Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended JULY 30, 2000
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____________ to _______________.
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 (I.R.S. Employer Identification No.)
incorporation or organization)
10300 49TH STREET NORTH, CLEARWATER, FLORIDA 33762
--------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code................(727) 561-2100
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
CLASS OUTSTANDING AT SEPTEMBER 12, 2000
----------------------------------- --------------------------------------
COMMON STOCK, $.001 PAR VALUE 5,770,704
<PAGE>
MAXXIM MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Condensed Consolidated Balance Sheets as of
July 30, 2000 and October 31, 1999 2
Condensed Consolidated Statements of Operations
for the Fiscal Quarters Ended
July 30, 2000 and August 1, 1999 3
Condensed Consolidated Statements of Shareholders'
Equity for the Fiscal Year Ended October 31, 1999
and the Fiscal Quarter Ended July 30, 2000 4
Condensed Consolidated Statements of Cash Flows
for the Fiscal Quarters Ended July 30, 2000 and
August 1, 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
-----------------
Item 5. Other Events 24
Item 6. Exhibits and Reports 24
SIGNATURES
----------
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JULY 30, OCTOBER 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 37,526 $ 4,040
Accounts receivable, net of allowances of $1,744 and $1,840 respectively ....... 69,502 61,323
Inventory, net ................................................................. 103,923 97,811
Net current deferred tax asset ................................................. 7,823 9,189
Prepaid expenses and other ..................................................... 5,826 6,597
Net assets held for sale ....................................................... -- 224,909
--------- ---------
Total current assets ............................................ 224,600 403,869
Property and equipment ............................................................ 168,149 194,208
Less: accumulated depreciation ................................................. (58,932) (54,902
--------- ---------
109,217 139,306
Goodwill, net of accumulated amortization of $20,044 and $16,152, respectively .... 141,776 142,459
Other assets, net ................................................................. 37,363 25,959
--------- ---------
Total assets .................................................... $ 512,956 $ 711,593
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................................... $ 10,930 $ 430
Current maturities of capital leases and other long-term obligations ........... 608 1,019
Accounts payable ............................................................... 41,500 31,826
Accrued liabilities ............................................................ 9,474 22,279
Due to affiliate ............................................................... 4,732 --
--------- ---------
Total current liabilities ....................................... 67,244 55,554
Long-term debt, net of current maturities ......................................... 259,940 255,940
Senior subordinated discount notes ................................................ 109,280 --
Senior discount notes ............................................................. 51,619 --
10 1/2% Senior subordinated notes ................................................. 5 100,000
Capital leases and other long-term obligations, net of current maturities.......... 3,948 4,360
Net non-current deferred tax liability ............................................ 2,921 10,622
--------- ---------
Total liabilities ............................................... 494,957 426,476
Shares with put rights ($.001 par value common stock, 169,619 shares
issued and outstanding) ......................................................... 4,410 --
Commitments and contingencies
Shareholders' equity
Preferred Stock, $1.00 par value, 10,000,000 shares authorized, none
issued or outstanding ....................................................... -- --
Common Stock, $.001 par value, 40,000,000 shares authorized,
5,601,085 and 14,278,942 issued and outstanding, respectively ............. 6 14
Additional paid-in capital ..................................................... (9,696) 220,230
Retained earnings .............................................................. 33,547 78,950
Subscriptions receivable ....................................................... (2,580) (5,200)
Accumulated other comprehensive loss ........................................... (7,688) (8,877)
--------- ---------
Total shareholders' equity ...................................... 13,589 285,117
--------- ---------
Total liabilities and shareholders' equity ...................... $ 512,956 $ 711,593
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
JULY 30, AUGUST 1, JULY 30, AUGUST 1,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 129,883 $ 131,615 $ 383,471 $ 390,910
Cost of sales .................................... 101,792 95,410 295,855 281,738
--------- --------- --------- ---------
Gross profit ................................ 28,091 36,205 87,616 109,172
Selling, general and administrative expenses ..... 25,352 23,936 73,146 70,457
Restructure charges and transition expenses ...... 935 -- 2,608 2,016
--------- --------- --------- ---------
Income from operations ...................... 1,804 12,269 11,862 36,699
Interest expense, net ............................ (12,425 (7,835) (35,823) (20,035
Other income (expense), net ...................... 279 (59) (2,063) 68
Recapitalization expenses ........................ (148) -- (19,046) --
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes ..................... (10,490) 4,375 (45,070) 16,732
Income tax (benefit) / provision ................. (3,812) 1,665 (10,740) 6,781
--------- --------- --------- ---------
Income (loss) from continuing operations ......... (6,678) 2,710 (34,330) 9,951
Income from discontinued operations, net of tax of
$0, $2,916, $56 and $5,447, respectively ...... -- 3,200 87 5,902
--------- --------- --------- ---------
Income (loss) before extraordinary item .......... (6,678) 5,910 (34,243) 15,853
Extraordinary item - loss related to early
retirement of debt, net of tax benefit of ..... -- -- (11,160) --
--------- --------- --------- ---------
Net income (loss) ........................... $ (6,678) $ 5,910 $ (45,403) $ 15,853
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN RETAINED SUBSCRIPTIONS COMPREHENSIVE
SHARES PAR VALUE CAPITAL EARNINGS RECEIVABLE INCOME (LOSS) TOTAL
-------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT NOVEMBER 1, 1998 .......... 14,239 $ 14 $ 219,268 $ 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 . 40 -- 711 -- -- -- 711
Comprehensive income:
Net income ............................ -- -- -- 14,064 -- -- 14,064
Other comprehensive loss, net of tax
Net unrealized loss on investment
securities ........................ -- -- -- -- -- (1,657) (1,657)
Translation adjustment .............. -- -- -- -- -- (1,161) (1,161)
---------
Total comprehensive income ....... 11,246
-------- --------- --------- --------- --------- --------- ---------
BALANCES AT OCTOBER 31, 1999 .......... 14,279 14 220,230 78,950 (5,200) (8,877) $ 285,117
Payment/cancellation received on
subscriptions receivable (unaudited) 5,200 5,200
Stock and options repurchased/
cancelled (unaudited) .............. (13,747) (368,557) -- (2,580) -- (371,151)
Issuance of common stock (unaudited) .. 5,069 6 131,794 -- -- -- 131,800
Issuance of warrants (unaudited) ...... -- -- 6,837 -- -- -- 6,837
Comprehensive income:
Net loss .............................. -- -- -- (45,403) -- -- (45,403)
Other comprehensive loss, net of tax
Net unrealized loss on investment
securities (unaudited) ............ -- -- -- -- -- 544 544
Translation adjustment (unaudited) .. -- -- -- -- -- 645 645
-------- --------- --------- --------- --------- --------- ---------
Total comprehensive
loss (unaudited) ............... (44,214)
---------
BALANCES AT JULY 30, 2000
(UNAUDITED) ........................ 5,601 $ 6 $ (9,696) $ 33,547 $ (2,580) $ (7,688) $ 13,589
======== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
JULY 30, AUGUST 1,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................................. $ (45,403) $ 15,853
Adjustment to reconcile net income to net cash provided by operating activities:
Debt tender and recapitalization expenses ................................... 37,378 --
Stock option compensation expense .......................................... -- 595
Write-off of debt offering costs ............................................ 7,100 --
