10-Q 1 g77901e10vq.txt MAXXIM MEDICAL, INC. Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT For the quarterly period ended JUNE 30, 2002 ------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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) 950 WINTER STREET, SUITE 2900, WALTHAM, MASSACHUSETTS 02451 ----------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code...............(781) 906-0700 -------------- 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 August 13, 2002 ----------------------------- ------------------------------- COMMON STOCK, $.001 PAR VALUE 26,743,627 MAXXIM MEDICAL, INC. INDEX PART I. Financial Information Page No. -------- Item 1. Condensed Consolidated Balance Sheets as of December 30, 2001 and June 30, 2002 2 Condensed Consolidated Statements of Operations for the Fiscal Quarters Ended June 24, 2001 and June 30, 2002 3 Condensed Consolidated Statements Of Shareholders' Equity (Accumulated Deficit) And Comprehensive Income (Loss) Periods from October 29, 2001 to December 30, 2001 and December 31, 2001 to June 30, 2002 (unaudited) and fiscal years ended October 28, 2001, and October 29, 2000 4 Condensed Consolidated Statements of Cash Flows for the Fiscal Quarters Ended June 24, 2001 and June 30, 2002 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. Other Information 27 Signatures 28 1 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 MAXXIM MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) (Unaudited)

See accompanying notes to condensed consolidated financial statements. 3 MAXXIM MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT) AND COMPREHENSIVE INCOME (LOSS) Periods from October 29, 2001 to December 30, 2001 and December 31, 2001 to June 30, 2002 (unaudited) and fiscal years ended October 28, 2001, and October 29, 2000 (In thousands)

See accompanying notes to condensed consolidated financial statements. 4 MAXXIM MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT) AND COMPREHENSIVE INCOME (LOSS) Periods from October 29, 2001 to December 30, 2001 and December 31, 2001 to June 30, 2002 (unaudited) and fiscal years ended October 28, 2001, and October 29, 2000 - Continued (In thousands)

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

See accompanying notes to condensed consolidated financial statements. 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. 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. Prior to the completion of the acquisition of the common shares held by certain former continuing shareholders on June 7, 2002, as explained in Note 12, Maxxim presented its financial statements for the periods from November 12, 1999 (the date of the recapitalization transaction) through June 6, 2002 using the historical basis of its assets and liabilities. Such accounting was appropriate under the accounting rules for recapitalization transactions in which continuing shareholders maintained a substantive common share interest in the Company after the recapitalization transaction. On June 7, 2002, Maxxim reached a settlement with certain former continuing shareholders as discussed in Note 12. As a result of the settlement, Maxxim acquired 3,621,534 common shares from the former continuing shareholders. Given that the former continuing shareholders no longer own an interest in Maxxim, the Company will apply the purchase method of accounting for the November 12, 1999 transaction in the consolidated financial statements. The purchase method has been applied as of June 7, 2002. Accordingly, a new basis of accounting is reflected in the accompanying financial statements as of June 7, 2002, and no prior period financial statements have been adjusted. The net purchase price that has been pushed down to the accompanying financial statements as of June 7, 2002 is as follows:

The application of the purchase method through the push down of a net purchase accounting entry reflects activity from the date of the acquisition (November 12, 1999) through June 6, 2002. The original purchase price included the amounts paid for all shares acquired plus direct acquisition costs. The purchase price was allocated to the fair value of the assets and liabilities as of November 12, 1999. The excess of the purchase price over the fair value of the assets and liabilities is classified as goodwill and was amortized using a 20 year life through December 30, 2001. The common shares of the former continuing shareholders were acquired on June 7, 2002 for total consideration of $5.8 million. Such transaction has been reflected using the purchase method of accounting and resulted in additional goodwill included above and in the accompanying balance sheet as of June 30, 2002. Effective November 1, 2000, the Company 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. On February 7, 2002, the Company changed its fiscal year-end from a fiscal year ending on the Sunday nearest to October 31 to a fiscal year ending on the Sunday nearest to December 31. Accordingly, the accompanying financial statements reflect this change. These financial statements should be read in conjunction with Maxxim's annual audited financial statements for the transition period from October 29, 2001 through December 30, 2001, included in its Transition Report on Form 10-K as filed with the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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. 7 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL QUARTER As a result of the change in fiscal year as discussed in Note 1, the second quarter of fiscal 2001 has been restated to reflect a comparable 13 week quarter. The second quarter of fiscal 2002 ended on June 30th while the fiscal 2001 second quarter ended on June 24th. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES Inventory includes the following as of:

GOODWILL For all periods prior to June 7, 2002, goodwill represents the excess of the aggregate price paid by the Company in business combinations accounted for as purchases over the fair market value of the tangible and identifiable intangible net assets acquired. Goodwill from the Company's previous acquisitions was approximately $157,629,000 of which approximately $106,134,000 remained unamortized as of December 30, 2001. As of June 7, 2002, upon the application of the purchase method of accounting for the November 12, 1999 transaction (see Note 1), all previously recorded goodwill was revalued and the new goodwill balance of $401,041,000 (net of accumulated amortization of $46,922,000 assuming a 20 year life through December 30, 2001) represents the excess of the aggregate purchase price over the fair value of the net assets acquired as of November 12, 1999. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the Company ceased amortization of goodwill as of December 31, 2001. Accordingly, no goodwill amortization was recorded in the six months ended June 30, 2002, whereas $1,938,000 of goodwill amortization was recorded in the six months ended June 24, 2001. SFAS No. 142 also requires that goodwill be assessed for impairment upon adoption and annually thereafter. The Company is in the process of completing the initial test for impairment but any impairment charge would be reflected as an accounting change recorded retroactively in the first quarter of fiscal 2002. The Company is currently evaluating all aspects of adopting SFAS No. 142 and believes that it is possible that an impairment loss will be incurred upon adoption of this statement. 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. 8 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss), consisting of net loss, unrealized holding gains and losses on available-for-sale securities and foreign currency translation adjustments is presented in the consolidated statements of shareholders' equity (accumulated deficit) and comprehensive income (loss). Total comprehensive income (loss) is as follows:

NOTE 3 - SALE OF EQUITY In November and December 2001, the Company consummated the sale of 50,000 units ("Units"), each Unit being comprised of one share of its Series A Participating Preferred Stock, par value $1.00 per share, and 162 warrants to purchase, for $.01 per share, one share of its common stock per warrant. The aggregate offering price and proceeds to the Company from the sale were $50 million in cash. Pursuant to the Stock Purchase Agreement by and among the Company, Maxxim Medical Group, Inc. (a wholly owned subsidiary of the Company), Fox Paine Capital Fund, L.P., FPC Investors, L.P., and Fox Paine Medic New Equity Corp., Fox Paine Capital Fund, L.P. and FPC Investors, L.P. collectively purchased 23,500 Units for $23,500,000 on November 30, 2001. Following that closing, the Company offered each of its existing shareholders and warrant holders the right to purchase their pro rata share of the 50,000 Units on the same terms as those in the Stock Purchase Agreement, based on such holder's pro rata ownership of the Company's common stock, on an as-converted basis. Those Units that were not purchased by the Company's existing shareholders and warrant holders were also offered to select potential investors. Under the Stock Purchase Agreement, Fox Paine Medic New Equity Corp. agreed to purchase any Units not subscribed for by the other offerees at the final closing, which occurred on December 31, 2001. Prior to December 30, 2001, 4,852 Units were sold to certain of the Company's existing shareholders, warrant holders and new investors, collectively, for $4.9 million in cash. On December 31, 2001, 21,648 Units were sold to Fox Paine Medic New Equity Corp., certain of the Company's existing shareholders and warrant holders and new investors, collectively, for $21.6 million. Preferred stock outstanding at June 30, 2002 totaled 50,000 shares. NOTE 4 - DEBT The following summarizes the Company's long-term debt as of:

