - Indenture, dated as of November 12, 1999, among the Registrant, the
Guarantors (as defined therein) and the Bank of New York, as Trustee,
as filed with the Commission on December 15, 1999 as exhibit 4.1 to
the Registration Statement on Form S-4.
4.2 - Purchase Agreement, dated as of November 12, 1999, by and among the
Registrant, the Guarantors and the Purchasers (as defined therein), as
filed with the Commission on December 15, 1999 as exhibit 4.2 to the
Registration Statement on Form S-4.
4.3 - Warrant Agreement, dated November 12, 1999, among Maxxim Medical,
Inc., a Texas corporation, and the Purchasers (as defined therein), as
filed with the Commission on December 15, 1999 as exhibit 4.3 to the
Registration Statement on Form S-4.
4.4 - Exchange and Registration Rights Agreement, dated as of November 12,
1999, by and among the Registrant and the Purchasers (as defined
therein), as filed with the Commission on December 15, 1999 as exhibit
4.4 to the Registration Statement on Form S-4.
4.5 - Indenture, dated as of November 12, 1999, by and among the Registrant
and Wilmington Trust Company, as Trustee, as filed with the Commission
on December 15, 1999 as exhibit 4.5 to the Registration Statement on
Form S-4.
4.6 - Purchase Agreement, dated as of November 12, 1999, by and among the
Registrant and GS Mezzanine Partners, L.P. and GS Mezzanine Partners
Offshore, L.P., as filed with the Commission on December 15, 1999 as
exhibit 4.6 to the Registration Statement on Form S-4.
4.7 - Warrant Agreement, dated as of November 12, 1999, by and among the
Registrant and GS Mezzanine Partners, L.P. and GS Mezzanine Partners
Offshore, L.P., as filed with the Commission on December 15, 1999 as
exhibit 4.7 to the Registration Statement on Form S-4.
4.8 - Exchange and Registration Rights Agreement, dated as of November 12,
1999, by and among the Registrant and GS Mezzanine Partners, L.P. and
GS Mezzanine Partners Offshore, L.P., as filed with the Commission on
December 15, 1999 as exhibit 4.8 to the Registration Statement on Form
S-4.
4.9 - Form of Warrant Agreements issued to purchasers of the Series A
Preferred Stock issued in November and December 2001, as filed with
the Commission on December 14, 2001 as exhibit 10.2 to Form 8-K.
10.1 - Credit Agreement, dated as of November 12, 1999, by and among the
Registrant, The Chase Manhattan Bank, Bankers Trust Company, Merrill
Lynch Capital Corporation, Canadian Imperial Bank of Commerce, Credit
Suisse First Boston and the financial institutions party thereto, as
filed with the Commission on December 15, 1999 as exhibit 10.1 to the
Registration Statement on Form S-4.
10.2 - Agreement, Notice, Amendment and Waiver dated as of October 27, 2000
by and among the Registrant, The Chase Manhattan Bank, Bankers Trust
Company, Merrill Lynch Capital Corporation, Canadian Imperial Bank of
Commerce, Credit Suisse First Boston and the financial institutions
party thereto, as filed with the Commission on February 14, 2001 as
exhibit 10.2 to Form 10-K.
10.3 - Amendment 2 and Waiver dated as of November 14, 2001 by and among the
Registrant, The Chase Manhattan Bank, Bankers Trust Company, Merrill
Lynch Capital Corporation, Canadian Imperial Bank of Commerce, Credit
Suisse First Boston and the financial institutions party thereto, as
filed with the Commission on December 14, 2001 as exhibit 10.3 to Form
8-K.
10.4 - Stockholders' Agreement, dated as of November 12, 1999, by and among
the Registrant and the shareholders listed on the signature pages
thereto, as filed with the Commission on December 15, 1999 as exhibit
10.2 to the Registration Statement on Form S-4.
*10.5 - Employment Agreement, dated as of November 12, 1999, between the
Registrant and Kenneth W. Davidson, as filed with the Commission on
March 14, 2000 as exhibit 10.3 to Amendment No. 2 to the Registration
Statement on Form S-4.
78
*10.6 - Employment Agreement, dated as of June 16, 2000 between the Registrant
and Akbar Naderi, as filed with the Commission on February 14, 2001 as
exhibit 10.8 on Form 10-K.
