SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| | 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
|X| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from October 29, 2001 to
December 30, 2001.
Commission File Number
333-92825
---------
MAXXIM MEDICAL, INC.
--------------------
(Exact name of registrant as specified in its charter)
TEXAS 76-0291634
----- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
950 WINTER STREET, SUITE 2900, WALTHAM, MASSACHUSETTS 02451
- ----------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
781-906-0700
------------
(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 March 25, 2002, 30,365,161 shares of the registrant's Common Stock,
$.001 par value, were outstanding.
TRANSITION REPORT ON FORM 10-K
FOR THE PERIOD FROM OCTOBER 29, 2001 THROUGH DECEMBER 30, 2001
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 transition period ended December 30, 2001, approximately 85.8% of our
net sales were in the United States, and 14.2% of our net sales were outside the
United States, primarily in Europe. For the transition period ended December 30,
2001, our operations generated net sales of $73.8 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 - non-powered - prepackaged needle kits
trays; instruments; and trays;
- drapes; - headgear; - diagnostic and interventional
- gowns; - needles; devices for cardiac and
radiology
We sell all such products. The primary customers for single-use specialty
medical products are hospitals, surgery centers, cardiac catherization 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 $33.8 million in the transition period ended December 30, 2001, or 45.7 %
of the Company's net sales.
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 $18.5 million in the transition period ended December 30, 2001, or
25.1 % of the Company's net sales.
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 transition period ended December 30,
2001, sales of non-latex medical examination gloves, latex medical examination
gloves, latex surgical gloves and non-latex surgical gloves accounted for 78.1%,
14.9%, 4.5% and 2.5% 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 Products Group sales were $15.8 million in the transition period ended
December 30, 2001, or 21.4 % of the Company's net sales.
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 $5.7 million in the transition period ended December 30, 2001,
or 7.8% of the Company's net sales.
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
3
drapes, electrosurgical accessories, instruments, needles, gloves, syringes,
tubing, sponges, towels and gauze.
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 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 $249,000 for the transition
period ended December 30, 2001.
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 single patent covered product sales that
constituted 5% or more of our total net sales for the transition period ended
December 30, 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 75.6% 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 transition period ended December 30, 2001, 85.8% of our total net
sales were in the United States, 9.0 % were in Europe, primarily in the
Netherlands, Germany and Belgium, and 5.2% 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 transition
period ended December 30, 2001, direct sales to hospitals/surgery centers and
distributors accounted for 25.1% and 74.9%, 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. During the transition period ended December 30,
2001, 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
37.2% and 8.8% of our net sales in the United States in the transition period
ended December 30, 2001. For the transition period ended December 30, 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 transition period ended December 30, 2001, direct sales to
dealers accounted for 44% and direct sales to end-users accounted for 56% 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;
8
- the FDA's refusal to grant future premarket clearances or approvals;
and
- withdrawals or suspensions of current product applications and
criminal prosecution.
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 December 30, 2001, we had 1,919 full-time domestic employees and 1,294
full-time foreign employees. Approximately 118 employees in Canada are covered
by a collective bargaining agreement that expires in October 2003. Approximately
81 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.
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 us, are the subject of
arbitration proceedings before the American Arbitration Association in New York
City. We have 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 us in
August 2001, and was voluntarily dismissed with respect to us by the plaintiff
in September 2001. In November 2001, the same plaintiff filed a substantially
identical complaint in state court in Florida. We have denied all material
allegations of this lawsuit and, pursuant to an agreement among the parties,
expect to answer or move in response to the Florida complaint on April 30,
2002.
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 during the transition period ended December 30, 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 Abromowitz 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 directors, officers,
representatives or agents ("our affiliates") taken at the direction of or on
behalf 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.
12
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.
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. 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
final closing, which occurred on December 31, 2001. Prior to December 30, 2001,
4,852 Units were sold to certain of our existing warrant holders and new
investors, collectively, for $4.9 million in cash. On December 31, 2001, 21,648
Units were sold to Fox Paine Medic New Equity Corp. and new investors,
collectively, for $21.6 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.
13
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 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
14
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.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
On February 7, 2002, we decided to change our fiscal year-end from a
fiscal year ending on the Sunday nearest to October 31 to a fiscal year-ending
on the Sunday nearest to December 31. Accordingly, the accompanying financial
statements reflect an audit of the transition period from October 29, 2001
through December 30, 2001.
PERIOD FROM PERIOD FROM
OCTOBER 29, OCTOBER 30,
2001 TO 2000 TO FISCAL YEARS ENDED
DECEMBER 30, DECEMBER 24, OCTOBER 28, OCTOBER 29, OCTOBER 31, NOVEMBER 1, NOVEMBER 2,
2001 2000 2001 2000 1999 1998 1997
------------ ------------ ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales $ 73,841 $ 75,397 $ 500,841 $ 499,193 $ 508,654 $ 522,516 $ 529,552
Cost of sales 58,169 58,417 391,107 410,470 366,778 381,638 397,691
--------- --------- --------- --------- --------- --------- ---------
Gross profit 15,672 16,980 109,734 88,723 141,876 140,878 131,861
Selling, general and
administrative expenses 17,280 13,812 107,219 125,576 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 (1,608) 3,168 (16,147) (108,381) 43,545 46,468 41,760
Interest expense, net (6,996) (7,187) (53,785) (47,038) (27,789) (13,420) (22,145)
Other income (expense), net (517) 132 (3,700) (7,186) (555) 1,042 2,751
Recapitalization expenses (4) -- -- -- (18,556) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income tax (9,121) (3,887) (73,632) (181,161) 15,201 34,090 22,366
Income taxes 104 (1,247) 1,033 (11,304) 7,175 14,454 9,485
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations (9,225) (2,640) (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) (355) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (9,225) $ (2,995) $ (75,020) $(186,914) $ 14,064 $ 19,636 $ 12,881
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital $ 26,039 $ 54,331 $ 16,102 $ 44,803 $ 348,315 $ 108,918 $ 99,815
Total assets 302,599 358,628 310,880 349,323 711,593 468,051 424,046
Total debt 393,456 388,917 414,530 379,017 361,749 121,683 221,085
Total shareholders'
equity (deficit) (191,820) (133,635) (204,335) (131,675) 285,117 272,909 137,928
OTHER FINANCIAL DATA:
Net cash provided by
(used in) operating activities (10,252) (5,871) (4,373) 21,513 42,340 55,542 49,577
Net cash provided by
(used in) investing activities (1,371) 37 (5,815) 246,477 (271,791) (67,954) (3,199)
Net cash provided by
(used in) financing 11,265 6,423 10,888 (270,397) 229,470 13,371 (48,807)
Depreciation and amortization 2,352 2,695 15,986 22,888 22,526 18,379 16,665
Capital expenditures (8) 1,373 213 5,788 7,914 25,757 23,441 6,829
Ratio of earnings
to fixed charges (9) n/a 0.5 n/a n/a 1.5x 3.3x 2.0x
- ----------
16
(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 101/2% 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 $8,271 for the transition
period ended December 30, 2001 and $58,513 and $48,432 for fiscal years
2001 and 2000, respectively.
17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements and the notes thereto that appear elsewhere in this document. The
following discussion and analysis compares the transition period from October
29, 2001 to December 30, 2001 to the period from October 30, 2000 to December
24, 2000, and fiscal year ended October 28, 2001 to the fiscal year ended
October 29, 2000 and fiscal year ended October 29, 2000 to fiscal year ended
October 31, 1999. The period ended December 24, 2000 is used herein as that was
the end of the December month in our prior November through October fiscal
year.
The following discussion and analysis and other sections of this document
contain forward-looking statements that involve risks and uncertainties. Words
such as "may," "expects," "projects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements. Similarly,
statements that describe our future plans, objectives, or goals also
are forward-looking statements. Future events and our actual results
could differ materially from the results reflected in these forward-looking
statements, as a result of certain of the factors set forth below and elsewhere
in this analysis and in this Form 10-K for the period ended December 30, 2001 in
Item 7 in the section entitled "Forward-Looking Statements."
On November 12, 1999, we consummated a series of transactions, including
the following that resulted in our recapitalization:
- 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 quarter ended October 28, 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 short-term 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; Short-term 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 quarter ended October 28, 2001, and will serve as the foundation for other
strategic initiatives.