Gain on sale of building .................................................... (464 (167)
Loss on sale of product line ................................................ -- 112
Income from discontinued operations, net of tax ............................. -- (5,902)
Deferred income tax expense (benefit) ....................................... (3,861) 2,310
Amortization of financing fees and accretion of debt discount ............... 9,975 828
Depreciation and amortization ............................................... 17,241 16,706
Change in operating assets and liabilities .................................. (14,705) 7,910
--------- ---------
Net cash provided by continuing operations .............................. 7,261 38,245
Net cash provided by discontinued operations ............................ -- 4,112
--------- ---------
Net cash provided by operating activities ............................... 7,261 42,357
--------- ---------
Cash flows from investing activities:
Proceeds from sale of Circon ................................................... 228,000 --
Proceeds from sale of investment securities .................................... 1,226 --
Payment received on notes ...................................................... 1,211 --
Payment for contract rights .................................................... (2,250) --
Proceeds from product line sale ................................................ -- 1,592
Proceeds from building sale .................................................... 19,937 336
Purchase of Circon, net of cash acquired ....................................... -- (254,287)
Purchase of property,equipment and other assets, net of asset acquisitions and
Business combinations ..................................................... (5,766) (22,140)
--------- ---------
Net cash provided by (used in) investing activities ..................... 242,358 (274,499)
--------- ---------
Cash flows from financing activities:
Net proceeds from the issuance of senior subordinated discount notes ........... 110,004 --
Repurchase of 101/2% senior subordinated notes ................................. (99,995) --
Net proceeds from the issuance of senior discount notes ........................ 50,000 --
Recapitalization of Maxxim ..................................................... (232,361) --
Debt tender and recapitalization expenses ...................................... (37,378) --
Increase in long-term borrowings ............................................... 260,000 206,100
Repayment of long-term borrowings .............................................. (254,000) (29,900)
Net borrowings on revolving line of credit ..................................... 8,500 64,700
Payment of debt offering costs ................................................. (21,330 (5,584)
Payments on capital leases and other long-term obligations ..................... (823) (2,032)
Increase in bank overdraft ..................................................... 1,455 453
Other, net ..................................................................... (18) (178)
--------- ---------
Net cash (used in) provided by financing activities ..................... (215,946) 233,559
--------- ---------
Effect of foreign currency translation adjustment ................................ (187) (188)
--------- ---------
Net increase in cash and cash equivalents ............................... 33,486 1,229
Cash and cash equivalents at beginning of period ................................. 4,040 4,125
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 37,526 $ 5,354
========= =========
Supplemental cash flow disclosures:
Interest paid during the period ................................................ $ 23,538 $ 16,102
Income taxes paid during the period ............................................ 1,365 6,145
Noncash investing and financing activities
Note receivable from sale of product line ................................... $ -- $ 1,543
Note receivable from sale of building ...................................... -- 196
Net unrealized gain on investment ........................................... 544 1,746
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
On November 12, 1999, Maxxim Medical, Inc. ("Maxxim" or the "Company")
was recapitalized in a going private transaction (see Note 4). 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.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. Generally Accepted
Accounting Principles have been omitted. The accompanying unaudited condensed
consolidated financial statements reflect all adjustments of a normal recurring
nature which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. All significant
intercompany balances and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with Maxxim's
annual audited financial statements for the fiscal year ended October 31, 1999,
included in its Form S-4 Registration Statement Amendment No. 2 as filed with
the Securities and Exchange Commission on March 14, 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL QUARTER
The third quarter of fiscal 2000 ended on July 30th compared to the
fiscal 1999 third quarter end date of August 1st .
INVENTORIES
Inventory includes the following as of:
JULY 30, OCTOBER 31,
2000 1999
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
Raw materials....................... $ 40,875 $ 36,325
Work in progress.................... 13,350 11,313
Finished goods...................... 56,936 55,620
Reserve............................. (7,238) (5,447)
--------- ---------
$ 103,923 $ 97,811
========= =========
GOODWILL
Goodwill represents the excess of the aggregate price paid by Maxxim in
business combinations accounted for as purchases over the fair market value of
the tangible and identifiable intangible net assets acquired. Goodwill from
Maxxim acquisitions is approximately $161,751,000 of which approximately
$141,776,000 remains unamortized as of July 30, 2000. Amortization periods for
goodwill range from 5 to 40 years. Management continues to evaluate its
expectation of future cash flow and may determine that an imparement in the
value of its intangibles has occurred in a future period.
INCOME TAXES
Maxxim has calculated current and deferred income tax provisions for
the periods ended August 1, 1999, and July 30, 2000, based on its best estimate
of the effective income tax rate expected to be applicable for the full fiscal
year.
6
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in a company's equity
including, among other things, unrealized holding gains and losses on
available-for-sale securities and foreign currency translation adjustments.
Total comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 30, AUGUST 1,
2000 1999
-------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
Net earnings (loss) .......................................... $ (6,678) $ 5,910
Foreign currency translation adjustments ..................... 450 (622)
Net unrealized losses on available for sale securities (152) (586)
-------- --------
Total comprehensive income (loss) ............................ $ (6,380) $ 4,702
======== ========
<CAPTION>
NINE MONTHS ENDED
-----------------------
JULY 30, AUGUST 1,
2000 1999
-------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
Net earnings (loss) .......................................... $(45,403) $ 15,853
Foreign currency translation adjustments ..................... 645 (3,657)
Net unrealized gains (losses) on available for sale securities 544 (1,746)
-------- --------
Total comprehensive income (loss) ............................ $(44,214) $ 10,450
======== ========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
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 will adopt SFAS No. 133 beginning in the first
quarter of fiscal 2001, but has not yet determined its impact.
NOTE 3 -DISCONTINUED OPERATIONS
Effective January 6, 1999, Maxxim completed the acquisition of Circon
Corporation ("Circon") for approximately $245,000,000, including the repayment
of $32,500,000 of Circon debt and certain fees and expenses incurred in
connection with the acquisition.
On November 12, 1999, in connection with the recapitalization (see Note
4), Maxxim sold all of the common stock of Circon to Circon Holdings Corporation
("Circon Holdings"), a newly formed Delaware corporation which is owned by the
shareholders of Maxxim, in exchange for the payment of $208 million in cash and
the repayment of $20 million of debt owed by Circon to Maxxim. Maxxim recorded a
nominal gain on the sale of Circon in the first quarter of fiscal year 2000.
At October 31, 1999, the net assets held for sale totaled $224,900,000
and were classified as current assets on the consolidated balance sheet.
