Securities and Exchange Commission
Washington, D.C.
20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 0-16093
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 French Road, Utica, New York 13502
(Address of principal executive offices) (Zip Code)
(315) 797-8375
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
The aggregate market value of the shares of the voting stock held by
non-affiliates of the Registrant was approximately $521,890,870 based upon the
closing price of the Company's common stock, which was $20.57 on February 26,
2002.
The number of shares of the Registrant's $0.01 par value common stock
outstanding as of February 26, 2002 was 25,371,457.
DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, scheduled to be mailed on or
about April 5, 2002 for the annual meeting of stockholders to be held May 14,
2002, are incorporated by reference into Part III.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-K
Part I
Item Number Page
- ----------- ----
Item 1. Business 2
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
Part III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management 32
Item 13. Certain Relationships and Related Transactions 32
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports 33
on Form 8-K
Signatures 34
Exhibit Index 35
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CONMED CORPORATION
Item 1. Business
Forward Looking Statements
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2001
("Form 10-K") contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to CONMED Corporation ("CONMED", the "Company", "we" or "us" -
references to "CONMED", "Company", "we" or "us" shall be deemed to include our
subsidiaries unless the context otherwise requires) that are based on the
beliefs of our management, as well as assumptions made by and information
currently available to our management.
When used in this Form 10-K, the words "estimate", "project", "believe",
"anticipate", "intend", "expect" and similar expressions are intended to
identify forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors, including those identified under the
caption "Item 1: Business - Risk Factors" and elsewhere in this Form 10-K that
may cause our actual results, performance or achievements, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
o general economic and business conditions;
o changes in customer preferences;
o competition;
o changes in technology;
o the introduction of new products;
o the integration of any acquisition;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies might initiate enforcement actions against us
or our distributors;
o our indebtedness;
o quality of our management and business abilities and the judgment of
our personnel;
o the availability, terms and deployment of capital;
o the risk of litigation, especially patent litigation as well as the
cost associated with patent and other litigation;
o changes in regulatory requirements; and
o various other factors referenced in this Form 10-K.
See "Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations " and "Item 1: - Business" for a further discussion of
these factors. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We do not
undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this Form 10-K or to reflect the occurrence of unanticipated events.
-2-
General
CONMED Corporation is a medical technology company specializing in
instruments, implants and video equipment for arthroscopic sports medicine, and
powered surgical instruments (drills and saws), for orthopaedic, ENT,
neuro-surgery and other surgical specialties. We are also a leading developer,
manufacturer and supplier of advanced medical devices, including RF
electrosurgery systems used routinely to cut and cauterize tissue in nearly all
types of surgical procedures worldwide, endoscopy products such as trocars, clip
appliers, scissors and surgical staplers, and a full line of ECG electrodes for
heart monitoring and other patient care products. Our products are used in a
variety of clinical settings, such as operating rooms, surgery centers,
physicians' offices and critical care areas of hospitals.
We have used strategic business acquisitions to broaden our product
offerings, to increase our market share in certain product lines and to realize
economies of scale. During the last five years, we have completed six strategic
business acquisitions. The completed acquisitions, together with internal
growth, have resulted in a compound annual growth rate in net sales of 32%
between 1997 and 2001.
Industry
The number of surgical procedures performed in the United States is
increasing. This growth in surgical procedures reflects demographic trends, such
as the aging of the population, and technological advancements which result in
safer and less invasive surgical procedures. Additionally, as people are living
longer, more active lives, they are engaging in contact sports and activities
such as running, skiing, rollerblading, golf and tennis which result in injuries
with greater frequency and at an earlier age than ever before. Sales of surgical
products represented over 85% of our total 2001 sales. See "Item 1: Business-Our
Products".