9 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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. In January 1999, the Company entered into a swap agreement with three banks participating in the Company's then existing credit agreement. The total notional value of the swaps are $125,000,000. In November 2000, the Company sold a portion of this swap agreement, with a notional value of $25,000,000, for $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 swaps to manage the interest risk associated with its borrowings and to manage the Company's allocation of fixed and variable rate debt associated with the credit facility in existence prior to the recapitalization. These swap agreements were continued by the Company subsequent to termination of the Company's previous credit facility . The swaps were redesignated as speculative positions for accounting purposes and have been recorded at their market value in the financial statements. The Company includes gains and losses associated with recording these instruments at fair value as a component of interest expense. For the six months ended June 30, 2002 and June 24, 2001, the Company recorded $340,000 and $2,353,000 of interest income relating to these swaps respectively. 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. Adjustments to the fair value of this instrument of $6,000 and $199,000 have been recorded as a component of interest expense for the six months ended June 30, 2002 and June 24, 2001, respectively. 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:

Fair values for the Company's other debts were determined from quoted market prices or estimated discounted cash flows. 10 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 6 - OTHER ASSETS Other assets, net of accumulated amortization, include the following as of:

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. Sales information in the table below is presented on the basis the Company uses to manage its business. Export sales are reported within the geographic areas where the final sales to customers are made.

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 June 30, 2002 and December 30, 2001. The Company distributes primarily through major distributors in the United States. Those distributors typically serve under a purchase order or supply agreement between the end-user and the Company. Sales through Owens & Minor, Inc., and General Medical Corp., the Company's largest distributors, were 37.6% and 8.2% of our net sales in the United States, respectively, for the six months ended June 30, 2002, and 37.8% and 10.5% of our net sales, respectively, for the six months ended June 24, 2001. For the six months ended June 30, 2002, no other single distributor accounted for more than 10% of our total net sales in the United States. 11 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 November 12, 1999 recapitalization, the continuing shareholders received loans in the aggregate amount of $2,580,000 for the purchase of Maxxim common stock which were reflected as subscriptions receivable at December 30, 2001 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. As discussed in Note 12, the Company reached a settlement with certain of these continuing shareholders. As part of the settlement 3,621,534 common shares were repurchased and subscriptions receivable of $2,528,000 and tax loans totaling $1,551,000 were repaid. 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. As discussed in Note 12, the Company reached a settlement with certain former continuing shareholders. As part of the settlement, the former CEO's loan was repaid. 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 was non-interest bearing, unsecured and repayable upon the earlier of the sale of his prior residence or December 31, 2000. As discussed in Note 12, the Company reached a settlement with certain former continuing shareholders. As part of the settlement, the former COO's loan was repaid. On May 31, 2000, Maxxim's former Corporate Controller received a loan and executed a promissory note for $270,000. This loan is non-interest bearing, unsecured and repayable on June 3, 2006. During 2002, the loan receivable was offset against an existing accrued bonus liability due to the former Corporate Controller. Under the terms of the Company's former Vice Chairman and President's ("President") employment agreement, the former President borrowed $318,750 for the purchase of Maxxim's common stock effective August 7, 2000. This loan is secured by a pledge of Maxxim's common stock, is repayable on the ninth anniversary of the note, bears interest at a rate of 10% annually and is reflected in subscriptions receivable in the accompanying balance sheet. Under the terms of the Company's Vice Chairman and Chief Financial Officer's ("CFO") employment agreement, the CFO borrowed $75,000 for the purchase of Maxxim's common stock effective July 13, 2000. This loan is secured by a pledge of Maxxim's common stock, is repayable on the second anniversary of the note, bears interest at a rate of 10% annually and is reflected in subscriptions receivable in the accompanying balance sheet. The CFO additionally received an advance of future bonuses in the amount of $175,000 in fiscal 2000. Such amount is reflected in other receivables as of June 30, 2002. In connection with the relocation of a portion of the Company's executive management staff from Clearwater, Florida to Waltham, Massachusetts in December 2001, the Company made a loan in the amount of $635,000 to its CFO to provide funds in connection with his relocation to the Boston area prior to the sale of his present home. The loan is secured by a security interest in both homes as well as all of the Maxxim stock and stock options held by him and certain other securities, and is due upon the earliest of (i) June 28, 2002, (ii) receipt by him of proceeds from the sale of either home, (iii) the termination of his employment with the Company for any reason, or (iv) upon the CFO's breach of any provision of the note or the related stock pledge agreement. This loan bears interest until paid at the lowest rate allowed under the Internal Revenue Code which avoids the imputation of income to the Company for tax purposes. At June 30, 2002, such loan is included in other receivables in the accompanying balance sheet. Under the terms of the Company's Vice Chairman and Chief Executive Officer's ("CEO") employment agreement, the CEO borrowed $500,000 for the purchase of Maxxim's common stock effective October 26, 2001. This loan is secured by a pledge of Maxxim's common stock, is repayable on the second anniversary of the note, bears interest at a rate of 10% annually and is reflected in subscriptions receivable in the accompanying balance sheet. 12 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 9 - INCOME TAXES In the quarter ended March 31, 2002, the Company reduced the valuation allowance by $3.6 million as a result of the enactment of a tax law change during the quarter in which the 3 year carryback of net operating losses was extended to 5 years. NOTE 10 - FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES Consolidating financial information regarding the Company, guarantor subsidiaries and non-guarantor subsidiaries as of June 30, 2002 and December 30, 2001 and for each of the three and six months ended June 30, 2002 and June 24, 2001 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. 13 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2002 (IN THOUSANDS)