Circon's activities during fiscal year 1999 have been accounted for as
discontinued operations. Net sales and income from Circon's operations through
the second quarter of 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):
7
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
FISCAL QUARTER ENDED
AUGUST 1, 1999
--------------------
(IN THOUSANDS)
Net sales......................................... $ 94,457
Income from operations............................ 11,023
Income taxes...................................... 5,447
Income from discontinued operations............... 5,902
NOTE 4 - RECAPITALIZATION
On June 13, 1999, Maxxim 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 of all of the capital stock of
Circon in exchange for $208,000,000 in cash and the repayment of $20,000,000 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 Group of all
of Maxxim's assets and liabilities, other than those relating to Maxxim's credit
facility in existence prior to the consummation of the recapitalization, which
was repaid and terminated as part of the recapitalization. Maxxim expects to
conduct substantially all its business and operations through subsidiaries of
Maxxim Group and any future subsidiaries it may form. The recapitalization
required total funding of approximately $799,600,000. Sources of funding were as
follows:
<TABLE>
<CAPTION>
MAXXIM MAXXIM
MEDICAL GROUP MAXXIM CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Borrowings under new senior credit facility .... $261,600,000 $ -- $261,600,000
Senior subordinated discount notes ............. 110,000,000 -- 110,000,000
Senior discount notes .......................... -- 50,000,000 50,000,000
Proceeds from sale of Circon ................... 228,000,000 -- 228,000,000
New equity ..................................... -- 150,000,000 150,000,000
------------ ------------ ------------
$599,600,000 $200,000,000 $799,600,000
============ ============ ============
</TABLE>
In connection with the recapitalization, Maxxim (1) repaid all amounts
outstanding under its previous credit facility and (2) consummated the tender
offer for Maxxim's $100,000,000 principal amount of outstanding 10 1/2% senior
subordinated notes due 2006. An aggregate principal amount of $99,995,000 of the
senior subordinated notes were tendered in the tender offer, leaving $5,000 in
aggregate principal amount of the senior subordinated notes outstanding.
Transaction fees and expenses related to the recapitalization totaled
approximately $54,200,000. Financing fees of approximately $24,200,000 have been
capitalized and will be amortized with the applicable debt. Additionally, the
transaction fees include the $11,200,000 premium paid on the tender of Maxxim's
10 1/2% senior subordinated notes. This tender premium, together with 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
$19,046,000 related to the recapitalization. These one time expenses include
professional fees of $14,028,000.
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. The Credit Facility consists of the
following:
Tranche A term loan ("term loan A facility").......... $ 80,000,000
Tranche B term loan ("term loan B facility").......... 90,000,000
Tranche C term loan ("term loan C facility").......... 90,000,000
Revolving credit facility ("revolver")................ 50,000,000
-------------
$ 310,000,000
=============
8
<PAGE>
MAXXIM MEDICAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Financing for the recapitalization required the full use of the term
loans and approximately $1,600,000 of the revolver. On July 30, 2000 the unused
portion of the revolver was $41,500,000. The term loan A facility is repayable
in six annual principal payments commencing October 31, 2000 with payments
ranging from $10,000,000 to $16,000,000. This facility bears interest at a rate
per annum equal to, 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 downward adjustments based on Maxxim
Group's leverage ratio. The term loan B facility is repayble in eight principal
payments over seven and one-half years, with the first six payments of $250,000
due annually commencing October 31, 2000, a payment of $40,000,000 million due
on October 31, 2006, and a final payment of $48,500,000 payable at maturity on
May 12, 2007. The term loan B facility bears 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 is repayable in nine principal
payments over eight and one-half years, with the first seven payments of
$250,000 due annually commencing October 31, 2000, a payment of $30,000,000
million due on October 31, 2007, and a final payment of $58,250,000 payable at
maturity on May 12, 2008. The term loan C facility bears interest at a rate per
annum equal to, 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 bear 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 downward
adjustments based on Maxxim Group's leverage ratio. All outstanding loans under
the revolving credit facility will be repayable at maturity.
On July 28, 2000, Maxxim Group received a waiver related to certain
items within its Credit Facility. In consideration of a fee to be paid to each
consenting lender, the lenders agreed to waive any default arising from the
failure of Maxxim Group to comply with the following covenants: (1) interest
coverage ratio of 1.55 to 1.00, (2) total adjusted leverage ratio of 6.20 to
1.00, (3) senior adjusted leverage ratio of 4.10 to 1.00. For the three fiscal
periods ending July 30, 2000. Maxxim's interest coverage ratio was 1.48 to 1.00
for the three fiscal periods ending July 31, 2000; Maxxim's total adjusted
leverage ratio was 6.86 to 1.00 and the senior adjusted leverage ratio was 4.91
to 1.00 at July 30, 2000.
SENIOR SUBORDINATED DISCOUNT NOTES
In connection with the recapitalization, Maxxim Group issued Senior
Subordinated Discount Notes due 2009 ("Maxxim Group Notes") with an aggregate
principal amount at maturity of $144,552,000 ($110,004,072 aggregate accreted
amount outstanding at issuance). The Maxxim Group Notes mature on November 15,
2009, unless previously redeemed by Maxxim Group. The Maxxim Group Notes were
sold at a discount of $34,547,928 from their aggregate face value, which amount
will be accreted over the 10 year life of the Maxxim Group Notes. With each
$1,000 face amount of Maxxim Group Notes issued, Maxxim issued one warrant to
purchase 0.8226 shares of its common stock on or before November 12, 2004, at a
price per share of $0.01. Each warrant is valued at $21.38 and will be amortized
over the life of the Maxxim Group Notes. Cash interest of 11% is payable on the
accreted value of the Maxxim Group Notes as of the issue date, on May 15 and
November 15, commencing May 15, 2000. The obligations under the Maxxim Group
Notes are guaranteed by Maxxim and all of Maxxim Group's U.S. subsidiaries.
Except as set forth in the following paragraph, Maxxim Group may not redeem the
Maxxim Group 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%
9
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
At any time prior to November 15, 2002, Maxxim Group may redeem up to
35% of the original aggregate principal amount of the Maxxim Group 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 Maxxim Group Notes
remains outstanding after each such redemption and any such redemption is made
within 90 days of the consummation of such equity offering.
Net proceeds from the offering of approximately $110,004,000 were used
in conjunction with proceeds from the new Credit Facility and the Maxxim Notes
(as defined below) to finance the recapitalization.
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 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 144,132 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.
NEW EQUITY
Immediately prior to the recapitalization, which included the merger of
Fox Paine Medic Acquisition Corporation ("Fox Paine Medic") with and into
Maxxim, Maxxim had 14,278,942 shares of common stock outstanding. In the merger,
all of the outstanding shares of Maxxim common stock, other than 531,854 shares
held by the ten continuing shareholders, were converted into the right to
receive $26 per share.
Also immediately prior to the merger, present and former directors,
officers and employees of Maxxim held options to purchase 1,481,460 shares of
Maxxim common stock at a weighted average exercise price of $14.72. As part of
the recapitalization, options to purchase 1,019,092 shares of Maxxim common
stock were canceled in exchange for a cash payment equal to the difference
between the $26.00 merger price and the exercise price per share under the
relevant option. The remaining 462,368 options held by the management investors
were canceled without any cash consideration.
As a result of the merger, the 5,069,231 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 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 169,619 additional
shares of Maxxim common stock immediately after the merger, at a price of $26.00
per share. All of the 169,619 shares provide the shareholders, under certain
conditions, with the right to put the shares to Maxxim at fair market value.
Accordingly, such shares are reflected as shares with put rights in the
accompanying balance sheet.
Upon completion of the recapitalization, Maxxim had 5,770,704 shares of
common stock outstanding.