In the transition period from October 29, 2001 through December 30, 2001,
we recorded a net loss of $9.2 million. The net loss was primarily Attributable
to a $2.6 million charge for non-cash interest expense and to charges relating
to non-recurring items totaling $3.9 million. The non-recurring charges were
primarily attributable to: charges associated with our operations improvement
initiatives, the implementation of the enterprise resource planning system, the
relocation of our headquarters to Waltham Massachusetts, and increased group
purchasing fees, freight costs, professional fees and insurance
costs.
18
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 transition period from October 29, 2001 through December 30, 2001,
approximately 14.2% 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.
19
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 transition report.
PERIOD FROM PERIOD FROM
OCTOBER 29, 2001 TO OCTOBER 30, 2000 TO
DECEMBER 30, 2001 DECEMBER 24, 2000
---------------------- ----------------------
FINANCIAL % OF FINANCIAL % OF
RESULTS NET SALES RESULTS NET SALES
--------- --------- -------- ---------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Net sales $73.8 100.0% $75.4 100.0%
Cost of sales 58.1 78.8% 58.4 77.5%
----- ----- ----- -----
Gross profit 15.7 21.2% 17.0 22.5%
Selling, general and administrative expenses 17.3 23.4% 13.8 18.3%
----- ----- ----- -----
Income (loss) from operations (1.6) (2.2)% 3.2 4.2%
Interest expense, net (7.0) (9.5)% (7.2) (9.5)%
Other income (expense), net (0.5) (0.7)% 0.1 0.2%
----- ----- ----- -----
Income (loss) before income taxes (9.1) (12.4)% (3.9) (5.1)%
Income taxes .1 0.1% (1.3) (1.7)%
----- ----- ----- -----
Income (loss) before cumulative effect of accounting change (9.2) (12.5)% (2.6) (3.4)%
Cumulative effect of change in accounting principle -- -- (0.4) (0.5)%
----- ----- ----- -----
Net income (loss) $(9.2) (12.5)% $(3.0) (3.9)%
===== ===== ===== ====
- ----------
PERIOD FROM OCTOBER 29, 2001 THROUGH DECEMBER 30, 2001 COMPARED TO PERIOD FROM
OCTOBER 30, 2000 THROUGH ENDED DECEMBER 24, 2000
NET SALES - Net sales for the period ended December 30, 2001 were $73.8
million compared to $75.4 million for the comparable period in 2000. The 2.1%
decrease in sales for the period ended December 30, 2001 over the comparable
period in 2000 is primarily the result of: 1) a decrease in custom procedure
tray sales from $45.3 million in the period ended December 24, 2000 to $42.1
million in the comparable period in 2001 due to a managed reduction in dealer
inventory levels over 2000 balances and 2) a decrease in European Products Group
sales from $7.6 million for the period ended December 24, 2000 to $6.6 million
for the comparable period ended December 30, 2001 due to a reduction in sales
generated from the distribution of non Maxxim products. The decrease in net
sales was offset by: 1) an increase in medical glove sales to $15.4 million in
the period ended December 30, 2001 from $12.9 million in the comparable period
in 2000 due to increased sales of our new Advantex polyurethane gloves and 2)
an increase in other sales from $9.6 million in the period ended December 24,
2000 to $9.8 million in the comparable period in 2001.
GROSS PROFIT - Gross profit was $15.7 million or 21.2% of net sales for
the period ended December 30, 2001 compared to $17.0 million or 22.5% on net
sales in the comparable period in 2000. Gross profit for the period ended
December 30, 2001 was negatively impacted by $2.9 million of non-recurring costs
associated with the continuation of our operations improvements initiatives and
were primarily attributable to: underutilize capacity, plant consolidation and
inventory reduction programs. Gross profit, excluding costs associated with our
operations improvements initiatives, was $18.6 million or 25.2% of net sales for
the period ending December 30, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses were $17.3 million or 23.4% of net sales for the period
ended December 30, 2001 compared to $13.8 million or 18.3% in the comparable
period in 2000. The increase in operating expense was primarily attributable to
costs associated with the implementation of our Enterprise Resource Planning
system, the relocation of our corporate headquarters to Waltham, Massachusetts,
and increased group purchasing fees and included approximately $1.0 million of
non-recurring costs.
INCOME (LOSS) FROM OPERATIONS - Loss from operations for the period ended
December 30, 2001 was $1.6 million or (2.2) % of net sales compared to income of
$3.2 million or 4.2% of net sales for the comparable period in 2000. Income from
operations, excluding costs associated with our operations improvements
initiatives, was $2.3 million or 3.1% of net sales for the period ending
December 30, 2001.
INTEREST EXPENSE - Interest expense decreased from $7.2 million for the
period ended December 24, 2000 to $7.0 million for the comparable period in
2001. Interest expense included non cash charges of $2.6 million and $2.5
million in the period ending December 30, 2001 and December 24, 2000
respectively. The non cash charge to interest expense related to debt accretion,
amortization expense on finance fees and charges associated with marking our
derivative securities to fair value.
20
OTHER INCOME (EXPENSE) - Other income (expense) for the period ending
December 30, 2001 was ($0.5) million compared to $0.1 million in the comparable
period in 2000. In the period ended December 30, 2001 these costs were primarily
attributable to management fees and transaction fees.
INCOME TAXES - Our effective rate was 1.0% for the period ended December
30, 2001 and December 24, 2000. The tax benefit rate for the transition periods
ended December 30, 2001 and December 24, 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - We implemented FASB
Statement No. 133 in November 2000. 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 $9.2
million for the period ending December 30, 2001 verses a loss of $2.9 million
for the comparable period in 2000.
21
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 transition report.
-----------------------------------------------------------------------------
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 million 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 in 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 of $1.0 million.
22
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.
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 administrative 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
were $16.2 million, compared to a loss of $108.4 million for fiscal 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
facility.
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 million in fiscal year 1999 to $87.2 million 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
23
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.
24
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.
25
LIQUIDITY AND CAPITAL RESOURCES
The table below presents summary cash flow information for the transition
period from October 29, 2001 through December 30, 2001, and for the fiscal
years indicated.
PERIOD FROM
OCTOBER 29, FISCAL YEARS ENDED
2001 TO -------------------------------------------
DECEMBER 30, OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2001 2000 1999
---- ---- ---- ----
(in millions)
Net cash provided by (used in) by operating activities $ (10.3) $ (4.4) $ 21.5 $ 42.3
Net cash provided by (used in) investing activities (1.4) (5.8) 246.5 (271.8)
Net cash provided by (used in) financing activities 11.3 11.0 (270.4) 229.5
Effect if foreign currency translation adjustment -- -- (0.4) (0.1)
------- ------- ------- -------
Total change in cash and cash equivalents $ (0.4) $ 0.8 $ (2.8) $ (0.1)
======= ======= ======= =======
OPERATING ACTIVITIES
As we continue to pursue our corporate strategy initiated in fiscal 2000,
focusing on internal growth and profitability, we used $10.3 million in cash
from operating activities for the period ended December 30, 2001. To accomplish
our goals, we intend to continue to invest in several strategic capital
projects, the first of which is the implementation of our Enterprise Resource
Planning and Customer Relationship Management systems, and to continue to
enhance our operating processes. We anticipate that the implementation of these
new systems and enhanced processes will be the foundation that will yield future
profitability.
Cash provided by operating activities and borrowings under our revolving
credit agreement provide primary source of funds to finance operating needs,
strategic initiatives and growth opportunities. We believe that cash generated
from operations and the availability under our revolving credit agreement
provides sufficient liquidity to support our planned business activities. Our
ability to borrow under the revolving credit agreements is dependent upon
compliance with covenants contained in the credit agreement.
Working capital and the corresponding current ratio were $26.0 million and
1.25:1.00 and $16.1 million and 1.13:1.00 at December 30, 2001 and October 28,
2001, respectively. The increase in working capital from October 28, 2001 to
December 30, 2001 resulted primarily from the repayment of short-term
obligations with proceeds from the issuance of preferred stock, and by a
reduction in accrued liabilities.
INVESTING ACTIVITIES
Investing activities during the transition period ended December 30, 2001
consisted of the routine replacement of capital equipment and expenditures
associated with the implementation of our Enterprise Resource Planning and
Customer Relationship Management systems.