In response to rising health care costs, managed care companies and other
payers have placed pressures on health care providers to reduce costs. As a
result, health care providers have focused on the high cost areas such as
surgery. To reduce costs, health care providers use minimally-invasive
techniques, which generally reduce patient trauma, recovery time and ultimately
the length of hospitalization. Many of our products are designed for use in
minimally invasive surgical procedures. See "Item 1: Business-Our Products".
Health care providers are also increasingly purchasing single-use, disposable
products, which reduce the costs associated with sterilizing surgical
instruments and products following surgery. The single-use nature of disposable
products lowers the risk of incorrectly sterilized instruments spreading
infection into the patient and increasing the cost of post-operative care.
Approximately 75% of our sales are derived from single-use disposable products.
In the United States, the pressure on health care providers to contain
costs has altered their purchasing patterns for general surgical instruments and
disposable medical products. Many health care providers have entered into
comprehensive purchasing contracts with fewer suppliers, which offer a broader
array of products at lower prices. In addition, many health care providers have
aligned themselves with group purchasing organizations ("GPOs"). GPOs aggregate
the purchasing volume of their members in order to negotiate competitive pricing
with suppliers, including manufacturers of surgical products. We believe that
these
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trends will favor entities that offer a broad product portfolio. See "Item 1:
Business-Business Strategy".
We believe that foreign markets offer growth opportunities for our
products. As economic conditions improve in developing countries, expenditures
on health care are expected to rise. We currently distribute our products
through our own sales subsidiaries or through local dealers in over 100 foreign
countries. International sales represent approximately 29% of total sales in
2001.
Our Products
The following table sets forth the percentage of net sales for each
category of our products for 1999, 2000 and 2001:
1999 2000 2001
---- ---- ----
Arthroscopy 38% 36% 36%
Powered surgical instruments 23 29 27
Electrosurgery 17 16 16
Patient Care 21 17 16
Endoscopy 1 2 5
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Arthroscopy
We offer a broad line of devices and products for use in arthroscopic
surgery. Arthroscopy refers to diagnostic and therapeutic surgical procedures
performed on joints with the use of minimally-invasive arthroscopes and related
instruments. Minimally-invasive arthroscopy procedures enable surgical repairs
to be completed with less trauma to the patient, resulting in shorter recovery
times and cost savings. About 75% of all arthroscopy is performed on the knee,
although arthroscopic procedures are increasingly performed on smaller joints
(such as the wrist and ankle) and shoulders.
Our arthroscopy products include powered resection instruments,
arthroscopes, reconstructive systems, tissue repair sets, fluid management
systems, imaging products, implants and related disposable products. It is our
standard practice to transfer some of these products, such as shaver consoles
and pumps, to certain customers at no charge. These capital placements allow for
and accommodate the use of a variety of disposable products, such as shaver
blades, burs and pump tubing. We have benefited from the introduction of new
products and new technologies in the arthroscopic area, such as bioresorbable
screws, ablators, "push-in" and "screw-in" suture anchors, resection shavers and
cartilage repair implants.
The majority of arthroscopic procedures are performed to repair injuries
that have occurred in the joint areas of the body. Many of these injuries are
the result of sports related events or other traumas. This explains why
arthroscopy is sometimes referred to as sports medicine.
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Arthroscopy
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Product Description Brand Name
- --------------------------------------------------------------------------------
Ablators and Shaver Electrosurgical ablators and resection Advantage(TM)
Ablators ablators to resect and remove soft ESA(TM)
tissue and bone; used in knee, Sterling(R)
shoulder and small joint surgery. UltrAblator(TM)
Heatwave(TM)
Trident(TM)
Knee Reconstructive Products used in cruciate Paramax(R)
Systems reconstructive surgery; includes Pinn-ACL(R)
instrumentation, screws, pins and GraFix(TM)
ligament harvesting and preparation
devices.
Soft Tissue Repair Instrument systems designed to attach Spectrum(R)
Systems specific torn or damaged soft tissue Inteq(R)
to bone or other soft tissue in the Shuttle Relay(TM)
knee, shoulder and wrist; includes Blitz(R)
instrumentation, guides, hooks and
suture devices.