*10.7 - Employment Agreement, dated as of July 13, 2000 between the Registrant
and Mark S. Sellers, as filed with the Commission on February 14, 2001
as exhibit 10.9 on Form 10-K.
*10.8 - Employment Agreement, dated as of June 18, 2001 between the Registrant
and Russell D. Hays, as filed with the Commission on September 17,
2001 as exhibit 10.1 on Form 10-Q.
*10.9 - 1999 Stock Incentive Plan, as filed with the Commission on December
15, 1999, as exhibit 10.7 to the Registration Statement on Form S-4.
*10.10 - Form of Vested Stock Option Agreement, as filed with the Commission on
December 15, 1999, as exhibit 10.8 to the Registration Statement on
Form S-4.
*10.11 - Form of Time Accelerated Stock Option Agreement, as filed with the
Commission on December 15, 1999, as exhibit 10.9 to the Registration
Statement on Form S-4.
*10.12 - Form of Time Vesting Stock Option Agreement, as filed with the
Commission on December 15, 1999, as exhibit 10.10 to the Registration
Statement on Form S-4.
*10.13 - Employment Agreement, dated as of September 20, 2000 between the
Registrant and Richard S. Martin.
*10.14 - Employment Agreement, dated as of November 6, 2000 between the
Registrant and Philip Seetin.
21 - Subsidiaries of the Registrant
- -------------------
* Compensatory plan or agreement.
(d) Financial Statement Schedules
SCHEDULE II
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
FISCAL YEARS ENDED 2001, 2000 AND 1999
BALANCE AT CHARGED TO BALANCE
BEGINNING OPERATING AT END
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS OF YEAR
- ----------- ------- ------- ---------- -------
(IN THOUSANDS)
2001: Allowance for uncollectible accounts receivable $ 3,526 $ 1,211 $ (860) $ 3,877
2000: Allowance for uncollectible accounts receivable $ 1,653 $ 2,254 $ (381) $ 3,526
1999: Allowance for uncollectible accounts receivable $ 1,840 $ 1,460 $ (1,647) $ 1,653
2001: Allowance for excess and obsolete inventory $ 16,118 $ 4,319 $ (12,165) $ 8,272
2000: Allowance for excess and obsolete inventory $ 5,447 $ 15,495 $ (4,824) $ 16,118
1999: Allowance for excess and obsolete inventory $ 6,225 $ 2,783 $ (3,561) $ 5,447
The notes to the consolidated financial statements
of Maxxim Medical, Inc. and subsidiaries
are an integral part of this schedule.
79
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/ RUSSELL D. HAYS
-------------------------------
Russell D. Hays
Vice Chairman and Chief
Executive Officer
By: /s/ MARK S. SELLERS
-------------------------------
Mark S. Sellers
Vice Chairman and Chief
Financial Officer
Dated:
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 .
SIGNATURES TITLE
---------- -----
/s/ SAUL A. FOX Chairman of the Board
- ------------------------------------
(Saul A. Fox)
/s/ RUSSELL D. HAYS Vice Chairman and Chief Executive Officer
- ------------------------------------ (principal executive officer)
(Russell D. Hays)
/s/ MARK S. SELLERS Vice Chairman and Chief Financial
- ------------------------------------ Officer (principal financial officer)
(Mark S. Sellers)
/s/ RICHARD S. MARTIN Corporate Vice President and Treasurer
- ------------------------------------ (principal accounting officer)
(Richard S. Martin)
/s/ W. DEXTER PAINE Director
- ------------------------------------
(W. Dexter Paine)
/s/ JASON B. HURWITZ Director
- ------------------------------------
(Jason B. Hurwitz)
/s/ JAMES R. KRONER Director
- ------------------------------------
(James R. Kroner)
/s/ Director
- ------------------------------------
(Greg Barrett)
/s/ Director
- ------------------------------------
(Thomas Mercer)
/s/ Director
- ------------------------------------
(Marc Abramowitz)
/s/ Director
- ------------------------------------
(Kenneth W. Davidson)
/s/ Director
- ------------------------------------
(Ernest J. Henley, Ph.D)
80