The Company anticipates that its capital expenditures during 2002 will be
approximately $15 million consisting of the routine replacement of capital
equipment and expenditures associated with the implementation of our Enterprise
Resource Planning and Customer Relationship Management systems.
FINANCING ACTIVITIES
The table below shows the components of total borrowings for the
transition period from October 29, 2001 through December 30, 2001, and for the
fiscal years indicated:
PERIOD FROM
OCTOBER 29, FISCAL YEARS ENDED
2001 TO ----------------------------------------
DECEMBER 30, OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2001 2000 1999
---- ---- ---- ----
(in millions)
Current maturities of long-term debt $ 10.3 $ 10.2 $ 10.7 $ 0.4
Long-term debt 198.5 211.0 200.2 255.9
Senior subordinated discount notes 114.1 113.6 110.1 --
Senior discount notes 63.7 62.2 53.8 --
101/2% Senior subordinated notes -- -- -- 100.0
------- ------- ------- -------
Total $ 386.6 $ 397.0 $ 374.8 $ 356.3
======= ======= ======= =======
Cash flows provided by financing activities were $11.3 million, and $11.0
million for the period ended December 30, 2001, and for the fiscal year 2001,
respectively. In the period ended December 30, 2001 we received $28.4 million
from the issuances of 28,352 shares of preferred stock and associated warrants.
We used the proceeds from the sale of the preferred stock and warrants to repay
the $9.9 million short-term
26
\loan, to pay down $12.5 million of our revolving bank credit facility, to pay
fees and expenses relating to the offering.
In the fiscal year ended October 28, 2001, we received $13.6 million from
the issuance of short-term notes, which includes $9.9 million from a short-term
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 December 30, 2001, our balance sheet included net goodwill of $106.1
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 $21.0 million
at December 30, 2001, which represents 19.8% of net goodwill as of that date. In
July 1996, we acquired Sterile Concepts. Unamortized goodwill from the Sterile
Concepts acquisition totaled $74.4 million at December 30, 2001, and represented
70.1% of net goodwill as of that date. The remaining $10.7 million of
unamortized goodwill at December 30, 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 the transition
period ended December 30, 2001 was $684,000. 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.
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.
27
- $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.
Second Amendment to the Credit Facilities and Waiver; Short-Term Loan; 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 projects. 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 a 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
28
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 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, (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
29
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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Capital Leases - We lease a production facility and various equipment
under long-term leases and have 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:
December 30, October 28, October 29,
2001 2001 2000
------------ ----------- -----------
Land $ 271 $ 271 $ 271
Buildings 1,956 1,956 1,930
Machinery and equipment 6,631 6,631 6,592
Accumulated depreciation (3,808) (3,629) (2,524)
------- ------- -------
$ 5,050 $ 5,229 $ 6,269
======= ======= =======
Future minimum lease payments for assets under capital leases at December
30, 2001 are as follows:
Fiscal Years (in thousands)
2002 $ 835
2003 835
2004 808
2005 588
2006 316
Thereafter 686
------
Total minimum lease payments 4,068
Less-amount representing interest 576
------
Present value of net minimum lease payments 3,492
Less current maturities 652
------
$2,840
======
Operating Leases - We are obligated under various operating leases. Rent
expense under these operating leases for the transition period ended December
30, 2001 was approximately $573,000. 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 December 30,
2001 are as follows:
Fiscal Years (in thousands)
2002 $ 3,824
2003 3,236
2004 2,744
2005 1,988
2006 1,988
Thereafter 5,969
-------
$19,749
=======
Conclusion
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified the following policies and estimates as critical to our
business operations and the understanding of our results of operations. Note
that our preparation of this Annual Report on Form 10-K requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
Sales Returns, Rebate Allowances and Allowance for Doubtful Accounts-
Management must make estimates of potential future product returns related to
current period product revenues. Management analyzes historical returns, current
economic trends, and changes in customer demand and acceptance of our products
when evaluating the adequacy of the sales returns, and allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and allowances in any accounting period. Material
differences may result in the amount and timing of our revenue for any period if
management made different judgments or utilized different estimates. Similarly,
our management must make estimates of the uncollectibility of our accounts
receivable. Management specifically analyzes accounts receivable, historical bad
debt, historical rebates, customer concentrations, customer creditworthiness,
current trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. Our accounts receivable balance
at December 30, 2001 was $45.9 million, net of sales returns and allowances of
$2.0 million, allowance for rebates of $5.2 million and allowance for doubtful
accounts of $3.7 million.
Valuation of Long-Lived and Intangible Assets and Goodwill - We assess the
impairment of long-lived assets, identifiable intangibles and related goodwill
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors we consider important which could trigger an
impairment include the following: (1) significant under performance relative to
expected historical or projected future operating results; (2) significant
changes in the manner of our use of the acquired assets or the strategy for our
overall business; and (3) significant negative industry or economic trends.
30
If we determine that the carrying value of long-lived assets and
intangibles and related goodwill may not be recoverable based on the existence
of one or more of the above indicators of impairment, we measure any impairment
based on a projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk inherent in our
current business model. Long-lived assets, net intangible assets and goodwill
amounted to $173.0 million as of December 30, 2001.
On January 1, 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," and, as a result, we
will cease to amortize goodwill. We had recorded $4,266,000 of amortization on
these amounts during 2001 and would have recorded approximately the same amount
of amortization during 2002. In lieu of amortization, we are required to
complete an initial impairment assessment of our goodwill no more than six
months after the adoption of SFAS No. 142 and perform an annual impairment
review thereafter. We expect to complete our initial impairment assessment of
goodwill before the end of the second quarter of 2002. We are assessing the
impact of adopting SFAS No. 142 and believe that it is possible that an
impairment loss will be incurred as a result of the adoption of this
pronouncement. In 2002, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" also became effective and it provides further
implementation guidance relative to SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." We expect
that adoption of SFAS No. 144 will not have a material impact on our results of
operations or financial condition.
Accounting for Income Taxes - As part of the process of preparing our
consolidated financial statements we are required to estimate the income taxes
in each jurisdiction in which we operate. This process involves estimating our
actual current tax exposure together with assessing temporary differences
resulting from the differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included on our consolidated balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future taxable income and,
to the extent that we believe that recovery is not likely, we must establish a
valuation allowance. If we establish a valuation allowance or increase this
allowance during any period, we must include this amount as an expense within
the tax provision on our consolidated statement of operations. Significant
management judgment is required in determining our provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against
net deferred assets. We have recorded a valuation allowance of $85.9 million as
of December 30, 2001, due to uncertainties related to our ability to utilize
some deferred tax assets, consisting primarily of tax loss carryforwards. The
valuation allowance is based on our estimates of the taxable income in the
jurisdictions in which we operate and the period over which our deferred tax
assets will be recoverable.
FOREIGN CURRENCY
Our earnings and cash flows are subject to fluctuations due to changes in
non-U.S. currency exchange rates. The Company is exposed to non-U.S. exchange
rate fluctuations as the financial results of non-U.S. subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, those
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The cumulative translation effects for
subsidiaries using functional currencies other than the U.S. dollar are included
in accumulated other comprehensive loss in shareholder's equity. Movements in
non-U.S. currency exchange rates may affect our competitive position, as
exchange rate changes may affect business practices and/or pricing strategies of
non-U.S. based competitors.
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.
31
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This document contains certain "forward-looking statements" concerning our
objectives and expectations with respect to gross profit, expenses, inventory
performance, capital expenditures and cash flow. In addition, management makes
other forward-looking statements from time to time concerning objectives and
expectations. Our success in achieving our objectives and expectations is
somewhat dependent upon economic conditions, competitive developments and
consumer attitudes. However, certain assumptions are specific to us and/or the
markets in which we operate.
We are exposed to market risks. Market risk is the risk of 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 December 30, 2001.