Fluid Management Disposable tubing sets, disposable and Apex(R)
Systems reusable inflow devices, pumps and Quick-Flow(R)
suction/waste management systems for Quick-Connect(R)
use in arthroscopic and general
surgeries.
Imaging Surgical video systems for endoscopic Apex(R)
procedures; includes autoclavable 8180 Series
single and three-chip camera heads and
consoles, endoscopes, light sources,
monitors, VCRs and printers.
Implants Products including bioabsorbable and BioScrew(R)
metal interference screws and suture BioStinger(R)
anchors for attaching soft tissue to BioAnchor(R)
bone in the knee, shoulder and wrist BioTwist(R)
as well as miniscal repair. Ultrafix(R)
Revo(R)
Super Revo(R)
Other Instruments and Forceps, graspers, punches, probes, Shutt(R)
Accessories sterilization cases and other general Concept(R)
instruments for arthroscopic TractionTower(R)
procedures.
- -----------------------------------------------------------------------------------
-5-
Powered Surgical Instruments
Powered surgical instruments are used to perform orthopaedic, arthroscopic
and other surgical procedures, such as cutting, drilling or reaming and are
driven by electric, battery or pneumatic power. Each instrument consists of one
or more handpieces and related accessories as well as disposable and limited
reuse items (e.g., burs, saw blades, drills and reamers). Powered instruments
are generally categorized as either small bone, large bone or specialty powered
instruments. Speciality powered instruments include surgical applications such
as spine, neurosurgery, otolaryngology (ENT), oral/maxillofacial surgery, and
cardiothoracic surgery.
Our line of powered instruments is sold principally under the Hall Surgical
brand name, for use in large and small bone orthopaedic, arthroscopic,
oral/maxillofacial, podiatric, plastic, otolaryngologic, neurological, spine and
cardiothoracic surgeries. Large bone, neurosurgical, spine and cardiothoracic
powered instruments are sold primarily to hospitals while small bone
arthroscopic, otolaryngological and oral/maxillofacial powered instruments are
sold to hospitals, outpatient facilities and physician offices. Our Linvatec
subsidiary has devoted substantial resources to developing a new technology base
for large bone, small bone, arthroscopic, neurosurgical, spine and
otolaryngological instruments that can be easily adapted and modified for new
procedures.
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Powered Surgical Instruments
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Product Description Brand Name
- --------------------------------------------------------------------------------
Large Bone Powered saws, drills and related Hall(R) Surgical
disposable accessories for use MaxiDriver(TM)
primarily in total knee and hip joint VersiPower(R)Plus
replacements and trauma surgical Series 4(R)
procedures. PowerPro(TM)
Advantage(TM)
Small Bone Powered saws, drills and related Hall(R)Surgical
disposable accessories for small bone E9000(R)
and joint surgical procedures. MiniDriver(TM)
MicroChoice(R)
Micro 100(TM)
Advantage(TM)
Otolaryngology Specialty powered saws, drills and Hall(R) Surgical
Neurosurgery related disposable accessories for use E9000(R)
Spine in neurosurgery, spine, and UltraPower(R)
otolaryngologic procedures. Hall Osteon(R)
Hall Ototome(R)
Cardiothoracic Powered sternum saws, drills, and Hall(R)Surgical
Oral/maxillofacial related disposable accessories for use E9000(R)
by cardiothoracic and UltraPower(R)
oral/maxillofacial surgeons. Micro 100(TM)
VersiPower(R)Plus
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Electrosurgery
Electrosurgery is the technique of using a high-frequency electric current
which, when applied to tissue through special instruments, can be used to cut
tissue, coagulate, or cut and coagulate simultaneously. Radio frequency ("RF")
is the form of high frequency electric current that is used in electrosurgery.