14 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONSOLIDATED BALANCE SHEET DECEMBER 30, 2001 (IN THOUSANDS)

15 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 IN THOUSANDS

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 24, 2001 IN THOUSANDS

16 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2002 IN THOUSANDS

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 24, 2001 IN THOUSANDS

17 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002

18 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (IN THOUSANDS) (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 24, 2001

19 MAXXIM MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 11 -RESTRUCTURING CHARGES In the fourth quarter of fiscal 2000, the Company announced the restructuring and reduction in workforce of five of its manufacturing plants. The Company recorded charges of $9,886,000 in the fourth quarter of fiscal 2000 related to this decision consisting of $3,717,000 in severance liabilities and $6,169,000 in other obligations in connection with these closures. The Company estimated a reduction of approximately 1,141 employees in connection with the restructuring. Through June 30, 2002, the Company has separated approximately 480 employees relating to the restructuring charges taken in fiscal 2000. In the fourth quarter of fiscal 2001, the Company decided to close another facility. The Company recorded charges of $5,571,000 in the fourth quarter of fiscal 2001 related to the decision to close this facility. The remaining severance benefits of $5,117,000 will be paid in accordance with the plan provisions.

NOTE 12 - SETTLEMENT WITH FORMER MANAGEMENT SHAREHOLDERS On June 7, 2002, the Company and certain of its directors, officers and affiliates settled three lawsuits brought by certain directors and former employees of the Company in state court in Florida in September 2000, October 2001 and April 2002, respectively. The plaintiffs' therein, all of whom were continuing shareholders in the November 1999 recapitalization, alleged various common law and statutory causes of action arising out of the termination of certain plaintiffs' employment with the Company following the recapitalization. Many of these claims, as well as certain counterclaims by the Company, were the subject of arbitration proceedings before the American Arbitration Association in New York. The parties entered into an omnibus settlement agreement dated as of June 7, 2002. The settlement consisted of the following: (a) the Company purchased all of the common shares of the Company held by plaintiffs (3,621,534 shares) for total consideration of $5.8 million; (b) the Company paid an additional $100,000 to settle all prior compensatory arrangements and in consideration of a full release of all claims against the Company, its directors, officers and their affiliates; (c) plaintiffs repaid certain subscriptions and notes due to the Company totaling $4.9 million; (d) plaintiffs transferred to the Company all of their options to purchase shares of the common stock of the Company, which were then canceled; (e) the parties dismissed all three lawsuits, the New York arbitration, and all related appeals; and (f) plaintiffs who were serving as directors of the Company resigned from the Company's Board of Directors. 20 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 second fiscal quarter of 2002 were $106.5 million compared to $128.6 million for the comparable period in 2001. Net sales for the six months ended June 30, 2002 were $223.1 million compared to $257.4 million for the comparable period in 2001. Our sales decline is primarily the result of two factors. First, a managed reduction in lower margin sales for both our surgical group (surgical custom trays, drapes and gowns) and our vascular group (catheterization lab tray and vascular components). Surgical group sales were $63.6 million and $125.4 million for the three and six months ended June 24, 2001, respectively, compared to $47.5 million and $103.0 million in the comparable periods of 2002 and our vascular group sales were $30.1 million and $59.9 million compared to $24.7 million and $50.5 million for the same periods. Second, a decrease in our Netherlands product group sales from $8.3 million and $17.2 million for the three and six months ended June 24, 2001, respectively, compared to $7.7 million and $15.4 million in the comparable periods of 2002 due to a reduction in sales generated from the distribution of non-Maxxim products. GROSS PROFIT - Gross profit was $26.7 million or 25.1% and $55.8 million or 25.0% of net sales for the three and six months ended June 30, 2002, respectively compared to $29.2 