32
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,682 $ 2,052 $ 1,287
Accounts receivable, net of allowance for doubtful
accounts of $3,728, $3,877 and $3,526, respectively 38,334 42,552 46,256
Inventory, net 70,849 72,058 66,913
Other receivables 3,235 3,061 15,024
Prepaid expenses and other 3,190 4,032 5,906
Assets held for sale 12,299 12,299 18,388
--------- --------- ---------
Total current assets 129,589 136,054 153,774
Property and equipment, net 44,211 44,468 56,746
Goodwill, net of accumulated amortization
of $51,495, $50,806 and $46,508, respectively 106,134 106,817 110,969
Other assets, net 22,665 23,541 27,834
--------- --------- ---------
Total assets $ 302,599 $ 310,880 $ 349,323
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 10,258 $ 10,258 $ 10,688
Current maturities of capital lease obligations 652 512 432
Short - term obligations 3,260 13,894 280
Accounts payable 43,086 42,930 47,505
Accrued liabilities 46,294 52,358 49,501
--------- --------- ---------
Total current liabilities 103,550 119,952 108,406
Long-term debt, net of current maturities 198,484 210,984 200,182
Senior subordinated discount notes 114,138 113,556 110,123
Senior discount notes 63,742 62,179 53,579
10 1/2% Senior subordinated notes -- -- 5
Capital lease obligations, net of current maturities 2,840 3,063 3,617
Other long-term obligations 82 84 111
Deferred tax liability 1,455 987 565
--------- --------- ---------
Total liabilities 484,291 510,805 476,588
Redeemable preferred stock ($1.00 par value, 725,000 shares authorized,
28,352, 0 and 0 shares issued and outstanding, respectively) 5,718 -- --
Shares with put rights ($.001 par value, 882,019 shares of common stock
issued and outstanding) 4,410 4,410 4,410
Commitments and contingencies
Shareholders' equity (deficit):
Preferred Stock, $1.00 par value, 9,275,000 shares authorized,
none issued or outstanding -- -- --
Common Stock, $.001 par value, 150,000,000 shares authorized,
29,483,142, 29,483,142 and 29,283,142 shares issued and
outstanding, respectively 29 29 29
Additional paid-in capital 18,772 (3,731) (4,731)
Accumulated deficit (192,593) (182,984) (107,964)
Subscriptions receivable (3,474) (3,474) (2,974)
Accumulated other comprehensive loss (14,554) (14,175) (16,035)
--------- --------- ---------
Total (accumulated deficit) shareholders' equity (191,820) (204,335) (131,675)
--------- --------- ---------
Total liabilities and shareholders' equity (deficit) $ 302,599 $ 310,880 $ 349,323
========= ========= =========
See accompanying notes to Consolidated Financial Statements.
33
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
OCTOBER 10, OCTOBER 30,
2001 TO 2000 TO FISCAL YEARS ENDED
DECEMBER 30, DECEMBER 24, OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2000 2001 2000 1999
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
Net sales $ 73,841 $ 75,397 $ 500,841 $ 499,193 $ 508,654
Cost of sales 58,169 58,417 391,107 410,470 366,778
-------- --------- --------- --------- ---------
Gross profit 15,672 16,980 109,734 88,723 141,876
-------- --------- --------- --------- ---------
Operating expenses:
Marketing and selling 12,517 11,285 82,890 87,402 71,070
General and administrative 4,763 2,527 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 --
-------- --------- --------- --------- ---------
17,280 13,812 125,881 197,104 98,331
-------- --------- --------- --------- ---------
Income (loss) from operations (1,608) 3,168 (16,147) (108,381) 43,545
Interest expense (6,996) (7,187) (53,785) (47,038) (27,789)
Other income (expense), net (517) 132 (3,700) (7,186) (555)
Recapitalization expenses -- -- -- (18,556) --
-------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes and extraordinary item (9,121) (3,887) (73,632) (181,161) 15,201
Income tax (benefit) / provision 104 (1,247) 1,033 (11,304) 7,175
-------- --------- --------- --------- ---------
Income (loss) from continuing
operations before
extraordinary item (9,225) (2,640) (74,665) (169,857) 8,026
Income from discontinued operations,
net of tax of $0, $0,
$0, $56 and $6,326, respectively -- -- -- 87 6,038
-------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (9,225) (2,640) (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 (9,225) (2,640) (74,665) (186,914) 14,064
Cumulative effect of change
in accounting principle -- (355) (355) -- --
-------- --------- --------- --------- ---------
Net income (loss) $ (9,225) $ (2,995) $ (75,020) $(186,914) $ 14,064
======== ========= ========= ========= =========
See accompanying notes to Consolidated Financial Statements.
34
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001 AND
FISCAL YEARS ENDED OCTOBER 28, 2001, OCTOBER 29, 2000 AND OCTOBER 31, 1999
(IN THOUSANDS)
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
PAR PAID-IN (ACCUMULATED SUBSCRIPTIONS COMPREHENSIVE
SHARES 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 -- -- -- -- -- (1,657) (1,657)
on investment securities
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 -- -- -- -- -- 229 229
on investment securities
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)
Issuance of warrants -- -- 22,503 -- -- -- 22,503
Amortization of discount on preferred
stock -- -- -- (61) -- -- (61)
Preferred stock dividend -- -- -- (323) -- -- (323)
Comprehensive loss:
Net loss -- -- -- (9,225) -- -- (9,225)
Other comprehensive loss, net of tax
Translation adjustment -- -- -- -- -- (379) (379)
---------
Total comprehensive loss (9,604)
-------- ---- --------- --------- ------- -------- ---------
BALANCE AT DECEMBER 30, 2001 29,483 $ 29 $ 18,772 $(192,593) $(3,474) $(14,554) $(191,820)
======== ==== ========= ========= ======= ======== =========
See accompanying notes to Consolidated Financial Statements.
35
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001
(IN THOUSANDS)
2001
--------
Cash flows from operating activities:
Net loss $ (9,225)
Adjustment to reconcile net loss to net cash used in operating activities:
Deferred income tax (benefit) expense 68
Amortization of financing fees 619
Accretion of notes payable 2,037
Depreciation and amortization 2,352
Loss on fair value of investment in derivative securities 527
Changes in current assets and liabilities
Decrease in accounts receivable, net 4,244
Increase in other receivable (174)
Decrease in inventory, net 1,256
Increase in prepaid expenses and other (1,161)
Decrease in accounts payable (6,588)
Decrease in accrued liabilities (4,207)
--------
Net cash used in operations (10,252)
--------
Cash flows from investing activities:
Payments received on notes 2
Purchase of property and equipment (1,373)
--------
Net cash (used in) provided by investing activities (1,371)
--------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock 28,352
Payment of preferred stock offering expenses (515)
Net (payments) borrowing on revolving line of credit (12,500)
Payments on capital lease obligations (83)
Net payments on other long-term obligations (10,636)
Increase in bank overdraft 6,773
Other, net (126)
--------
Net cash provided by financing activities 11,265
--------
Effect of foreign currency translation adjustment (12)
--------
Net decrease in cash and cash equivalents (370)
Cash and cash equivalents at beginning of period 2,052
--------
Cash and cash equivalents at end of period $ 1,682
========
Supplemental cash flow disclosures:
Interest paid during the period $ 8,325
Income taxes paid during the period --
See accompanying notes to Consolidated Financial Statements.
36
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 (used in) 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 101/2% 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
======== ========= =========
37
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.
38
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, Maxxim 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.
On February 7, 2002, Maxxim Medical, Inc. decided to change its fiscal
year-end from a fiscal year ending on the Sunday nearest to October 31 to a
fiscal year ending on the Sunday nearest to December 31. Accordingly, the
accompanying financial statements reflect an audit of the transition period
financial statements from October 29, 2001 through December 30, 2001.
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.
39
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:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
(IN THOUSANDS)
Raw materials $ 34,888 $ 36,224 $ 32,667
Work in progress 6,463 8,361 9,301
Finished goods 37,126 35,745 41,063
Allowance for excess and obsolete inventory (7,628) (8,272) (16,118)
-------- -------- --------
$ 70,849 $ 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:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
USEFUL LIFE 2001 2001 2000
----------- ------------ ---------- -----------
(IN THOUSANDS)
Land $ 1,086 $ 1,097 $ 1,824
Buildings and improvements 5-25 years 19,795 19,968 22,964
Machinery and equipment 2-10 years 61,556 60,411 70,206
Furniture and fixtures 3-5 years 11,043 11,067 8,958
Accumulated depreciation (49,269) (48,075) (47,206)
---------- ---------- ----------
$ 44,211 $ 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 $106,134,000 remains unamortized as of December 30, 2001.