An electrosurgical system consists of a generator, an active electrode in the
form of a cautery pencil or other instrument which the surgeon uses to apply the
current from the generator to the target tissue and a ground pad to safely
return the current to the generator. Electrosurgery is routinely used in most
forms of surgery, including general, dermatologic, thoracic, orthopaedic,
urologic, neurosurgical, gynecological, laparoscopic, arthroscopic and other
endoscopic procedures.
Our electrosurgical products include electrosurgical pencils and blades,
ground pads, generators, the argon-beam coagulation system (ABC)(R), and related
disposable products. ABC(R) technology is a special method of electrosurgery,
which allows a faster and more complete coagulation of many tissues as compared
to conventional electrosurgery. Unlike conventional electrosurgery, the
electrical current travels in a beam of ionized argon gas, allowing the current
to be dispersed onto the bleeding tissue without the instrument touching the
tissue. Clinicians have reported notable benefits of ABC(R) over traditional
electrosurgical coagulation in certain clinical situations, including
open-heart, liver, spleen and trauma surgery.
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Electrosurgery
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Product Description Brand Name
- --------------------------------------------------------------------------------
Pencils Disposable and reusable instruments Hand-trol(R)
designed to deliver high-frequency Gold Line(R)
electric current to cut and/or Clear Vac(R)
coagulate tissue.
Ground Pads Disposable ground pads to safely Macrolyte(R)
return the current to the generator; Bio-gard(R)
available in adult, pediatric and SureFit(TM)
infant sizes.
Blades Surgical blades with accessory Ultra Clean(TM)
electrode that uses a proprietary
coating to eliminate tissue buildup on
the blade during surgery.
Generators Monopolar and bipolar generators for EXCALIBUR Plus PC(R)
surgical procedures performed in a SABRE(R)
physician's office or clinic setting. Hyfrecator(R)2000
Argon Beam Specialized electrosurgical ABC(R)
Coagulation generators, disposable hand pieces and Beamer Plus(R)
Systems ground pads for enhanced non-contact System 7500(R)
coagulation of tissue. ABC Flex(R)
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Endoscopy
Endoscopic surgery (also called Laparoscopic surgery) is surgery performed
without a major incision, which results in less trauma for the patient and
produces important cost savings as a result of reduced hospitalization and
therapy. Endoscopic surgery is performed on organs in the abdominal cavity such
as the gallbladder, appendix and female reproductive organs. During a procedure,
devices called trocars are used to puncture the abdominal wall and then are
removed, leaving in place a trocar cannula. The trocar cannula provides access
into the abdomen for camera systems and surgical instruments. Some of our
endoscopic instruments are "reposable", which means that the instrument has a
disposable and a reusable component.
Our Endoscopy products include the Reflex(R) clip applier for vessel and
duct ligation, UNIVERSAL S/I(TM) (suction/irrigation) and UNIVERSAL PLUS(R)
laparoscopic instruments, and specialized, suction/irrigation electrosurgical
instrument systems for use in laparoscopic surgery and the TroGARD Finesse(R)
which incorporates a blunt-tipped version of a trocar. The TroGARD Finesse(R)
dilates access through the body wall rather than cutting with the sharp, pointed
tips of conventional trocars. This results in smaller wounds, and less bleeding.
We also market cutting trocars, suction/irrigation accessories, laparoscopic
scissors, active electrodes, insufflation needles, linear cutters and staplers,
and ABC(R) handpieces for use in laparoscopic surgery. Disposable skin staplers
are used to close large skin incisions with surgical staples eliminating the
time consuming suturing process.
- -------------------------------------------------------------------------------
Endoscopy
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Product Description Brand Name
- -------------------------------------------------------------------------------
Trocars Disposable and reposable devices used Finesse(R)
to puncture the abdominal wall to Reflex(R)
provide access to the abdominal cavity
for camera systems and instruments.
Multi-functional Instruments for cutting and Detach a Port(R)
Electrosurgery and coagulating tissue by delivering high- Universal(TM)
Suction/Irrigation frequency current. Instruments that Universal Plus(TM)
instruments deliver irrigating fluid to the tissue
and remove blood and fluids from the
internal operating field.