10
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - OTHER ASSETS
Other assets, net of accumulated amortization, include the following as
of:
JULY 30, OCTOBER 31,
2000 1999
------- -------
(UNAUDITED)
(IN THOUSANDS)
Patents ........................ $ 9,944 $10,736
Debt offering costs ............ 21,931 7,100
Non-compete agreements ......... 791 1,338
Notes receivable ............... 938 1,909
Other .......................... 3,759 4,876
------- -------
$37,363 $25,959
======= =======
NOTE 6 - BUSINESS SEGMENTS, GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
Effective October 31, 1999, Maxxim adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." Maxxim's business is
organized, managed and internally reported as a single segment comprised of
medical products used in surgical and other medical procedures. Maxxim believes
its various product lines have similar economic, operating and other related
characteristics.
Information in the table below is presented on the basis Maxxim uses to
manage its business. Export sales are reported within the geographic areas where
the final sales to customers are made.
THREE MONTHS ENDED
JULY 30, 2000 AUGUST 1, 1999
------------- --------------
(UNAUDITED, IN THOUSANDS)
United States ................... $112,162 $114,120
Europe .......................... 11,207 11,240
Rest of World ................... 6,514 6,255
-------- --------
Total Company ................... $129,883 $131,615
======== ========
NINE MONTHS ENDED
JULY 30, 2000 AUGUST 1, 1999
------------- --------------
(UNAUDITED, IN THOUSANDS)
United States..................... $329,843 $336,335
Europe............................ 33,788 35,183
Rest of World..................... 19,840 19,392
-------- --------
Total Company..................... $383,471 $390,910
======== ========
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 July 30, 2000 and October 31, 1999.
Maxxim 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 Maxxim. Sales through Owens & Minor, Inc.,
and General Medical Corp., our largest distributors, were 26.3% and 10.1% of our
net sales in the United States for the nine months ended July 30, 2000,
respectively, and 25.3% and 9.8% of our net sales in the United States for the
nine months ended August 1, 1999, respectively. For the nine months ended July
30, 2000, no other single distributor accounted for more than 10% of our United
States total net sales.
11
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 7 - RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES
In connection with the recapitalization, the continuing shareholders
received loans in the aggregate amount $2,580,000 for the purchase of Maxxim
stock. 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 355,987 shares
used to purchase Circon Holding 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 July 30, 2000. The former CEO is current in
all 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 $325,000. This loan is non-interest bearing, unsecured and repayable
upon the earlier of the sale of his prior residence or December 31, 2000.
On May 31, 2000, Maxxim executed a $270,000 promissory note to its
former Corporate Controller. This loan is non-interest bearing, unsecured and
repayable on June 3, 2006.
MANAGEMENT AND ADVISORY SERVICES PROVIDED BY FOX PAINE
In connection with the recapitalization, 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 will receive a fee of $763,000 for
fiscal year 2000. Thereafter such fee shall be equal to 1% of the annual
adjusted consolidated EBITDA of Maxxim for the prior fiscal year. For the nine
months ended July 30, 2000, other expense included $572,000 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
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. Maxxim's shared services charges billed to Circon Holdings and Circon
totaled $1,500,000 in the nine months ended July 30, 2000.
NOTE 8 - FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES
Consolidating financial information regarding Maxxim, guarantor
subsidiaries and non-guarantor subsidiaries as of July 30, 2000 and October 31,
1999 and for each of the fiscal quarters ended July 30, 2000 and August 1, 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 Group that have fully and
unconditionally guaranteed Maxxim Group's senior subordinated discount notes due
2009 issued in connection with the recapitalization (see Note 4).
12
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 30, 2000
<TABLE>
<CAPTION>
JULY 30, 2000
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL GUARANTOR TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........... $ 34,773 $ 2,753 $ 37,526 $ -- $ 37,526
Accounts receivable, net ............ 57,878 11,624 69,502 -- 69,502
Inventory, net ...................... 85,526 18,397 103,923 -- 103,923
Net current deferred tax asset ...... 5,361 2,462 7,823 -- 7,823
Prepaid expenses and other .......... 5,335 491 5,826 -- 5,826
--------- --------- --------- --------- ---------
Total current assets .............. 188,873 35,727 224,600 -- 224,600
Property and equipment ................. 110,729 57,420 168,149 -- 168,149
Less: accumulated depreciation....... (39,199) (19,733) (58,932) -- (58,932)
--------- --------- --------- --------- ---------
71,530 37,687 109,217 -- 109,217
Goodwill, net .......................... 139,311 2,465 141,776 -- 141,776
Other assets, net ...................... 34,349 712 35,061 2,302 37,363
--------- --------- --------- --------- ---------
Total assets ...................... $ 434,063 $ 76,591 $ 510,654 $ 2,302 $ 512,956
========= ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,930 $ -- $ 10,930 $ -- $ 10,930
Current maturities of capital leases
and other long-term obligations .. 608 -- 608 -- 608
Accounts payable .................... 35,380 6,120 41,500 -- 41,500
Accrued liabilities ................. 14,312 2,894 17,206 (7,732) 9,474
Due (from)/ to affiliates ........... (2,006) 6,738 4,732 -- 4,732
--------- --------- --------- --------- ---------
Total current liabilities ......... 59,224 15,752 74,976 (7,732) 67,244
Intercompany (receivable) payable ...... (38,651) 38,651 -- -- --
Long-term debt, net of current
maturities .......................... 259,940 -- 259,940 -- 259,940
Senior subordinated discount notes ..... 109,280 -- 109,280 -- 109,280
Senior discount notes .................. -- -- -- 51,619 51,619
10 1/2% Senior subordinated notes ...... 5 -- 5 -- 5
Capital lease and other long-term
obligations, net of current ......... 3,948 -- 3,948 -- 3,948
Net non-current deferred tax liability . 581 2,340 2,921 -- 2,921
--------- --------- --------- --------- ---------
Total liabilities ................. 394,327 56,743 451,070 43,887 494,957
Shares with put rights ................. -- -- -- 4,410 4,410
Commitments and contingencies
Shareholders' equity:
Preferred Stock .................... -- -- -- -- --
Common Stock ....................... -- -- -- 6 6
Additional paid-in capital .......... -- -- -- (9,696) (9,696)
Retained earnings ................... -- -- -- 33,547 33,547
Subscriptions receivable ............ -- -- -- (2,580) (2,580)
Accumulated other comprehensive loss -- -- -- (7,688) (7,688)
--------- --------- --------- ---------
Total shareholders' equity ........ -- -- -- 13,589 13,589
(Investment in)/net equity of
Guarantor subsidiaires .......... 59,584 -- 59,584 (59,584) --
(Investment in)/net equity of
Non-guarantor subsidiaries ...... (19,848) 19,848 -- -- --
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity ......... $ 434,063 $ 76,591 $ 510,654 $ 2,302 $ 512,956
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
<TABLE>
<CAPTION>
OCTOBER 31, 1999
-----------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 474 $ 3,566 $ 4,040
Accounts receivable, net ......................... 30,512 30,811 61,323
Inventory, net ................................... 81,610 16,201 97,811