Amortization periods for 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
40
The Company recognizes revenue upon shipment to customers, pursuant to
customer orders. The Company grants rebates to certain of its customers. Sales
to customers that entitle the customer to rebates, and the related receivables,
are recognized net of the expected rebate.
41
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. In the transition period ended December 30, 2001, Company
research and development expenses were $249,000. 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
transition period ended December 30, 2001 as well as 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.
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.
42
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)
November and December 2001 change (379) -- (379)
-------- ------- --------
Balance at December 30, 2001 $(14,554) $ -- $(14,554)
======== ======= ========
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 the Company to continue to amortize goodwill existing at
June 30, 2001 through December 30, 2001, ceasing goodwill amortization at the
beginning of fiscal year 2002. 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 believes that it is possible that an
impairment loss will be incurred upon adoption of this statement.
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 expects that adoption of SFAS No. 144 will not
have a material impact on its results of operation or Financial condition.
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. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Product" require statements 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. These changes have not had any significant effect on the
Company's financial statements.
43
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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.
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
44
future subsidiaries it may form. The recapitalization required total funding of
approximately $799,600,000. Sources of funding were as follows:
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
============
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 December 30, 2001 totaled
30,365,161 shares.
In November and December 2001, 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. 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 Units for $23.5 million 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 the 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 final closing, which
occurred on December 31, 2001. Prior to December 30, 2001, 4,852 Units were sold
to certain of the Company's existing warrant holders and new investors,
collectively, for $4.9 million in cash. On December 31, 2001, 21,648 Units were
sold to Fox Paine New Medic Equity Corp. and new investors, collectively, for
$21.6 million. Accordingly, preferred stock outstanding at December 30, 2001,
totaled 28,352 shares.
45
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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 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.
46
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
million revolving credit facility is paid and terminated or December 31, 2003;
(7) revised the financial covenants relating to the Company's 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
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 December 30, 2001, the total term loans outstanding under the credit
facility were $198,242,000 and borrowings under the revolving credit facility
totaled $10,500,000 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 quarter ended October 28,
2001, the Company sold the property and retired the debt.
LONG-TERM DEBT
The following summarizes the Company's long-term debt as of:
DECEMBER 30, OCTOBER 28, OCTOBER 29
2001 2001 2000
------------ ----------- ----------
(IN THOUSANDS)
Industrial revenue bonds $ -- $ -- $ 2,370
Revolving line of credit 10,500 23,000 --
Term loan under Credit Facility 198,242 198,242 208,500
--------- --------- ---------
Total long term debt 208,742 221,242 210,870
Less - Current maturities (10,258) (10,258) (10,688)
--------- --------- ---------
$ 198,484 $ 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 were
recorded as a discount which is being amortized over the life of the Discount
Notes. The net book value of the Discount Notes was $114,138,000 at December 30,
2001. Cash interest of 11% is payable on the discounted value of the Discount
Notes as of the issue date,
47
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.
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 $63,742,000 at
December 30, 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 had a maturity date of
August 1, 2006. Interest on the 10 1/2% Notes was 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
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
48
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 paid on the effective
date of an amendment to the Compay's 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.
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SHORT - TERM OBLIGATIONS
The following summarizes the Company's other short-term obligations as of:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
(IN THOUSANDS)
Bridge loan $ -- $ 9,850 $ --
Other obligations 3,260 4,044 280
------ ------- ----
Total short-term obligations $3,260 $13,894 $280
====== ======= ====
FUTURE MINIMUM PRINCIPAL PAYMENTS
Future minimum principal payments on long-term debt and other obligations
are as follows:
FISCAL YEARS (IN THOUSANDS)
------------
2002 $ 13,517
2003 11,909
2004 13,548
2005 24,080
2006 33,898
Thereafter 358,184
---------
$ 455,136
=========
(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. For the two months ended December 30, 2001, the
Company recorded interest income of $521,000 relating to these swaps. During
fiscal year 2001, the Company recorded $5,444,000 of interest expense relating
to these swaps.
49
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 discussed 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
$7,000 and ($208,000) have been recorded as a component of interest income
(expense) during the transition period ended December 30, 2001 and fiscal year
2001, respectively.
50
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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:
DECEMBER 30, 2001 OCTOBER 28, 2001 OCTOBER 29, 2000
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Interest rate cap $ 6 $ 6 $ -- $ -- $ 576 $ 221
Swap agreement, paying fixed (3,300) (3,300) (3,822) (3,822) 2,007 2,007
Long-term debt (including
current maturities) (393,456) (393,456) (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.
(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:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
(IN THOUSANDS)
Land $ 271 $ 271 $ 271
Buildings 1,956 1,956 1,930
Machinery and equipment 6,631 6,631 6,592
Accumulated depreciation (3,808) (3,629) (2,524)
------- ------- -------
$ 5,050 $ 5,229 $ 6,269
======= ======= =======
Future minimum lease payments for assets under capital leases at December
30, 2001 are as follows:
FISCAL YEARS (IN THOUSANDS)
------------
2002 $ 835
2003 835
2004 808
2005 588
2006 316
Thereafter 686
-----------
Total minimum lease payments 4,068
Less- amount representing interest 576
-----------
Present value of net minimum lease payments 3,490
Less current maturities 652
-----------
$ 2,840
===========
51
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OPERATING LEASES
The Company is obligated under various operating leases. Rent expense
under these operating leases for the transition period ended December 30, 2001
was approximately $573,000. 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 December 30, 2001
are as follows:
FISCAL YEARS (IN THOUSANDS)
------------
2002 $ 3,824
2003 3,236
2004 2,744
2005 1,988
2006 1,988
Thereafter 5,969
----------
$ 19,749
==========
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.
52
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 April 30, 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.
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:
TRANSITION
PERIOD ENDED FISCAL YEAR ENDED
------------ ---------------------------------------------
DECEMBER 30, OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 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 104 404 (1,706) (59)
---- ------- -------- --------
$104 $ 404 (1,433) 2,496
---- ------- -------- --------
Income taxes from
continuing operations $104 $ 1,033 $(11,304) $ 7,175
Income taxes from
discontinued operations
and extraordinary item -- -- (1,096) 6,326
---- ------- -------- --------
Total $104 $ 1,033 $(12,400) $ 13,501
==== ======= ======== ========
53
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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:
PERIOD ENDED FISCAL YEARS ENDED
DECEMBER 30, OCTOBER 28, OCTOBER 29, OCTOBER 31,
2001 2001 2000 1999
------------ ----------- ----------- -----------
Statutory rate (35%) (35%) (35%) 35%
Amortization of goodwill 2 5 2 8
State taxes, net of federal benefit (3) (3) (3) 3
Recapitalization expenditures -- -- 2 --
Other, net 1 2 1 1
Valuation allowance 36 32 27 --
------------ ----------- ----------- -----------
Effective rate 1% 1% (6%) 47%
============ =========== =========== ===========
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:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
(IN THOUSANDS)
Current deferred tax assets (liabilities):
Accounts receivable, principally due to
allowance for doubtful accounts $ 2,962 $ 3,079 $ 3,472
Inventory, principally due to reserve for obsolescence
and costs capitalized for tax purposes 3,111 3,333 5,924
Accruals and provisions not currently deductible 5,841 6,435 9,300
Unrealized loss on financial instruments 1,694 1,452 246
-------- -------- --------
Current deferred tax asset 13,608 14,299 18,942
Valuation allowance (13,590) (14,281) (18,942)
-------- -------- --------
Net current deferred tax asset $ 18 $ 18 $ --
======== ======== ========
Noncurrent deferred tax assets (liabilities):
Unrealized loss on currency translation
of foreign subsidiaries $ 5,679 $ 5,528 $ 6,007
Net operating loss carryforwards 50,722 46,168 27,367
Debt discount 5,522 5,010 --
Book over tax amortization 2,186 2,265 983
Differences between book and tax basis
of property and equipment 5,772 5,981 5,658
Federal alternative minimum tax credit carryover 938 938 938
-------- -------- --------
Noncurrent deferred tax asset (liability) 70,819 65,890 40,953
Valuation allowance (72,274) (66,877) (41,518)
-------- -------- --------
Net noncurrent deferred tax liability $ (1,455) $ (987) $ (565)
======== ======== ========
The Company recorded valuation allowances of $85,864 and $81,158 at
December 30, 2001 and October 28, 2001, 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.