Clip Appliers Disposable devices for ligating blood FloVac(R)
vessels and ducts by placing a Reflex(R)
titanium clip on the vessel
Laparoscopic Scissors, graspers Detach a Tip(R)
Instruments
Skin Staplers Disposable devices that place surgical Reflex(R)
staples to close a surgical incision.
Microlaparoscopy Small laparoscopes and instruments for MicroLap(R)
scopes and doing surgery through very small
instruments incisions.
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Patient Care
We manufacture a variety of patient care products for use in monitoring
cardiac rhythms, wound care management and IV therapy. These products include
ECG electrodes and cables, wound dressings and catheter stabilization dressings.
Our patient care product lines also include disposable surgical suction
instruments and connecting tubing. The majority of our sales in this category
are derived from the sale of ECG electrodes and surgical suction instruments and
tubing. Although wound management and intravenous therapy product sales are
comparatively small, the application of these products in the operating room
complements our surgery business.
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Patient Care Products
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Product Description Brand Name
- --------------------------------------------------------------------------------
ECG Monitoring Line of disposable electrodes, CONMED(R)
monitoring cables, lead wire products Ultratrace(R)
and accessories designed to transmit Cleartrace(R)
ECG signals from the heart to an ECG
monitor or recorder.
Wound Care Disposable transparent wound dressings ClearSite(R)
comprising proprietary hydrogel; able Hydrogauze(R)
to absorb 2 1/2 times its weight in
wound exudate.
Surgical Suction Disposable surgical suction CONMED(R)
Instruments and instruments and connecting tubing,
Tubing including Yankauer, Poole, Frazier and
Sigmoidoscopic instrumentation, for
use by physicians in the majority of
open surgical procedures.
Intravenous Therapy Disposable IV drip rate gravity VENI-GARD(R)
controller and disposable catheter MasterFlow(R)
stabilization dressing designed to Stat 2(R)
hold and secure an IV needle or
catheter for use in IV therapy.
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Competitive Strengths
We attribute our strong position in certain markets to the following
competitive factors:
o Leading Market Position in Key Product Areas. We are a leading
provider of arthroscopic surgery devices, electrosurgical systems,
powered surgical instruments and ECG electrodes. Our product breadth
has enhanced our ability to market our products to surgeons,
hospitals, surgery centers, GPOs and other customers, particularly as
institutions seek to reduce costs and to minimize the number of
suppliers. In addition, our products are sold under leading brand
names, including CONMED(R), Linvatec(R), and Hall(R)Surgical.
o Broad Product Offering in Key Product Areas. We offer a broad product
line in our key product areas. For example, we offer a complete set of
the
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arthroscopy products a surgeon requires for most arthroscopic
procedures, including instrument and repair sets, implants, shaver
consoles and handpieces, video systems and related disposables. Our
product offerings have enabled us to meet a wide range of customer
requirements and preferences. In addition, our customers are
increasingly dealing with fewer vendors and demanding a broader
product offering from vendors in order to reduce administrative costs.
o Marketing and Distribution Network. Our domestic sales force consists
of approximately 210 employee sales representatives and an additional
90 sales professionals employed by eight exclusive sales agent groups.
All of our sales professionals are trained and educated in the
applications for the products they sell and call directly on surgeons,
hospital departments, outpatient surgery centers and physician
offices. Additionally, we have an international presence through sales
subsidiaries and branches located in key international markets. We
sell direct to hospital customers in these markets in the local
currency with an employee-based international sales force of
approximately 40 sales representatives. We also maintain distributor
relationships domestically and in numerous countries worldwide. Our
international distributor sales are in United States dollars. See
"Item 1: Business-Marketing".