Net current deferred tax asset ................... 9,189 -- 9,189
Prepaid expenses and other ....................... 6,339 258 6,597
Net assets held for sale ......................... -- 224,909 224,909
--------- --------- ---------
Total current assets .............. 128,124 275,745 403,869
Property and equipment .............................. 134,375 59,833 194,208
Less: accumulated depreciation ................... (37,678) (17,224) (54,902)
--------- --------- ---------
96,697 42,609 139,306
Goodwill and other intangibles, net ................. 140,811 1,648 142,459
Other assets, net ................................... 25,010 949 25,959
--------- --------- ---------
Total assets ...................... $ 390,642 $ 320,951 $ 711,593
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............. $ 430 $ -- $ 430
Current maturities of capital leases and other
long-term obligations ........................ 1,019 -- 1,019
Accounts payable ................................. 25,986 5,840 31,826
Accrued liabilities .............................. 18,380 3,899 22,279
--------- --------- ---------
Total current liabilities ......... 45,815 9,739 55,554
Intercompany (receivables) payables ................. (42,704) 42,704 --
Long-term debt, net of current maturities ........... 255,940 -- 255,940
10 1/2% Senior subordinated notes ................... 100,000 -- 100,000
Capital leases and other long-term obligations,
net of current maturities ....................... 4,360 -- 4,360
Net non-current deferred tax liability .............. 10,553 69 10,622
--------- --------- ---------
Total liabilities ................. 373,964 52,512 426,476
Commitments and contingencies
Shareholders' equity
Preferred Stock ................................. -- -- --
Common Stock .................................... 14 -- 14
Additional paid-in capital ....................... 220,230 -- 220,230
Retained earnings ................................ 78,950 -- 78,950
Subscriptions receivable ......................... (5,200) -- (5,200)
Accumulated other comprehensive loss ............. (8,877) -- (8,877)
--------- --------- ---------
Total shareholders' equity ............... 285,117 -- 285,117
(Investment in)/net equity of non-guarantor
subsidiaries .................................. (268,439) 268,439 --
--------- --------- ---------
Total liabilities and shareholders' equity $ 390,642 $ 320,951 $ 711,593
========= ========= =========
</TABLE>
14
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS JULY 30, 2000
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 30, 2000
-------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL GUARANTOR TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 116,723 $ 22,518 $ (9,358) $ 129,883 $ -- $ 129,883
Cost of sales ..................... 92,625 18,525 (9,358) 101,792 -- 101,792
--------- --------- --------- --------- --------- ---------
Gross profit ...................... 24,098 3,993 -- 28,091 -- 28,091
--------- --------- --------- --------- --------- ---------
Selling, general and
administrative ................... 21,566 3,786 -- 25,352 -- 25,352
Restructure and transition expenses 935 -- -- 935 -- 935
--------- --------- --------- --------- --------- ---------
22,501 3,786 -- 26,287 -- 26,287
--------- --------- --------- --------- --------- ---------
Income from operations ............ 1,597 207 -- 1,804 -- 1,804
Interest (expense), net .......... (9,858) (572) -- (10,430) (1,995) (12,425)
Other income/(expense), net ...... 138 141 -- 279 -- 279
Recapitalization expenses ......... (148) -- -- (148) -- (148)
--------- --------- --------- --------- --------- ---------
Loss before income taxes .......... (8,271) (224) -- (8,495) (1,995) (10,490)
Income taxes ...................... (3,124) 90 -- (3,034) (778) (3,812)
--------- --------- --------- --------- --------- ---------
Net loss ..................... $ (5,147) $ (314) $ -- $ (5,461) $ (1,217) $ (6,678)
========= ========= ========= ========= ========= =========
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED AUGUST 1, 1999
THREE MONTHS ENDED AUGUST 1, 1999
-----------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .............................. $ 119,036 $ 19,572 $ (6,993) $ 131,615
Cost of sales .......................... 86,616 15,787 (6,993) 95,410
--------- --------- --------- ---------
Gross profit ........................... 32,420 3,785 -- 36,205
Selling, general and administrative .... 20,702 3,234 -- 23,936
--------- --------- --------- ---------
Income from operations ................. 11,718 551 -- 12,269
Interest expense, net .................. (7,275) (560) -- (7,835)
Other income / (expense), net ........ (55) (4) -- (59)
--------- --------- --------- ---------
Income (loss) before income taxes ...... 4,388 (13) -- 4,375
Income taxes ........................... 1,661 4 -- 1,665
--------- --------- --------- ---------
Income (loss) from continuing operations 2,727 (17) -- 2,710
Income from discontinued operations, net -- 3,200 -- 3,200
--------- --------- --------- ---------
Net income ........................ $ 2,727 $ 3,183 $ -- $ 5,910
========= ========= ========= =========
</TABLE>
15
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS JULY 30, 2000
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 30, 2000
--------------------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL GUARANTOR TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 344,893 $ 65,397 $ (26,819) $ 383,471 $ -- $ 383,471
Cost of sales ..................... 267,491 55,183 (26,819) 295,855 -- 295,855
--------- --------- --------- --------- --------- ---------
Gross profit ...................... 77,402 10,214 -- 87,616 -- 87,616
--------- --------- --------- --------- --------- ---------
Selling, general and administrative 61,796 11,350 -- 73,146 -- 73,146
Restructure and transition expenses 2,608 -- -- 2,608 -- 2,608
--------- --------- --------- --------- --------- ---------
64,404 11,350 -- 75,754 -- 75,754
--------- --------- --------- --------- --------- ---------
Income (loss) from operations ..... 12,998 (1,136) -- 11,862 -- 11,862
Interest (expense), net .......... (28,583) (1,717) -- (30,300) (5,523) (35,823)
Other income/(expense), net ...... (2,098) 35 -- (2,063) -- (2,063)
Recapitalization expenses ......... (19,046) -- -- (19,046) -- (19,046)
--------- --------- --------- --------- --------- ---------
Loss before income taxes .......... (36,729) (2,818) -- (39,547) (5,523) (45,070)
Income taxes ...................... (7,787) (799) -- (8,586) (2,154) (10,740)
--------- --------- --------- --------- --------- ---------
Loss from continuing
operations ....................... (28,942) (2,019) -- (30,961) (3,369) (34,330)
Income from discontinued
operations, net ................. 87 -- -- 87 -- 87
--------- --------- --------- --------- --------- ---------
Loss before extraordinary item .... (28,855) (2,019) -- (30,874) (3,369) (34,243)
Extraordinary item - loss on
early retirement of debt, net ... (8,084) -- -- (8,084) (3,076) (11,160)
--------- --------- --------- --------- --------- ---------
Net loss ..................... $ (36,939) $ (2,019) $ -- $ (38,958) $ (6,445) $ (45,403)
========= ========= ========= ========= ========= =========
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED AUGUST 1, 1999
NINE MONTHS ENDED AUGUST 1, 1999
-----------------------------------------------------------
GUARANTOR NON-GUARANTOR ELIMINATING CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .............................. $ 351,139 $ 62,413 $ (22,642) $ 390,910
Cost of sales .......................... 253,742 50,638 (22,642) 281,738
--------- --------- --------- ---------
Gross profit ........................... 97,397 11,775 -- 109,172
--------- --------- --------- ---------
Selling, general and administrative .... 60,943 9,514 -- 70,457