54
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) ACCRUED LIABILITIES
Accrued liabilities include the following as of:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
(IN THOUSANDS)
Health insurance and benefit accrual $ 6,215 $ 7,335 $ 8,064
Accrued taxes payable 4,810 5,332 2,784
Fees payable to hospital buying groups 4,660 5,520 7,055
Accrued payroll and commissions 3,672 2,701 6,978
Accrued interest payable 3,905 7,253 7,978
Accrued professional fees 1,942 2,327 2,645
Restructuring accrual 6,463 6,488 4,144
Accrued insurance 2,618 3,155 3,847
Financial instruments 3,301 3,822 --
Other 8,708 8,425 6,006
------- ------- -------
$46,294 $52,358 $49,501
======= ======= =======
(9) OTHER ASSETS
Other assets, net of accumulated amortization, include the following as
of:
DECEMBER 30, OCTOBER 28, OCTOBER 29,
2001 2001 2000
------------ ----------- -----------
(IN THOUSANDS)
Patents $ 3,424 $ 3,530 $ 4,118
Debt offering costs 17,921 18,426 21,105
Non-compete agreements 466 495 596
Notes receivable 134 136 338
Other 720 954 1,677
------- ------- -------
$22,665 $23,541 $27,834
======= ======= =======
(10) STOCK OPTION AGREEMENTS
Commencing 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:
55
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
Period 2001:
Granted -- --
Cancelled (696,467) 5.00
-----------
Balance at December 30, 2001 2,468,954 $ 5.00
===========
The 2,468,954 options outstanding as of December 30, 2001 had an exercise
price and weighted average exercise price of $5.00 and a weighted average
remaining contract life of 8.7 years. At December 30, 2001, options to purchase
292,237 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
transition period ended December 30, 2001 and for the years ended October 28,
2001, October 29, 2000 and October 31, 1999 would have been reduced as follows:
PERIOD FROM OCTOBER 29, 2001
TO DECEMBER 30, 2001
----------------------------
AS REPORTED PROFORMA
------------ ---------
(IN THOUSANDS)
Net income (loss) $(9,225) $(9,516)
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) $ (81,037) $ (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.
56
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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.
UNITED REST OF TOTAL
STATES EUROPE WORLD COMPANY
-------- ------- ------- --------
(IN THOUSANDS)
TRANSITION PERIOD ENDED
December 30, 2001 $ 63,368 $ 6,658 $ 3,815 $ 73,841
FISCAL YEARS ENDED
October 28, 2001 $437,597 $39,425 $23,819 $500,841
October 29, 2000 433,413 41,856 23,924 499,193
October 31, 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 December 30, 2001, 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 37.2%
and 8.8% of the Company's net sales in the United States in the transition
period ended December 30, 2001, respectively, 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 transition period ended
December 30, 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 totaled
$106,000 for the transition period ended December 30, 2001. 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 amounts associated with this plan have been
distributed.
57
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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 December 30, 2001. The former CEO is delinquent in payment of his
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.
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.
In connection with the relocation of a portion of the Company's executive
management staff from Clearwater, Florida to Waltham, Massachusetts in December
2001, the Company made a loan in the amount of $635,000 to its Vice Chairman and
CFO 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 him 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 the Company for any reason, or (iv) upon the
CFO's breach 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 the Company for
tax purposes. At December 30, 2001, such loan is included in other receivables
in the accompanying balance sheet.
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.
58
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 transition
period ended December 30, 2001, other expense included $83,400 for the
management and advisory services fee. 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. No amounts
have been paid under this agreement in any of the periods presented.
(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.
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 periods
ended December 30, 2001 and December 24, 2000, as well as 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).
59
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATED BALANCE SHEET
DECEMBER 30, 2001
(IN THOUSANDS)
DECEMBER 30, 2001
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
------------ ------------- ------------ --------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 142 $ 1,540 $ 1,682 $ -- $ 1,682
Accounts receivable, net 29,010 9,324 38,334 -- 38,334
Inventory, net 59,003 11,846 70,849 -- 70,849
Other receivables 3,235 -- 3,235 -- 3,235
Prepaid expenses and other 1,703 1,487 3,190 -- 3,190
Assets held for sale 10,459 1,840 12,299 -- 12,299
--------- --------- --------- --------- ---------
Total current assets 103,552 26,037 129,589 -- 129,589
Property and equipment 56,553 36,927 93,480 -- 93,480
Less: accumulated depreciation (32,553) (16,716) (49,269) -- (49,269)
--------- --------- --------- --------- ---------
24,000 20,211 44,211 -- 44,211
Goodwill, net 105,477 657 106,134 -- 106,134
Other assets, net 20,165 477 20,642 2,023 22,665
--------- --------- --------- --------- ---------
Total assets $ 253,194 $ 47,382 $ 300,576 $ 2,023 $ 302,599
========= ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,258 $ -- $ 10,258 $ -- $ 10,258
Current maturities of capital leases 652 -- 652 -- 652
Current maturities of other obligations 3,012 248 3,260 -- 3,260
Accounts payable 34,779 8,307 43,086 -- 43,086
Accrued liabilities 35,641 10,653 46,294 -- 46,294
--------- --------- --------- --------- ---------
Total current liabilities 84,342 19,208 103,450 -- 103,450
Intercompany (receivable) payable (30,956) 30,956 -- -- --
Long-term debt, net of current maturities 198,484 -- 198,484 -- 198,484
Senior subordinated discount notes 114,138 -- 114,138 -- 114,138
Senior discount notes -- -- -- 63,742 63,742
Capital lease, net of current maturities 2,840 -- 2,840 -- 2,840
Other obligations, net of current maturities 82 -- 82 -- 82
Deferred tax liabilities (19) 1,474 1,455 -- 1,455
--------- --------- --------- --------- ---------
Total liabilities 368,911 51,638 420,549 63,742 484,291
Redeemable preferred stock -- -- -- 5,718 5,718
Shares with put rights -- -- -- 4,410 4,410
Commitments and contingencies
Shareholders' equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- 29 29
Additional paid-in capital -- -- -- 18,772 18,772
Accumulated deficit -- -- -- (192,593) (192,593)
Subscriptions receivable -- -- -- (3,474) (3,474)
Accumulated other comprehensive loss -- -- -- (14,554) (14,554)
--------- --------- --------- --------- ---------
Total shareholders' equity -- -- -- (191,820) (191,820)
(Investment in) / net equity of
Guarantor subsidiaries (119,973) (119,973) 119,973 --
(Investment in) / net equity of
Non-guarantor subsidiaries 4,256 (4,256) -- -- --
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 253,194 $ 47,382 $ 300,576 $ 2,023 $ 302,599
========= ========= ========= ========= =========
60
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
========= ======== ========= ========= =========
61
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
========= ======== ========= ========= =========
62
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001
(IN THOUSANDS)
PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001
----------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL GUARANTOR TOTAL
------------ ------------- ----------- ------------ --------- ------------
Net sales $ 65,651 $ 11,955 $ (3,765) $ 73,841 $ -- $ 73,841
Cost of sales 51,811 10,123 (3,765) 58,169 -- 58,169
-------- -------- -------- -------- -------- --------
Gross profit 13,840 1,832 -- 15,672 -- 15,672
-------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and selling 11,002 1,515 -- 12,517 -- 12,517
General and administrative 4,239 524 -- 4,763 -- 4,763
-------- -------- -------- -------- -------- --------
15,241 2,039 -- 17,280 -- 17,280
-------- -------- -------- -------- -------- --------
Income (loss) from operations (1,401) (207) -- (1,608) -- (1,608)
Interest (expense), net (5,132) (283) -- (5,415) (1,581) (6,996)
Other income/(expense), net (378) (139) -- (517) -- (517)
-------- -------- -------- -------- -------- --------
Loss before income taxes (6,911) (629) -- (7,540) (1,581) (9,121)
Income taxes -- 104 -- 104 -- 104
-------- -------- -------- -------- -------- --------
Net loss $ (6,911) $ (733) $ -- $ (7,644) $ (1,581) $ (9,225)
======== ======== ======== ======== ======== ========
CONSOLIDATING STATEMENT OF OPERATIONS
PERIOD FROM OCTOBER 30, 2000 TO DECEMBER 24, 2000
(IN THOUSANDS)
(UNAUDITED)
PERIOD FROM OCTOBER 30, 2000 TO DECEMBER 24, 2000
----------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL GUARANTOR TOTAL
------------ ------------- ----------- ------------ --------- ------------
Net sales $ 68,131 $ 10,709 $ (3,443) $ 75,397 $ -- $ 75,397