o Vertically-integrated Manufacturing. We manufacture most of our
products. Our vertically integrated manufacturing process has allowed
us to provide quality products, to react quickly to changes in demand
and to generate manufacturing efficiencies, including purchasing raw
materials used in a variety of disposable products in bulk. We believe
that our manufacturing capabilities allow us to contain costs, control
quality and maintain security of proprietary processes. We continually
evaluate our manufacturing processes with the objective of increasing
automation, streamlining production and enhancing efficiency in order
to achieve cost savings.
o Research and Development Capabilities. We have utilized our research
and development capabilities to introduce new products, product
enhancements and new technologies. Research and development
expenditures were $14.8 million in 2001. Recent new product
introductions include the Advantage(TM) drive system, BioTwist(TM)
bioabsorbable shoulder anchor implant, UltrAblator(TM) for the
ablation and thermal modification of soft tissue, the PowerPro(TM)
electric-powered drive system, the Envision(TM) Autoclavable 3CCD
(three chip) Camera Head, the SureFit(TM) electrosurgical grounding
pad and the UltraClean(TM) electrosurgical blade.
o Integrating Acquisitions. Since 1997, we have completed six
acquisitions including the 1997 acquisition of Linvatec Corporation
which more than doubled our size. These acquisitions have enabled us
to broaden our product categories, expand our sales and distribution
capabilities and increase our international presence. Our management
team has demonstrated a historical ability to identify complementary
acquisitions and to integrate acquired companies into our operations.
Business Strategy
We intend to implement the following business strategies:
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o Introduce New Products and Product Enhancements. Our research and
development programs focus on the development of new products, as well
as the enhancement of existing products with the latest technology and
updated designs. We are continually seeking to develop new
technologies to improve durability, performance and usability of
existing products. In addition to our own research and development, we
receive new product and technology disclosures, especially in
procedure-specific areas, from surgeons, inventors and operating room
personnel. For disclosures that we deem promising from a clinical and
commercial perspective, we seek to obtain rights to these ideas by
negotiating agreements, which typically compensate the originator of
the idea through royalty payments based on a percentage of net sales
of licensed products.
o Increase International Sales. We believe there are significant sales
opportunities for our surgical products outside the United States. The
Linvatec acquisition increased our access to international markets. We
intend to seek to expand our international presence and increase our
penetration into international markets by utilizing Linvatec's
relationships with foreign surgeons, hospitals and third-party payers,
as well as foreign distributors. We also intend to utilize Linvatec's
sales relationships to introduce Linvatec's customers to our other
products. In 2001, our sales outside the United States grew by 14% and
represented 29% of our 2001 sales.
o Pursue Strategic Acquisitions. We believe that strategic acquisitions
represent a cost-effective means of broadening our product line. We
have historically targeted companies with proven technologies,
established brand names and a significant portion of sales from
single-use, disposable products. Since 1997, we have completed six
acquisitions, expanding our product line to include arthroscopy
products, powered surgical instruments and most recently endoscopy
products.
o Provide Broad Product Offering in Key Product Areas. As a result of
competitive pressures in the health care industry, many health care
providers have aligned themselves with GPOs, which are increasingly
dealing with fewer vendors and demanding a broader product offering
from their vendors in order to reduce administrative costs. We believe
that our broad product line is a positive factor in our efforts to
meet such demands. In addition, we have a corporate sales department
that markets our broad product offering to GPOs.
o Realize Manufacturing and Operating Efficiencies. We expect to
continue to review opportunities for consolidating product lines and
streamlining production. We believe our vertically integrated
manufacturing process should produce further opportunities to reduce
overhead and to increase operating efficiencies and capacity
utilization.
Marketing
In order to provide a high level of expertise to medical specialties
served, our overall domestic sales force consists of the following:
o 180 sales representatives selling arthroscopy and orthopaedic powered
surgical instrument products, including 90 employee sales
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representatives and 90 sales professionals employed by 8 sales agent
groups.
o 60 employee sales representatives selling electrosurgery products.
o 30 employee sales representatives selling endoscopy products.
o 30 employee sales representatives selling patient care products.