Restructure and transition expenses .... 2,016 -- -- 2,016
--------- --------- --------- ---------
62,959 9,514 -- 72,473
--------- --------- --------- ---------
Income from operations ................. 34,438 2,261 -- 36,699
Interest expense, net .................. (18,444) (1,591) -- (20,035)
Other income / (expense), net ........ 67 1 -- 68
--------- --------- --------- ---------
Income before income taxes ............. 16,061 671 -- 16,732
Income taxes ........................... 6,491 290 -- 6,781
--------- --------- --------- ---------
Income from continuing operations ...... 9,570 381 -- 9,951
Income from discontinued operations, net -- 5,902 -- 5,902
--------- --------- --------- ---------
Net income ........................ $ 9,570 $ 6,283 $ -- $ 15,853
========= ========= ========= =========
</TABLE>
16
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 30, 2000
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 30, 2000
---------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MAXXIM GROUP PARENT CONSOLIDATED
SUBSIDIARIES SUBSIDIAIRES TOTAL GUARANTOR TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................. $ (36,939) $ (2,019) $ (38,958) $ (6,445) $ (45,403)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Debt tender and recapitalization
expenses ............................ 37,378 -- 37,378 -- 37,378
Write-off of debt offering costs ...... 2,057 -- 2,057 5,043 7,100
Gain on sale of building .............. (464) -- (464) -- (464)
Deferred income tax (benefit) expense . (3,670) (191) (3,861) -- (3,861
Amortization of financing fees and
accretion of debt discount ......... 5,189 -- 5,189 4,786 9,975
Depreciation and amortization ......... 12,550 4,691 17,241 -- 17,241
Change in operating assets
and liabilities ..................... (5,948) (1,025) (6,973) (7,732) (14,705)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities .................... 10,153 1,456 11,609 (4,348) 7,261
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of Circon ............. 228,000 -- 228,000 -- 228,000
Proceeds from sale of building ........... 19,937 -- 19,937 -- 19,937
Proceeds from sale of investment
securities ............................. 1,226 -- 1,226 -- 1,226
Payment received on notes ................ 1,211 -- 1,211 -- 1,211
Payment for contract rights .............. (2,250) -- (2,250 -- (2,250)
Purchase of property, equipment
and other assets, net of asset
acquisitions and business combinations (3,618) (2,148) (5,766) -- (5,766)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities .................. 244,506 (2,148) 242,358 -- 242,358
--------- --------- --------- --------- ---------
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 ............... (443,170) -- (443,170) 210,809 (232,361)
Debt tender and recapitalization
expenses .............................. (37,378) -- (37,378) -- (37,378)
Increase in long-term borrowings ......... 260,000 260,000 -- 260,000
Repayment on long-term borrowings ........ -- -- -- (254,000) (254,000)
Net borrowings on revolving line of credit 8,500 8,500 -- 8,500
Payment of debt offering costs ........... (18,869) -- (18,869) (2,461) (21,330)
Payments on capital leases and other
long-term obligations ................ (823) -- (823) -- (823)
Increase in bank overdraft ............... 1,455 -- 1,455 -- 1,455
Other, net ............................... (84) 66 (18) -- (18)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities .................... (220,360) 66 (220,294) 4,348 (215,946)
--------- --------- --------- --------- ---------
Effect of foreign currency
translation adjustment .................. -- (187) (187) -- (187)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ............................. 34,299 (813) 33,486 -- 33,486
Cash and cash equivalents
at beginning of period .................... 474 3,566 4,040 -- 4,040
--------- --------- --------- --------- ---------
Cash and cash equivalents
at end of period ......................... $ 34,773 $ 2,753 $ 37,526 $ -- $ 37,526
========= ========= ========= ======= =========
</TABLE>
17
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 1, 1999
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 1, 1999
--------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 9,366 $ 6,487 $ 15,853
Adjustment to reconcile net income to net cash
provided by operating activities:
Stock option compensation expense ..................... 595 -- 595
Gain on sale of building .............................. (167) -- (167)
Loss on sale of product line .......................... 112 -- 112
Income from discontinued operations, net of tax ....... -- (5,902) (5,902)
Deferred income tax expense (benefit) ................. 3,325 (1,015) 2,310
Amortization of financing fees ........................ 828 -- 828
Depreciation and amortization ......................... 12,726 3,980 16,706
Changes in operating assets and liabilities .......... 2,530 5,380 7,910
--------- --------- ---------
Net cash provided by continuing operations ................. 29,315 8,930 38,245
Net cash provided by discontinued operations ............... -- 4,112 4,112
--------- --------- ---------
Net cash provided by operating activities .................. 29,315 13,042 42,357
--------- --------- ---------
Cash flows from investing activities:
Proceeds from product line sale .......................... 1,592 -- 1,592
Proceeds from building sale .............................. 336 -- 336
Purchase of Circon, net of cash acquired ................. (251,911) (2,376) (254,287)
Purchase of property, equipment, net of asset acquisitions
and business combinations ............................. (13,117) (9,023) (22,140)
--------- --------- ---------
Net cash provided by (used in) investing activities ........ (263,100) (11,399) (274,499)
--------- --------- ---------
Cash flows from financing activities:
Increase in long-term borrowings ......................... 206,100 -- 206,100
Payment of long-term borrowings .......................... (29,900) -- (29,900)
Net borrowing (payments) on revolving line of credit ..... 64,700 -- 64,700
Payments on capital lease obligations and other
long-term obligations ................................. (2,032) -- (2,032)
Payment of debt offering costs ........................... (5,584) -- (5,584)
Increase in bank overdraft ............................... 453 -- 453
Other, net ............................................... (200) 22 (178)
--------- --------- ---------
Net cash (used in) provided by financing activities ....... 233,537 22 233,559
--------- --------- ---------
Effect of foreign currency translation adjustment .......... -- (188) (188)
--------- --------- ---------
Net increase in cash and cash equivalents .................. (248) 1,477 1,229
Cash and cash equivalents at beginning of period ........... 742 3,383 4,125
--------- --------- ---------
Cash and cash equivalents at end of period ................. $ 494 $ 4,860 $ 5,354
========= ========= =========
</TABLE>
18
<PAGE>
MAXXIM MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 9 -RESTRUCTURE CHARGES AND TRANSITION EXPENSES
In the first quarter of fiscal 1999, Maxxim incurred approximately
$2,016,000 of transition costs in connection with the restructuring of its sales
force. The sales force transition costs included severance and training expenses
associated with the realignment of Maxxim's sales force. In the fourth quarter
of fiscal year 1999, the Company announced the closing of one of its glove
plants. We 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 and $935,000 in the third quarter of fiscal 2000 related to this
decision. The restructure charges and transition expenses are summarized below.
Unpaid expenses are included in accrued expenses on Maxxim's consolidated
balance sheet, and Maxxim expects to pay the remaining accruals in fiscal 2000.