Cost of sales 52,455 9,405 (3,443) 58,417 -- 58,417
-------- -------- -------- -------- -------- --------
Gross profit 15,676 1,304 -- 16,980 -- 16,980
-------- -------- -------- -------- -------- --------
Operating expenses:
Marketing and selling 9,913 1,372 -- 11,285 -- 11,285
General and administrative 2,205 322 -- 2,527 -- 2,257
-------- -------- -------- -------- -------- --------
12,118 1,694 -- 13,812 -- 13,812
-------- -------- -------- -------- -------- --------
Income (loss) from operations 3,558 (390) -- 3,168 -- 3,168
Interest (expense), net (5,455) (341) -- (5,796) (1,391) (7,187)
Other income/(expense), net 197 (65) -- 132 -- 132
-------- -------- -------- -------- -------- --------
Loss before income taxes (1,700) (796) -- (2,496) (1,391) (3,887)
Income taxes (1,086) (161) -- (1,247) -- (1,247)
-------- -------- -------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle (614) (635) -- (1,249) (1,391) (2,640)
Cumulative effect of change in
accounting principle (355) -- -- (355) -- (355)
-------- -------- -------- -------- -------- --------
Net loss $ (969) $ (635) $ -- $ (1,604) $ (1,391) $ (2,995)
======== ======== ======== ======== ======== ========
63
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)
========= ======== ========= ========= ========= =========
64
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)
========= ======== ========= ========= ========= =========
65
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
========= ======== ======== =========
66
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STATEMENT OF CASH FLOWS
FOR PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001
(IN THOUSANDS)
PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001
-------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
------------ ------------- ------------ --------- ------------
Cash flows from operating activities:
Net loss $ (6,911) $ (733) $ (7,644) $ (1,581) $ (9,225)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Deferred income tax (benefit) (19) 87 68 -- 68
Amortization of financing fees 562 -- 562 57 619
Accretion of notes payable 531 -- 531 1,506 2,037
Depreciation and amortization 1,577 757 2,334 18 2,352
Gain on fair value of derivative securities 527 -- 527 -- 527
Change in operating assets and liabilities (9,932) 3,302 (6,630) -- (6,630)
-------- ------- -------- -------- --------
Net cash (used in) provided by operating (13,665) 3,413 (10,252) -- (10,252)
-------- ------- -------- -------- --------
Cash flows from investing activities:
Payment received on notes 2 -- 2 -- 2
Purchase of property, equipment
and other assets , net (1,074) (299) (1,373) -- (1,373)
-------- ------- -------- -------- --------
Net cash provided by investing activities (1,072) (299) (1,371) -- (1,371)
-------- ------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of stock -- -- -- 28,352 28,352
Payment of stock offering expenses -- -- -- (515) (515)
Dividend 27,837 -- 27,837 (27,837) --
Net borrowings on revolving line of credit (12,500) -- (12,500) -- (12,500)
Payments on capital leases (83) -- (83) -- (83)
Payments on long-term obligations (10,636) -- (10,636) -- (10,636)
Decrease in bank overdraft 8,441 (1,668) 6,773 -- 6,773
Other, net (121) (5) (126) -- (126)
-------- ------- -------- -------- --------
Net cash (used in) provided by financing 12,938 (1,673) 11,265 -- 11,265
-------- ------- -------- -------- --------
Effect of foreign currency
translation adjustment -- (12) (12) -- (12)
-------- ------- -------- -------- --------
Net increase (decrease) in cash and cash
Equivalents (1,799) 1,429 (370) -- (370)
Cash and cash equivalents
at beginning of period 1,941 111 2,052 -- 2,052
-------- ------- -------- -------- --------
Cash and cash equivalents
at end of period $ 142 $ 1,540 $ 1,682 $ -- $ 1,682
======== ======= ======== ======== ========
67
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 196 -- 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 101/2% 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
======== ======== ======== ======= ========
68
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
========= ========= ========= ========= =========
69
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
========= ========
70
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. The Company 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 December 30, 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.
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
======= ======= ======= ======
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
======= ======= ======= ======
BALANCE TRANSITION PERIOD BALANCE
OCTOBER 28, RECORDED PAYMENTS & DECEMBER 30,
2001 EXPENSES ADJUSTMENTS 2001
----------- ----------- ----------- -----------
(IN THOUSANDS)
Severance $ 5,117 $ -- $ -- $5,117
Termination benefits 1,175 -- -- 1,175
Plant closure expenses 196 -- 25 171
------- ------- ------- ------
$ 6,488 $ -- $ 25 $6,463
======= ======= ======= ======
71
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 Company's corporate strategy, which is focused on
internal growth and profitability, 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.
72
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 December 30, 2001,
October 28, 2001 and October 29, 2000 and the consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the period from
October 29, 2001 to December 30, 2001 and for the fiscal years ended October 28,
2001 and October 29, 2000. 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 December 30, 2001, October 28, 2001 and October 29, 2000 and
the results of their operations and their cash flows for the period from October
29, 2001 to December 30, 2001, and for the fiscal years ended October 28, 2001
and October 29, 2000, 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 the period from October 29, 2001 to
December 30, 2001 and for the 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
February 22, 2002
73
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
74
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 38 Corporate Vice President Finance and Tax, Treasurer and Assistant Secretary
Paul Mooney 44 President, Surgical and Vascular Product Groups
Anthony Parziale 43 Corporate Vice President, Information Systems and Chief Technology Officer
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 Circon Holdings Corporation.
75
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.
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. 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.
76
JAMES R. KRONER has been a director since February 2000. He is currently
Executive Vice President and Chief Investment officer of Endurance Specialty
Insurance Ltd, a position he began in January 2002. He served as Managing
Director at Fox Paine, from February 2000 to January 2002. 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.
77
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Generally our directors serve without monetary compensation for their
service as directors. 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; Short-Term 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.
78
COMPENSATION OF EXECUTIVE OFFICERS
The following table is a summary of the compensation paid or accrued by us
in the transition period from October 29, 2001 to December 30, 2001, in calendar
2001 as well as 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 the transition period.
Long-Term
Compensation
Awards
------
Compensation Securities
Name and ----------------------------------------------- Other Underlying Other
Principal Position Period Salary (1) Bonus(1) Compensation(2) Options(#) (3) Compensation(4)
- ------------------ ------ ---------- -------- --------------- -------------- ---------------
RUSSELL D. HAYS Transition Period $110,000 $ -- $ -- -- $ --
Vice Chairman and Calendar 2001 357,500 -- -- 2,000,000 --
Chief Executive Officer Fiscal 2001 357,500 -- -- 2,000,000 --
Fiscal 2000 -- -- -- -- --
Fiscal 1999 -- -- -- -- --
MARK S. SELLERS Transition Period 297,655 -- -- -- --
Vice Chairman and Calendar 2001 610,732 166,667 7,500 -- --
Chief Financial Officer Fiscal 2001 619,646 166,667 7,500 -- --
Fiscal 2000 163,462 -- -- 220,000 --
Fiscal 1999 -- -- -- -- --
PHILIP SEETIN Transition Period 28,615 2,308 -- -- 914
Senior Vice President Calendar 2001 154,193 15,750 -- -- 2,382
Administration and Fiscal 2001 134,808 25,904 -- -- 1,669
Human Resources Fiscal 2000 -- -- -- -- --
Fiscal 1999 -- -- -- -- --
PAULEE C. DAY Transition Period 85,001 -- -- -- --
Corporate Vice President, Calendar 2001 190,775 12,550 -- -- 2,176
General Counsel, Fiscal 2001 124,235 12,550 -- -- --
Corporate Secretary and Fiscal 2000 93,090 10,000 -- -- 2,181
Regulatory Officer Fiscal 1999 35,970 -- -- -- --
ANTHONY PARZIALE Transition Period 71,295 -- -- -- 554
Vice President Calendar 2001 154,383 26,827 -- -- 2,043
Information Systems Fiscal 2001 120,016 31,442 -- -- 1,489
Fiscal 2000 -- -- -- -- --
Fiscal 1999 -- -- -- -- --
(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 $10,500, and to have such
deferred amounts invested in the 401(k) plan. We may, but are not required
to, make a matching contribution to the 401(k) plan of up to the first 6%
of the salary of such participating employee. All employee contributions
are fully vested. Our contributions vest over a six-year period.