Each employee sales representative has a defined geographic area and is
compensated on a commission basis or through a combination of salary and
commission. The sales force is supervised and supported by area directors. Sales
agent groups are used in the eight largest metropolitan areas of the United
States. All of these sales agent groups, except one, sell CONMED products
exclusively. None stock product for resale to customers as CONMED ships product
directly to customers and carries the receivable for that business. The sales
agent groups are all paid a commission for sales made to customers in their
exclusive geographic areas. Home office sales and marketing management provide
the overall direction for the sales of our products.
Our sales professionals call on surgeons, hospitals, outpatient surgery
centers and physician offices. We also have a corporate sales department that is
responsible for interacting with GPOs. We believe that we have contracts with
many such organizations and that the lack of any individual group purchasing
contract will not adversely impact our competitiveness in the marketplace. The
sale of our products is accompanied by initial and ongoing in-service training
of the end user. Our sales professionals are trained in the technical aspects of
our products and their uses, and provide surgeons and medical personnel with
information relating to the technical features and benefits of our products. For
hospital inventory management purposes, at the hospitals request, some products
are sold to hospitals through distributors. Our sales professionals are required
to work closely with distributors where applicable and to maintain close
relationships with end-users.
Our international sales accounted for approximately 29% of total revenues
in 2001. Products are sold in over 100 foreign countries. International sales
efforts are coordinated through local country dealers or with direct sales
efforts. We distribute our products through sales subsidiaries and branches with
offices located in Australia, Belgium, Canada, France, Germany, Korea, Spain and
the United Kingdom.
Manufacturing
We manufacture most of our products. We believe our vertically integrated
manufacturing process allows us to provide quality products and generate
manufacturing efficiencies by purchasing raw materials for our disposable
products in bulk. We also believe that our manufacturing capabilities allow us
to contain costs, control quality and maintain security of proprietary
processes. We use various manual and automated equipment for fabrication and
assembly of our products and are continuing to further automate our facilities.
We believe our production and inventory practices are generally reflective
of conditions in the industry. Our products are not generally made to order or
to individual customer specifications. Accordingly, we schedule production and
stock inventory on the basis of experience and our knowledge of customer order
patterns, and our judgment as to anticipated demand. Since customer orders must
generally be filled promptly for immediate shipment, backlog of unfilled orders
is not significant to an understanding of our business.
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Research and Development Activities
During the three years, 1999, 2000 and 2001, we spent approximately $12.1
million, $14.9 million and $14.8 million for research and development. Our
research and development departments consist of 116 employees.
Our research and development programs focus on the development of new
products, as well as the enhancement of existing products with the latest
technology and updated designs. We are continually seeking to develop new
technologies to improve durability, performance and usability of existing
products. In addition to our own research and development, we receive new
product and technology disclosures, especially in procedure-specific areas, from
surgeons, inventors and operating room personnel. For disclosures that we deem
promising from a clinical and commercial perspective, we seek to obtain rights
to these ideas by negotiating agreements, which typically compensate the
originator of the idea through royalty payments based on a percentage of net
sales of licensed products.
We have rights to numerous U.S. patents and corresponding foreign patents,
covering a wide range of our products. We own a majority of these patents and
have licensed rights to the remainder, both on an exclusive and non-exclusive
basis. In addition, certain patents are currently licensed to third parties on a
non-exclusive basis. Due to technological advancements, we do not rely on our
patents to maintain our competitive position, and we believe that development of
new products and improvement of existing ones is and will continue to be more
important than patent protection in maintaining our competitive position.
Competition
The markets for our products are highly competitive, and many of our
competitors are substantially larger and stronger financially than us. However,
we do not believe that any one competitor competes with us across all our
product lines. Major competitors include Arthrex, Johnson & Johnson, Medtronic,
Inc., Minnesota Mining and Manufacturing Company, Smith & Nephew plc, Stryker
Corporation, and Tyco International Ltd.