million or 22.7% and $60.8 million or 23.6% of net sales in the comparable periods in 2001. Gross profit for the six months ended June 30, 2002 was negatively impacted by $1.6 million of non-recurring costs associated with the continuation of our operations improvements initiatives, and were primarily attributable to: underutilized capacity, plant consolidations and inventory reduction programs. Gross profit, excluding costs associated with our operations improvements initiatives, was $57.4 million or 25.7% of net sales for the six months ending June 30, 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and administrative expenses were $22.2 million or 20.9% of net sales and $46.3 million or 20.7% of net sales for the three and six months ended June 30, 2002, respectively, compared to $23.0 million or 17.9% and $45.1 million or 17.5% in the comparable periods in 2001. The decrease in operating expense for the quarter ended June 30, 2002, was primarily attributable to a decrease in distribution expenses and the elimination of a reserve of $2.8 million recorded in connection with the litigation with our former continuing shareholders. For the six months ended June 30, 2002, the increase in operating expenses was primarily attributable to costs associated with the implementation of our enterprise resource planning system, the relocation of our corporate headquarters to Waltham, Massachusetts, and increased group purchasing fees and included approximately $1.2 million of non-recurring costs. These increases were partially offset by the adoption of FASB Statement No. 142 which eliminated goodwill amortization expense which was $1.9 million for the six months ended June 24, 2001. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (CONTINUED) INCOME FROM OPERATIONS - Income from operations for the three months ended June 30, 2002, was $4.5 million or 4.2 % of net sales compared to income of $6.1 million or 4.8% of net sales for the comparable period in 2001. For the six months ended June 30, 2002 income from operations was $9.5 million or 4.3% of net sales compared to $15.8 million or 6.1% for the comparable period in 2001. Income from operations, excluding costs associated with our operations improvements initiatives, was $11.1 million or 5.0% of net sales for the six months ended June 30, 2002. NET INTEREST EXPENSE - Net interest expense decreased from $13.1 million and $27.6 million for the three and six months ended June 24, 2001, respectively, to $11.8 million and $21.8 million for the comparable periods in 2002. Interest expense included non-cash charges of $3.8 million and $5.9 million in the three and six months ending June 30, 2002, respectively and $3.8 million and $8.2 million for the three and six months ending June 24, 2001, respectively. The decrease in interest expense in fiscal 2002 is attributable to a $3.7 million reduction in cash interest expense and a $2.3 million reduction in non-cash interest expense. The reduction in cash interest expense is attributable to lower interest rates and lower outstanding debt balances in the period ended June 30, 2002 compared to the comparable period in 2001. The decrease in non-cash interest expense is attributable to recording $0.3 million of interest income associated with increasing the carrying value of our swap and hedge agreements to reflect their market value at June 30, 2002 as compared to recognizing an expense of $2.6 million in the comparable period ended June 24, 2001. OTHER EXPENSE - Other expense for the three and six months ending June 30, 2002 was $0.4 million and $1.4 million, respectively compared to $0.7 and $1.8 million in 2001. These costs were primarily attributable to consulting fees. INCOME TAXES - Our tax provision for the three months ended June 30, 2002 was $0.2 million versus a benefit of ($0.1) million in the comparable period of 2001. For the six months ended June 30, 2002 our tax benefit was ($3.1) million versus a provision of $1.2 million for the comparable period of 2001. The benefit for the six months ending June 30, 2002 includes a benefit adjustment to reduce the valuation allowance by $3.6 million attributable to a recent tax law change, which allows an additional two-year carry back of our net operating losses. NET LOSS - As a result of the foregoing, we reported a loss of $8.0 million and $10.6 million for the three and six months ending June 30, 2002, respectively, versus a loss of $7.6 million and $14.9 million for the comparable periods in 2001. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The table below presents summary cash flow information for the six months ended June 30, 2002 and June 24, 2001, respectively.