79
OPTIONS GRANTED IN TRANSITION PERIOD
% OF
TOTAL
NUMBER OF OPTIONS MARKET POTENTIAL REALIZABLE VALUE
SECURITIES GRANTED VALUE OF AT ASSUMED ANNUAL RATES
UNDERLYING TO EXERCISE STOCK ON OF STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE DATE OF FOR OPTION TERM
GRANTED IN FISCAL PRICE GRANT EXPIRATION -----------------------------
NAME (#) YEAR ($/SH) ($/SH) DATE 5%($) 10%($) 0%($)
- ---- --- ---- ------ ------ ---- ------ ------ -----
Russell Hays -- -- -- -- -- $ -- $ -- $ --
Mark Sellers -- -- -- -- -- -- -- --
Philip Seetin -- -- -- -- -- -- -- --
Paulee Day -- -- -- -- -- -- -- --
Anthony Parziale -- -- -- -- -- -- -- --
- ----------
The Company has not granted any stock appreciation rights.
Set forth in the following table is summary information regarding the
stock option exercises in the transition period ended December 30, 2001 and the
value of all unexercised options as of the end of the transition period for each
of the executive officers included in the Summary Compensation Table:
AGGREGATED OPTIONS EXERCISED IN TRANSITION PERIOD
AND PERIOD END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT PERIOD-END AT PERIOD-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 -- -- -- --
Paulee Day -- -- -- --
Anthony Parziale -- -- -- --
80
Employment Agreements
In June 2001, July 2000, November 2000 and November 2001, we entered into
employment agreements with Messrs. Hays, Sellers and Seetin and Ms. Day
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 our 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. 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
81
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 November 2000, we entered into an employment agreement with Mr. Seetin,
as described below.
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.
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.
In November 2001, we entered into an employment agreement with Ms. Day as
described below.
The employment agreement with Ms. Day provides for a term through October
31, 2002. During the employment term, Ms. Day will serve as corporate vice
president, general counsel and secretary, and receive an annual base salary in
the amount of $130,000. In addition, the employment agreement provides for an
initial retention bonus consisting of the continuation of her benefits for 12
months following the termination of her employment and the payment of an amount
equal to Ms. Day's annual base salary, which amount is to be paid in two equal
installments. The first installment was paid in November 2001, and vests ratably
over a period ending on April 30, 2002. The second installment will be paid on
November 1, 2002, unless certain conditions for acceleration are met. The
employment agreement provides for the extension of Ms. Day's employment based
upon mutual agreement between Ms. Day and the Company. If extended, Ms. Day will
be entitled to an additional retention bonus equal to one month's salary for
each month or partial month of employment after November 1, 2002, payable at the
end of the additional employment period, as well as the continuation of all of
her benefits for an additional month after the termination of her employment for
each month or partial month of employment after November 1, 2002.
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.
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. 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.
82
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 December 30, 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
December 30, 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. 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 such
note was outstanding at December 30, 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 December 30,
83
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 December 30, 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 December 30, 2001.
84
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 March 22,
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) 33,153,893 86.6% 30,266 59.4%
Fox Paine Capital Fund, L.P. (1) 28,197,686 48.1 29,620 58.1
FPC Investors, L.P. (1) 472,298 1.5 645 1.3
GS Mezzanine Partners, L.P. and GS Mezzanine 3,236 6.3
Partners Offshore, L.P. (2) 2,901,666 (2) 9.0 -- --
Russell D. Hays 200,000 * -- --
Mark S. Sellers 103,260 (3) * -- --
Richard S. Martin -- -- -- --
Anthony Parziale -- -- -- --
Philip Seetin -- -- -- --
Akbar Naderi (4) 315,000 1.0 -- --
Kenneth W. Davidson (5) 959,473 3.2 -- --
Ernest J. Henley, Ph.D (6) 745,602 2.5 -- --
Saul A. Fox(1) 472,298 (1) 1.5 645 1.3
W. Dexter Paine, III (1) 472,298 (1) 1.5 645 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) 3,320,890 10.5 -- --
- ----------
* Ownership is less than 1.0% 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 4,903,040
shares purchasable under currently exercisable warrants and 3,026,568
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.
85
(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.
(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 transition period ended
December 30, 2001, we recorded expenses of $83,400 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 transition period ended
December 30, 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 December 30, 2001.
86
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
December 30, 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 the employment agreement between us and our
former President, Akbar Naderi, 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 December 30, 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 December 30, 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
87
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 December
30, 2001, was $500,000. Mr. Davidson is delinquent in the repayment of his
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 December 30, 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 December 30, 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. 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 final closing, which occurred on December 31, 2001.
Prior to December 30, 2001, 4,852 Units were sold to certain of our existing
warrant holders and new investors, collectively, for $4.9 million in cash. On
December 31, 2001, 21,648 Units were sold to Fox Paine Medic New Equity Corp.
and new investors, collectively, for $21.6 million.
88
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 Sheets as of December 30, 2001, October 28, 2001
and October 29, 2000 32
Consolidated Statements of Operations for the period from
October 29, 2001 to December 30, 2001 and for the period from
October 30, 2000 to December 24, 2000 and fiscal years
ended October 28, 2001, October 29, 2000 and October 31, 1999 33
Consolidated Statements of Shareholders' Equity (Accumulated
Deficit) and Comprehensive Income (Loss) for the period
from October 29, 2001 to December 30, 2001, and the fiscal
years ended October 28, 2001, October 29, 2000 and
October 31, 1999 34
Consolidated Statements of Cash Flows for the period from
October 29, 2001 to December 30, 2001 and the fiscal years
ended October 28, 2001, October 29, 2000 and October 31, 1999 35
Notes to Consolidated Financial Statements 38
Report of Independent Public Accountants on Consolidated
Financial Statements and Financial Statements Schedule
of the Company 71
(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
February 7, 2002, change in fiscal year.
(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 .
3.2 - Bylaws of the Registrant, as filed with the Commission on January
28, 2002 as exhibit 3.2 to Form 10-K.
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.
89
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.
*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.
90
*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, as filed with the Commission on
January 28, 2002, as exhibit 10.13 on Form 10-K.
*10.14 - Employment Agreement, dated as of November 6, 2000 between the
Registrant and Philip Seetin, as filed with the Commission on
January 28, 2002, as exhibit 10.14 on Form 10-K.
*10.15 - Employment Agreement, dated as of November 1, 2001 between the
Registrant and Paulee C. Day.
21 - Subsidiaries of the Registrant
99.1 - Letter to Commission pursuant to temporary Note 3T.
- ----------
* Compensatory plan or agreement.
91
(d) Financial Statement Schedules
SCHEDULE II
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
TRANSITION PERIOD FROM OCTOBER 29, 2001 TO DECEMBER 30, 2001 AND
FISCAL YEARS ENDED 2001, 2000 AND 1999
BALANCE AT CHARGED TO BALANCE
BEGINNING OPERATING AT END
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
- ----------- --------- ------- ---------- ---------
(IN THOUSANDS)
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Transition Period $ 3,877 $ 120 $ (269) $ 3,728
2001 $ 3,526 $ 1,211 $ (860) $ 3,877
2000 $ 1,653 $ 2,254 $ (381) $ 3,526
1999 $ 1,840 $ 1,460 $ (1,647) $ 1,653
ALLOWANCE FOR EXCESS AND OBSOLETE INVENTORY
Transition Period $ 8,272 $ 21 $ (665) $ 7,628
2001 $16,118 $ 4,319 $ (12,165) $ 8,272
2000 $ 5,447 $15,495 $ (4,824) $16,118
1999 $ 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.
92
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: March 29, 2002
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 March 29, 2002.
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/ GREG BARRETT Director
- -----------------------------------
(Greg Barrett)
/s/ Director
- -----------------------------------
(Thomas Mercer)
/s/ Director
- -----------------------------------
(Marc Abramowitz)
/s/ Director
- -----------------------------------
(Kenneth W. Davidson)
/s/ Director
- -----------------------------------
(Ernest J. Henley, Ph.D)
93