10-Q 1 g71623e10-q.txt MAXXIM MEDICAL, INC. 1 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 29, 2001 ------------- [ ] 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 [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock: Class Outstanding at August 31, 2000 ------------------------------------- ------------------------------ COMMON STOCK, $.001 PAR VALUE 30,165,161 2 MAXXIM MEDICAL, INC. INDEX

1 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAXXIM MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)

See accompanying notes to condensed consolidated financial statements. 2 4 MAXXIM MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) (Unaudited)

See accompanying notes to condensed consolidated financial statements. 3 5 MAXXIM MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements. 4 6 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. Current financial information includes the accounts of Maxxim, Maxxim Medical Group, Inc. ("Maxxim Group") and Maxxim Group's wholly owned subsidiaries. Effective November 1, 2000, we announced a 5.2 for 1 stock split in the form of stock dividend of 4.2 shares of common stock on each share of common stock issued and outstanding on such effective date. These financial statements have been adjusted to reflect this stock split. 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 29, 2000, included in its Annual Report on Form 10-K as filed with the Securities and Exchange Commission. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL QUARTER The third quarter of fiscal 2001 ended on July 29th compared to the fiscal 2000 third quarter end date of July 30th. INVENTORIES Inventory includes the following as of: JULY 29, OCTOBER 29, 2001 2000 -------- ----------- (UNAUDITED) (IN THOUSANDS) Raw materials $ 44,275 $ 32,667 Work in progress 7,226 9,301 Finished goods 35,919 41,063 Allowance for excess and obsolete (7,108) (16,118) -------- -------- $ 80,312 $ 66,913 ======== ======== 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 the Company's previous acquisitions is approximately $157,608,000 of which approximately $107,901,000 remains unamortized as of July 29, 2001. Amortization periods for goodwill range from 5 to 40 years. The Company evaluates its goodwill for impairment by comparison of carrying value against undiscounted future pre-tax cashflows. If an impairment is identified, we adjust the asset's carrying amounts to the value of future discounted cashflows. 5 7 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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. 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:

NOTE 3 - BUSINESS COMBINATIONS, SIGNIFICANT ASSET ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS DISCONTINUED OPERATIONS On November 12, 1999, in connection with the recapitalization, Maxxim sold all of the common stock of Circon Corporation, a wholly owned subsidiary of the Company, to Circon Holdings Corporation ("Circon Holdings"), a newly formed Delaware corporation. Income of $87,000 from these discontinued operations was recorded in the quarter ended January 30, 2000. 6 8 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 4 - DEBT The following summarizes the Company's long-term debt as of: JULY 29, 2001 OCTOBER 29, 2000 ------------- ---------------- (UNAUDITED) (In thousands) Industrial revenue bonds ....... $ 1,940 $ 2,370 Revolving line of credit ....... 15,500 -- Term loans under credit facility 208,500 208,500 --------- --------- Total long term debt ........ 225,940 210,870 Less - Current maturities ...... (10,708) (10,688) --------- --------- $ 215,232 $ 200,182 ========= ========= NOTE 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 cumulative change in accounting method of $355,000 in the first quarter of fiscal 2001. In January 1999, the Company entered into swap agreements with three banks participating in the Company's Third 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%, so long as LIBOR does not exceed 6.75%. The Company used the interest rate swap to manage the interest risk associated with its borrowings and to manage the Company's allocation of fixed and variable rate debt associated with the credit facility in existence prior to the recapitalization. This swap agreement was continued by the Company subsequent to termination of the Company's previous credit facility . The swap was redesignated as a speculative position for accounting purposes and has been recorded at its market value in the financial statements. The Company includes gains and losses associated with recording this instrument at fair value as a component of interest expense. Pursuant to the Credit Facility, 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 has recorded the instrument at fair value in its financial statements as of October 30, 2000. Accordingly, 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 have been recorded as a component of interest expense. 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:

7 9 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Fair values for the Company's 10 1/2% Senior Subordinated Notes were based upon the redemption value paid in connection with the recapitalization. Fair values for the Company's other debts were determined from quoted market prices or estimated discounted cash flows. NOTE 6 - OTHER ASSETS Other assets, net of accumulated amortization, include the following as of: JULY 29, OCTOBER 29, 2001 2000 -------- ----------- (UNAUDITED) (IN THOUSANDS) Patents .............. $ 3,690 $ 4,118 Debt offering costs .. 18,242 21,105 Non-compete agreements 520 596 Notes receivable ..... 146 338 Other ................ 1,545 1,677 ------- ------- $24,143 $27,834 ======= ======= NOTE 7 - 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. 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 29, 2001 JULY 30, 2000 ------------- ------------- (UNAUDITED, IN THOUSANDS) United States ........... $109,231 $112,162 Europe .................. 9,331 11,207 Rest of World ........... 5,803 6,514 -------- -------- Total Company ........... $124,365 $129,883 ======== ======== NINE MONTHS ENDED --------------------------------- JULY 29, 2001 JULY 30, 2000 ------------- ------------- (UNAUDITED, IN THOUSANDS) United States ........... $334,520 $329,843 Europe .................. 30,136 33,788 Rest of World ........... 17,506 19,840 -------- -------- Total Company ........... $382,162 $383,471 ======== ======== 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 29, 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., our largest distributors, were 35.8% and 8.8% of our net sales in the United States, respectively, for the nine months ended July 29, 2001, and 26.3% and 10.1% of our net sales, respectively, for the nine months ended July 30, 2000. For the nine months ended July 29, 2001, no other single distributor accounted for more than 10% of our total net sales in the United States. 8 10 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 8 - 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 July 29, 2001. The former CEO is delinquent in payment of his 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 executed a $270,000 promissory note to its former Corporate Controller. This loan is non-interest bearing, unsecured and repayable on June 3, 2006. NOTE 9 - FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES Consolidating financial information regarding the Company, guarantor subsidiaries and non-guarantor subsidiaries as of July 29, 2001 and October 29, 2000 and for each of the fiscal quarters ended July 29, 2001 and July 30, 2000 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. 9 11 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEET JULY 29, 2001

10 12 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONSOLIDATED BALANCE SHEET OCTOBER 29, 2000 (IN THOUSANDS)

11 13 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 29, 2001

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED JULY 30, 2000

12 14 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 29, 2001

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED JULY 30, 2000

13 15 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 29, 2001

14 16 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

15 17 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 10 -RESTRUCTURE CHARGES AND TRANSITION EXPENSES Through July 29, 2001 we have separated approximately 470 employees relating to the restructuring charges taken in fiscal 2000. The remaining severance benefits of $396,000 will be paid in accordance with plan provisions.

16 18 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:

NET SALES - Net sales for the third fiscal quarter of 2001 were $124.4 million compared to $129.9 million in the third fiscal quarter of 2000. The 4.2% decrease in sales quarter over quarter is primarily the result of the following factors: a decrease in custom procedure tray sales to $76.0 million for the third quarter of fiscal 2001 from $78.2 million for the third quarter of fiscal 2000 due to a managed reduction in dealer inventory levels; a slight decline in medical glove sales to $21.1 million in the third quarter of fiscal 2001 from $21.7 million in the comparable quarter of fiscal 2000; and a decline in all other product sales to $27.3 million in the third quarter of fiscal 2001 from $29.9 million in the third quarter of fiscal 2000, primarily due to reduced endoscopic sales to European distributors, offset in part by a reduction in estimated rebate obligations. Net sales for the nine months ended July 29, 2001 were $382.2 million compared to $383.5 million in the first nine months of fiscal 2000. An increase in custom procedure tray sales to $234.1 million for the nine months ended July 29, 2001 from $224.8 million in the comparable period of fiscal 2000 due to sales conversions from a large group purchasing organization contract obtained in fiscal 2000 were offset by the following factors; a decline in medical glove sales to $63.1 million in the nine months ended July 29, 2001 from $67.0 million in the comparable period of fiscal 2000 primarily caused by lower O.E.M. sales; and a decline in all our other product sales to $84.9 million in the nine months ended July 29, 2001 from $91.7 million in the comparable period of fiscal 2000, primarily due to reduced endoscopic sales to European distributors. 17 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (CONTINUED) GROSS PROFIT - Gross profit increased to $28.8 million or 23.2% of net sales in the third quarter of fiscal 2001 from $28.1 million or 21.6% of net sales reported in the third quarter of fiscal 2000. For the nine month period ended July 29, 2001, gross profit was $90.7 million or 23.7% of net sales in fiscal 2001 versus $87.6 million or 22.8% of net sales in the comparable period of fiscal 2000. Gross profit for fiscal 2001 was negatively impacted by costs associated with the plant rationalization program that began in the fourth quarter of fiscal 2000. The negative impact on the fiscal 2001 first quarter gross profit was $2.1 million, $1.5 million in the second quarter, and $1.7 million in the third quarter. Gross profit for fiscal 2000 was 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and administrative expenses declined to $22.4 million or 18.0% of net sales in the third quarter of fiscal 2001 from $25.4 million or 19.5% of net sales in the third quarter of fiscal 2000. For the nine month period ended July 29, 2001, selling, general and administrative expenses declined to $67.2 million or 17.6% of net sales in fiscal 2001 from $73.1 million or 19.1% of net sales in the comparable period of fiscal 2000. The improvement in selling, general and administrative expenses quarter over quarter as well as period over period is attributable to improvements in sales, marketing and distribution expenses combined with general cost reductions. RESTRUCTURE CHARGES AND TRANSITION EXPENSES - In the first nine months of fiscal 2000, we recorded charges of $0.9 million in severance costs and $2.6 million of other transition expenses related to the closing of one of our glove plants. In connection with the resignation of Akbar Naderi, the Company has recorded a liability of approximately $1.0 million. INCOME FROM OPERATIONS - Income from operations for the third quarter of fiscal 2001 was $6.4 million or 5.2% of net sales, compared to $1.8 million or 1.4% of net sales in the third quarter of fiscal 2000. Income from operations for the nine months ended July 29, 2001 was $23.4 million or 6.1% of net sales, compared to $11.9 million or 3.1% of net sales in the comparable period of fiscal 2000. INTEREST EXPENSE - Interest expense increased to $12.7 million in the third quarter of fiscal 2001 from $12.4 million reported in the third quarter of fiscal 2000. Interest expense increased to $39.9 million in the nine months ended July 29, 2001 from $35.8 million reported in the comparable period of fiscal 2000. The Company incurred cash interest expense of $7.9 million and $9.4 million in the quarters ended July 29, 2001 and July 30, 2000, respectively. In the nine months ended July 29, 2001 and July 30, 2000, the Company incurred $25.4 million and $26.9 million of cash interest expense, respectively. The increased interest expense period over period is primarily a function of the marking to market of the Company's derivative securities and a full period's interest expense and amortization on the debt incurred with the recapitalization. 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 - 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. As a result, the Company has recorded a full valuation allowance on tax benefits generated for the quarter and the nine months ended July 29, 2001. Our effective tax rate for the nine months ended July 30, 2000 was a benefit of 23.8%. LOSS FROM CONTINUING OPERATIONS - As a result of the foregoing, we reported a loss from continuing operations of $6.1 million in the third quarter of fiscal 2001 versus $6.7 million in the third quarter of fiscal 2000. We reported a loss from continuing operations of $17.9 million in the nine months ended July 29, 2001 versus $34.3 million in the comparable period of fiscal 2000. 18 20 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. 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. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - In the quarter ended January 28, 2001, the Company implemented FASB Statement No. 133. As a result, a loss was recorded to reflect a derivative instrument at its fair value at October 30, 2000. NET LOSS - As a result of the foregoing, we reported a loss of $6.1 million for the third quarter of fiscal 2001 versus $6.7 million in the third quarter of fiscal 2000. We reported a loss of $18.2 million for the nine months ended July 29, 2001 versus $45.4 million in the comparable period of fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities was $8.2 million in the nine months ended July 29, 2001 versus cash provided from operations of $7.3 million in the comparable period of fiscal 2000. Net cash from operating activities was negatively impacted in the first nine months of fiscal 2001 due to an increase in accounts receivable and inventory which was somewhat offset by an increase in accounts payable and the receipt of an income tax refund. Net cash from operating activities was negatively impacted in nine months of fiscal 2000 due to increases in inventory, accounts receivable, an income tax receivable and a decline in accrued expenses. Cash flows used by investing activities were $3.1 million in the first nine months of fiscal 2001 while cash flows generated in investing activities were $242.4 in the first nine months of 2000. The sale of Circon as part of the recapitalization provided $228 million in the first quarter of fiscal 2000. Capital expenditures totaled $3.4 million and $5.8 million in first nine months of fiscal 2001 and 2000, respectively. Cash flows provided from financing activities were $11.8 million in the first nine months of fiscal 2001 while cash flows used in financing activities was $215.6 million in the first nine months of fiscal 2000. In the nine months ended July 30, 2000 Maxxim or its subsidiaries 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 first nine months of fiscal 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 the payment of $232.4 million in the nine months ended July 30, 2000. 19 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (CONTINUED) At July 29, 2001, our balance sheet included net goodwill of $107.9 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 $21.3 million at July 29, 2001, which represents 19.7% of net goodwill on that date. In July 1996, Maxxim acquired Sterile Concepts. Unamortized goodwill from the Sterile Concepts acquisition totaled $75.3 million at July 29, 2001, and represented 69.6% of net goodwill as of that date. The remaining $11.3 million of unamortized goodwill at July 29, 2001, 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 29, 2001, and July 30, 2000, were $3.1 million and $3.8 million, respectively. Management believes that there is not persuasive evidence that any material portion of this intangible asset will dissipate over a period shorter than the determined useful life. The revolving credit facility is available for general corporate purposes, including working capital and capital expenditures, and includes sublimits of $25.0 million and $10.0 million, respectively, for letters of credit and swingline loans. At July 29, 2001, the Company had $15.5 million drawn under its revolving credit facility. The 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 credit facilities require us to maintain certain financial ratios. The 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. 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. FORWARD LOOKING STATEMENTS This report contains forward looking statements. Forward looking statements are statements of our expectations, estimates, projections and beliefs and are based on assumptions made by and information currently available to us regarding our business and the industry in which we operate. Forward-looking statements describe our expectations today of what we believe is most likely to occur or reasonably achievable in the future, but such statements do not predict or assure any future occurrence and may turn out to be wrong. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. The words "believe," "anticipate," "intend," "expect," "estimate," "project", "predict", "hope" and "should", variations of such words, and similar expressions, among others, are intended to identify forward-looking statements. Forward looking statements are subject to potential risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. The potential risks and uncertainties that could affect forward looking statements are listed within our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 14, 2001. We caution that undue reliance should not be placed on our forward-looking statements, which speak only as of the date of this document. We hereby disclaim any obligation to update information contained in any forward-looking statement. 20 22 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 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. The interest rate on all outstanding obligations under the new credit facility are currently set off three month LIBOR. 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 other impairment of intangible assets existed as of July 29, 2001. 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 On June 18, 2001 Russell D. Hays was appointed Chief Executive Officer. On June 28, 2001 Akbar Naderi resigned his position as President and as Vice Chairman of the Company. Item 6. EXHIBITS AND REPORTS (a) Exhibits Exhibit 10.1 Russell D. Hays Employment Agreement. (b) Reports on Form 8-K None. 21 23 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: 8/31/01 By: /s/ RUSSELL D. HAYS ------------------------------------ Russell D. Hays Chief Executive Officer (principal executive officer) Date: 8/31/01 By: /s/ MARK S. SELLERS ------------------------------------ Mark S. Sellers Vice Chairman and Chief Financial Officer (principal financial officer) 22

MAXXIM MEDICAL INC 10-Q