OPERATING ACTIVITIES As we continue to pursue our corporate strategy, initiated in fiscal 2000, focusing on internal growth and profitability, we used $13.4 million in cash from operating activities for the period ended June 30, 2002. To accomplish our goals, we intend to continue to invest in several strategic capital projects, the first of which is the implementation of our Enterprise Resource Planning and Customer Relationship Management systems, and to continue to enhance our operating processes. We anticipate that the implementation of these new systems and enhanced processes will enhance future profitability. Cash provided by operating activities and borrowings under our revolving credit agreement provide the primary source of funds to finance operating needs, strategic initiatives and growth opportunities. We believe that cash generated from operations and the availability under our revolving credit agreement provides sufficient liquidity to support our planned business activities. Our ability to borrow under the revolving credit agreements is dependent upon compliance with covenants contained in the credit agreement. Working capital and the corresponding current ratio were $39.3 million and 1.41:1 and $26.0 million and 1.25:1 at June 30, 2002 and December 30, 2001, respectively. The increase in working capital from December 30, 2001 to June 30, 2002 resulted primarily from an increase in inventories due to additional purchases of new outsourced gloves to meet contract requirements and maintain exclusivity, the repayment of short-term obligations with proceeds from the issuance of preferred stock, and by a reduction in accrued liabilities. INVESTING ACTIVITIES Investing activities during the period ended June 30, 2002 consisted of: 1) the sale of a facility that was not in service, 2) payment for group purchasing contract rights associated with our surgical sales group and 3) the routine replacement of capital equipment and expenditures associated with the implementation of our Enterprise Resource Planning and Customer Relationship Management systems. The Company anticipates that its capital expenditures for the remainder of 2002 will be approximately $6.4 million consisting of the routine replacement of capital equipment and expenditures associated with the implementation of our Enterprise Resource Planning and Customer Relationship Management systems. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (CONTINUED) FINANCING ACTIVITIES The table below shows the components of total borrowings as of June 30, 2002 and December 30, 2001:

Cash flows provided by financing activities were $20.4 million and $9.0 million for the six months ended June 30, 2002, and for the comparable period in 2001, respectively. In the period ended June 30, 2002 we received $21.6 million for the issuance of 21,648 shares of preferred stock and associated warrants. We used the proceeds from the sale of the preferred stock and warrants to pay down $10.5 million of our revolving bank credit facility, to pay fees and expenses related to the offering and to provide additional working capital. In June 2002, we repurchased 3,621,534 shares of our common stock for $5.8 million and received $4.9 million in payment of subscriptions and other loans receivable. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (CONTINUED) For all periods prior to June 7, 2002, goodwill represents the excess of the aggregate price paid by the Company in business combinations accounted for as purchases over the fair market value of the tangible and identifiable intangible net assets acquired. Goodwill from the Company's previous acquisitions was approximately $157,629,000 of which approximately $106,134,000 remained unamortized as of December 30, 2001. As of June 7, 2002, upon the application of the purchase method of accounting for the November 12, 1999 transaction (see Note 1), all previously recorded goodwill was revalued and the new goodwill balance of $401,041,000 (net of accumulated amortization of $46,922,000 assuming a 20 year life through December 30, 2001) represents the excess of the aggregate purchase price over the fair value of the net assets acquired as of November 12, 1999. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the Company ceased amortization of goodwill as of December 31, 2001. Accordingly, no goodwill amortization was recorded in the six months ended June 30, 2002, whereas $1,938,000 of goodwill amortization was recorded in the six months ended June 24, 2001. SFAS No. 142 also requires that goodwill be assessed for impairment upon adoption and annually thereafter. The Company is in the process of completing the initial test for impairment but any impairment charge would be reflected as an accounting change recorded retroactively in the first quarter of fiscal 2002. The Company is currently evaluating all aspects of adopting SFAS No. 142 and believes that it is possible that an impairment loss will be incurred upon adoption of this statement. Interest payments under our bank credit facilities and our senior subordinated discount notes, working capital and capital expenditures represent our significant liquidity requirements. Future, but as yet unidentified, acquisition opportunities may also represent potentially significant liquidity requirements. 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 Transition Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2002. We caution that undue reliance should not be placed on our forward-looking statements, which speak only as of the date of this document. We hereby disclaim any obligation to update information contained in any forward-looking statement. 25 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. 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. On December 31, 2001, we began assessing the recoverability of intangible assets in accordance with SFAS No. 142. As discussed in "Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition," the Company is evaluating the impact of adopting this statement and believes it is possible that an impairment loss will be incurred upon adoption. 26 PART II. OTHER INFORMATION Items 2, 3, and 5 for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. Item 1. LEGAL PROCEEDINGS On June 7, 2002, we and certain of our directors, officers and affiliates settled three lawsuits brought by certain directors and former employees of the Company in state court in Florida in September 2000, October 2001 and April 2002, respectively. The plaintiffs' therein, all of whom were continuing shareholders in the November 1999 recapitalization, alleged various common law and statutory causes of action arising out of the termination of certain plaintiffs' employment with the Company following the recapitalization. Many of these claims, as well as certain counterclaims by us, were the subject of arbitration proceedings before the American Arbitration Association in New York. The parties entered into an omnibus settlement agreement dated as of June 7, 2002. The settlement consisted of the following: (a) we purchased all of the common shares of the Company held by plaintiffs (3,621,534 shares) for total consideration of $5.8 million; (b) we paid an additional $100,000 to settle all prior compensatory arrangements, and in consideration of a full release of all claims against the Company, its directors, officers and their affiliates; (c) plaintiffs repaid all subscriptions and notes due to the Company totaling $4.9 million; (d) plaintiffs transferred to us all of their options to purchase shares of the common stock of the Company, which were then canceled; (e) the parties dismissed all three lawsuits, the New York arbitration, and all related appeals; and (f) plaintiffs who were serving as directors of the Company resigned from the Company's Board of Directors. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 7, 2002, shareholders owning a majority of our common stock acted by written consent to approve the omnibus settlement agreement to settle the litigation by certain of our directors and former employees, as disclosed in Item 1 above. In addition, such shareholders also acted by written consent to approve resolutions of the Board reducing the size of the Board to eight, reauthorizing an executive committee and operating committee, appointing our officers, determining the surplus of the Company for purposes of a provision in the Texas Business Corporation Act, and an amendment to the Stockholders' Agreement, dated as of November 12, 1999, by the Company and the shareholders who are bound by the agreement. Subsequently, notice was given to the non-voting shareholders in accordance with Texas law. Item 6. EXHIBITS AND REPORTS (a) EXHIBITS NONE. (b) Reports on Form 8-K NONE. 27 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: 8/14/02 By: /s/ Russell D. Hays ------------- -------------------------------- Russell D. Hays Vice Chairman and Chief Executive Officer (principal executive officer) Date: 8/14/02 By: /s/ Mark S. Sellers ------------- -------------------------------- Mark S. Sellers Vice Chairman and Chief Financial Officer (principal financial officer) 28

MAXXIM MEDICAL INC 10-Q