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE FISCAL 1999 FISCAL 1999 BALANCE
NOVEMBER 2, RECORDED PAYMENTS & OCTOBER 31,
1998 EXPENSES ADJUSTMENTS 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Severance ............................................. $ -- $ 2,860 $ 1,739 $ 1,121
Training .............................................. -- 395 395 --
Termination benefits .................................. -- 443 100 343
Other transition expenses ............................. -- 473 473 --
Plant closure expenses ................................ -- 466 267 199
---------- ---------- ---------- ----------
$ -- $ 4,637 $ 2,974 $ 1,663
========== ========== ========== ==========
<CAPTION>
BEGINNING ENDING
BALANCE FISCAL 2000 FISCAL 2000 BALANCE
NOVEMBER 1, RECORDED PAYMENTS & JULY 30,
1999 EXPENSES ADJUSTMENTS 2000
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Severance..................................... $ 1,121 $ 247 $ 1,021 $ 347
Termination benefits........................ 343 -- 265 78
Plant closure expenses...................... 199 2,361 2,560 --
---------- ---------- ---------- ----------
$ 1,663 $ 2,608 $ 3,846 $ 425
========== ========== ========== ==========
</TABLE>
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and related Notes appearing
elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which selected items in the Condensed Consolidated Statements of
Operations bear to net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- --------------------
JULY 30, AUGUST 1, JULY 30, AUGUST 1,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 78.4 72.5 77.1 72.1
------- ------- ------- -------
Gross profit ............................... 21.6 27.5 22.9 27.9
Selling, general and administrative expenses 19.5 18.2 19.1 18.0
Restructure charges and transition expenses 0.7 -- 0.7 0.5
------- ------- ------- -------
Income from operations ..................... 1.4 9.3 3.1 9.4
Interest expense ........................... (9.6) (6.0) (9.3) (5.1)
Other income (expense), net ................ 0.2 -- (0.5) --
Recapitalization expenses .................. (0.1) -- (5.0) --
------- ------- ------- -------
Income (loss) from continuing operation
before income taxes ..................... (8.1) 3.3 (11.7) 4.3
Income taxes ............................... (2.9) 1.2 (2.8) 1.8
------- ------- ------- -------
Income (loss) from continuing operations ... (5.2) 2.1 (8.9) 2.5
Income from discontinued operations,
net of tax .............................. -- 2.4 -- (1.5)
------- ------- ------- -------
Income (loss) before extraordinary item .... (5.2) 4.5 (8.9) 4.0
Extraordinary item - loss related to early
retirement of debt, net of tax ........... -- -- (2.9) --
------- ------- ------- -------
Net income (loss) .......................... (5.2)% 4.5% (11.8)% 4.0%
======= ======= ======= =======
</TABLE>
NET SALES - Net sales for the third fiscal quarter of 2000 were $129.9
million compared to $131.6 million in the third fiscal quarter of 1999. The 1.3%
decline in sales quarter over quarter is primarily the result of the following
factors: a slight decline in custom procedure tray sales to $78.2 million for
the third quarter of fiscal 2000 from $78.8 million for the third quarter of
fiscal 1999; a decline in medical glove sales to $21.7 million in the third
quarter of fiscal 2000 from $24.6 million in the comparable quarter of fiscal
1999 primarily caused by a decrease in O.E.M. sales and somewhat mitigated by an
increase in medical glove sales in North America; and an increase in all our
other product sales to $29.9 million in the third quarter of fiscal 2000 from
$28.2 million in the third quarter of fiscal 1999. Net sales for the nine months
ended July 30, 2000 were $383.5 million compared to $390.9 million in the first
nine months of fiscal 1999. The 1.9% decline in sales period over period is
primarily the result of the following factors: an increase in custom procedure
tray sales to $224.8 million for the nine months ended July 30, 2000 from $223.3
million in the comparable period of fiscal 1999; a decline in medical glove
sales to $67.0 million in the nine months ended July 30, 2000 from $82.7 million
in the comparable period of fiscal 1999 primarily caused by a decrease in O.E.M.
sales and somewhat mitigated by an increase in medical glove sales in North
America; and an increase in all our other product sales to $91.6 million in the
nine months ended July 30, 2000 from $85.0 million in the comparable period of
fiscal 1999.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (CONTINUED)
GROSS PROFIT - Gross profit was $28.1 million or 21.6% of net sales in
the third quarter of fiscal 2000 versus $36.2 million or 27.5% of net sales
reported in the third quarter of fiscal 1999. For the nine month period ended
July 30, 2000, gross profit was $87.6 million or 22.9% of net sales in fiscal
2000 versus $109.2 million or 27.9% of net sales in the comparable period of
fiscal 1999. The decline in gross profit is generally the result of lower glove
sales in the O.E.M. market as well as lower pricing in both medical gloves and
custom procedure trays caused by competitive pressure in the marketplace. The
gross profit for fiscal 2000 was also negatively impacted by a strike and a
facility rationalization program in our glove business. The negative impact on
the fiscal 2000 first quarter gross profit was $2.9 million of which $1.8
million was a non-cash inventory write-down. The negative impact on the fiscal
2000 second quarter gross profit was $4.3 million of which $1.2 million related
to the strike which ended in May with the signing of a new collective bargaining
agreement. The remaining declines in each period are primarily due to
under-utilized capacity at the facilities being rationalized. This
under-utilized capacity continued in the third quarter of fiscal 2000,
negatively impacting gross margin by $2.4 million. The Company expects to
complete its rationalization program before the end of the fiscal year. One
facility has been sold and the Company received net proceeds of approximately
$19.9 million in its third fiscal quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses were $25.4 million or 19.5% of net sales in the third
quarter of fiscal 2000 versus $23.9 million or 18.2% of net sales in the third
quarter of fiscal 1999. For the nine month period ended July 30, 2000, selling,
general and administrative expenses were $73.1 million or 19.1% of net sales in
fiscal 2000 versus $70.5 million or 18.0% of net sales in the comparable period
of fiscal 1999. The increase in operating expenses year over year is primarily
the result of higher administrative fees paid to group purchasing organizations
and higher delivery costs caused by expedited shipments, a fuel price surcharge
and the strike. These were somewhat offset by lower research and development
expenses as well as reduced general and administrative expenses.
RESTRUCTURE CHARGES AND TRANSITION EXPENSES - In the first nine months
of fiscal 2000, we recorded charges of $0.2 million in severance costs and $2.4
million of other transition expenses related to the closing of one of our glove
plants. In the first quarter of fiscal 1999, we recorded transition expenses of
$2.0 million related to the restructuring of our sales force.
INCOME FROM OPERATIONS - Income from operations for the third quarter
of fiscal 2000 was $1.8 million or 1.4% of net sales, compared to $12.3 million
or 9.3% of net sales in the third quarter of fiscal 1999. Income from operations
for the nine months ended July 30, 2000 was $11.9 million or 3.1% of net sales,
compared to $36.7 million or 9.4% of net sales in the comparable period of
fiscal 1999.
INTEREST EXPENSE - Interest expense increased to $12.4 million in the
third quarter of fiscal 2000 from $7.8 million reported in the third quarter of
fiscal 1999. Interest expense increased to $35.8 million in the nine months
ended July 30, 2000 from $20.0 million reported in the comparable period of
fiscal 1999. Our debt level, including capital leases, increased more than
$420.0 million due to the recapitalization of the Company. The increased
interest expense is primarily a function of higher average debt levels in the
current year versus the prior year for the corresponding periods.
RECAPITALIZATION EXPENSES - Recapitalization expenses of $19.0 million
were recorded in the first nine months of fiscal 2000 due to the
recapitalization of Maxxim on November 12, 1999. The recapitalization expenses
include approximately $14.0 million of professional fees.
INCOME TAXES - Our effective tax rate for the nine months ended July
30, 2000 was a tax benefit of 23.8% and the rate for the nine months ended
August 1, 1999 was a tax provision of 40.5%. The tax benefit rate for July 30,
2000 is lower than the statutory rate due to nondeductible goodwill amortization
and recapitalization expenses. The tax provision rate for August 1, 1999 is
higher than the statutory rate due to nondeductible goodwill amortization
resulting from acquisitions.
INCOME (LOSS) FROM CONTINUING OPERATIONS - As a result of the
foregoing, we reported a loss from continuing operations of $6.7 million in the
third quarter of fiscal 2000 versus income of $2.7 million in the third quarter
of fiscal 1999. We reported a loss from continuing operations of $34.3 million
in the nine months ended July 30, 2000 versus income of $10.0 million in the
comparable period of fiscal 1999.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (CONTINUED)
DISCONTINUED OPERATIONS - In connection 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 by Circon
to Maxxim. Accordingly, Circon's operations have been reflected as discontinued
operations in our condensed consolidating statements of operations. In the
quarter ended January 30, 2000, we recorded a gain of $87,000 on the sale of
Circon. In the nine months ended August 1, 1999, Circon's operating activities
resulted in net income of $5.9 million.
EXTRAORDINARY ITEM - In connection with the recapitalization, we
consumated a tender offer for our 10 1/2% senior subordinated notes.
Accordingly, the tender premium and deferred debt issuance costs related to
these notes were written off as an extraordinary loss in the quarter ended
January 30, 2000.
NET INCOME (LOSS) - As a result of the foregoing, we reported a loss of
$6.7 million for the third quarter of fiscal 2000 versus net income of $5.9
million in the third quarter of fiscal 1999. We reported a loss of $45.4 million
for the nine months ended July 30, 2000 versus net income of $15.9 million in
the comparable period of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.3 million in the nine
months ended July 30, 2000 versus $42.4 million in the nine months ended August
1, 1999. Net cash from operating activities was negatively impacted in the first
nine months of fiscal 2000 due to increases in inventory, accounts receivable,
income taxes receivable, accounts payable and a decline in accrued expenses. Net
cash from operating activities was favorably impacted in the nine months of
fiscal 1999 due to a decrease in accounts receivable and an increase in accrued
liabilities offset by an increase in inventory and a decline in accounts payable
for the period.
The purchase of Circon in January 1999 consumed $254.3 million in the
nine months ended August 1, 1999 and the sale of Circon as part of the
recapitalization provided $228.0 million in the nine months ended July 30, 2000.
The sale of one of our glove plants in June 2000 provided net proceeds of $19.9
million in the nine months ended July 30, 2000.
In the nine months ended July 30, 2000 Maxxim or its subsidiaires
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 in the nine months ended July 30, 2000: $100.0 million
for Maxxim's 10 1/2% senior subordinated notes, $254.0 million for the
outstanding balance on Maxxim's previous credit facility, $21.3 million for debt
offering costs and $37.4 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 $232.4 million in the nine months ended
July 30, 2000. In the nine months ended July 30, 2000 net borrowings under the
revolving credit facility totaled $8.5 million. The nine months ended August 1,
1999 reflects borrowings of $270.8 million under a new credit facility
established to fund the purchase of Circon, and payment of $5.6 million for
related debt offering costs.
We believe that borrowings available under our existing Credit Facility
will be sufficient to fund our working capital and other cash requirements for
the foreseeable future.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - (CONTINUED)
At July 30, 2000 our balance sheet included net goodwill of $141.8
million. The majority of this balance represents goodwill from the acquisitions
of Winfield Medical and Sterile Concepts. Maxxim acquired Winfield Medical in
June 1998. Unamortized goodwill from the Winfield acquisition totaled $22.1
million at July 30, 2000, which represents 15.7% of net goodwill on that date.
In July 1996, Maxxim acquired Sterile Concepts. Unamortized goodwill from the
Sterile Concepts acquisition totaled $105.6 million at July 30, 2000, and
represented 75.0% of net goodwill as of that date. The remaining $14.1 million
of unamortized goodwill at July 30, 2000 relates to various other acquisitions
made between 1992 and 2000. 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 goodwill amortization
expense for the nine months ended July 30, 2000 and August 1, 1999 were $3.8
million and $3.7 million, respectively. Management continues to evaluate its
expectation of future cash flow and may determine that an imparement in the
value of its intangibles has occurred in a future period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss arising
from adverse changes in market prices, interest rates and foreign exchange
rates. We do not enter into derivative or other financial instruments for
trading or speculative purposes.
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 is at a fixed percentage point spread from
either (1) the greater of prime, base CD or federal funds rates or (2) LIBOR. At
our option we can fix the interest rate for LIBOR for periods ranging from one
to six months. The interest on all outstanding obligations under the new credit
facilities are currently based on one month LIBOR.
In accordance with its Credit Facility, Maxxim Group is required to enter
into interest rate protection agreements to the extent necessary to provide that
at least 50% of Maxxim Group's aggregate term loan indebtedness is subject to
either fixed interest rates or interest rate protection. At July 30, 2000, more
than 50% of Maxxim Group's aggregate term loan indebtedness was subject to such
protection.
The interest rate protection agreements in place at July 30, 2000, included
agreements with the Chase Manhattan Bank, the Bank of Nova Scotia and Credit
Lyonnais. Maxxim Group and the Chase Manhattan Bank entered into an arrangement
to cap Maxxim Group's floating interest rate at 8.0% on an agreed upon notional
principal amount of $130,000,000. Maxxim and the Bank of Nova Scotia entered
into a swap arrangement whereby Maxxim agreed to pay a 5.02% fixed rate of
interest in exchange for the receipt of variable LIBOR interest up to 6.75% on
an agreed upon initial notional principal amount of $40,000,000. Additionally,
Maxxim and the Bank of Nova Scotia entered into a swap arrangement whereby
Maxxim agreed to pay a 5.08% fixed rate of interest in exchange for the receipt
of variable LIBOR interest up to 6.75% on an agreed upon initial notional
principal amount of $60,000,000. Maxxim and Credit Lyonnais entered into a swap
arrangement whereby Maxxim agreed to pay a 5.02% fixed rate of interest in
exchange for the receipt of variable LIBOR interest up to 6.75% on an agreed
upon initial notional principal amount of $25,000,000. The notional amount of
the agreed upon interest rate is used to measure interest to be received and
does not represent the amount of exposure to credit loss. In accordance with the
interest rate agreement, the measurement of three month London Interbank
Offering Rate occurs on the first day of each calculation period. For interest
rate instruments that effectively hedge interest rate exposure, the net cash
amounts received on the agreement is accrued as incurred and recognized as an
adjustment to interest expense.
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 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. Management continues to evaluate its expectation of future cash flow and
may determine that an imparement in the value of its intangibles has occurred in
a future period.
23
<PAGE>
PART II. OTHER INFORMATION
Items 1, 2, 3, and 4 for which provision is made in the applicable regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
Item 5. OTHER MATTERS
MANAGEMENT CHANGES
On July 13, 2000, Akbar Naderi became Vice Chairman and President of the Company
and Mark S. Sellers became Vice Chairman and Chief Financial Officer of the
Company. As of this date Kenneth Davidson, Peter Graham and Alan Blazei are no
longer with the Company.
Item 6. EXHIBITS AND REPORTS
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXXIM MEDICAL, INC.
Date: 9/13/00 By: /s/ AKBAR NADERI
------------- --------------------------------
Akbar Naderi
Vice Chairman & President
(principal executive officer)
Date: 9/13/00 By: /s/ MARK SELLERS
------------- --------------------------------
Mark Sellers
Vice Chairman & Chief Financial Officer
(principal financial officer)
25