We believe that product design, development and improvement, customer
acceptance, marketing strategy, customer service and price are critical elements
to compete in our industry. Other alternatives, such as medical procedures or
pharmaceuticals, could at some point prove to be interchangeable alternatives to
our products.
Government Regulation
Most if not all of our products are classified as medical devices subject
to regulation by the Food and Drug Administration (the "FDA"). Our new products
generally require FDA clearance under a procedure known as 510(k) premarketing
notification. A 510(k) premarketing notification clearance indicates FDA
agreement with an applicants determination that the product for which clearance
has been sought is substantially equivalent to another medical device that was
on the market prior to 1976 or that has received 510(k) premarketing
notification clearance. Some products have been continuously produced, marketed
and sold since May 1976 and require no 510(k) premarketing clearance. Our
products generally are either Class I or Class II products with the FDA, meaning
that our products must meet certain FDA standards and are subject to the 510(k)
premarketing notification clearance discussed above, but are not required to be
approved by the FDA. FDA clearance is subject to continual review, and later
discovery of previously unknown problems may
-13-
result in restrictions on a product's marketing or withdrawal of the
product from the market.
We have quality control/regulatory compliance groups that are tasked with
monitoring compliance with design specifications and relevant government
regulations for all of our products. We and substantially all of our products
are subject to the provisions of the Federal Food, Drug and Cosmetic Act of
1938, as amended by the Medical Device Amendments of 1976, and the Safe Medical
Device Act of 1990, as amended in 1992, and similar foreign regulations.
As a manufacturer of medical devices, our manufacturing processes and
facilities are subject to periodic on-site inspections and continuing review by
the FDA to insure compliance with Quality System Regulations as specified in
Title 21, Code of Federal Regulation (CFR) part 820. Many of our products are
subject to industry-set standards. Industry standards relating to our products
are generally formulated by committees of the Association for the Advancement of
Medical Instrumentation. We believe that our products presently meet applicable
standards. We market our products in a number of foreign markets. Requirements
pertaining to our products vary widely from country to country, ranging from
simple product registrations to detailed submissions such as those required by
the FDA. We believe that our products currently meet applicable standards for
the countries in which they are marketed.
We are subject to product recall. No recall has had a material effect on
our financial condition, but there can be no assurance regulatory issues may not
have a material adverse effect in the future.
Any change in existing federal, state or foreign laws or regulations, or in
the interpretation or enforcement thereof, or the promulgation or any additional
laws or regulations could have an adverse effect on our financial condition or
results of operations.
Employees
As of December 2001, we had 2,560 full-time employees, of whom 1,754 were
in manufacturing, 116 in research and development, and the balance were in
sales, marketing, executive and administrative positions. None of our employees
are represented by a union, and we consider our employee relations to be
excellent. We have never experienced any strikes or work stoppages.
Risk Factors
Investors should carefully consider the specific factors set forth below as
well as the other information included or incorporated by reference in this Form
10-K. See "Item 1: Business - Forward Looking Statements" relating to certain
forward-looking statements in this Form 10-K.
Significant Leverage and Debt Service
We have indebtedness which is substantial in relation to our shareholders
equity, as well as interest and debt service requirements that are significant
compared to our cash flow from operations. As of December 2001, we had $335.9
million of debt outstanding, which represented 54.2% of total capitalization. In
addition, at December 2001, we had $42.0 million available for borrowing under
the $100.0 million revolving credit facility portion of our principal bank
credit
-14-
agreement (our "credit facility"). The revolving credit facility expires on
December 31, 2002 and is expected to be renegotiated during 2002.
The degree to which we are leveraged could have important consequences to
investors, including but not limited to the following:
o a substantial portion of our cash flow from operations must be
dedicated to debt service and will not be available for operations,
capital expenditures, acquisitions, dividends and other purposes;
o our ability to renegotiate our revolving credit facility and obtain
additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be
limited or impaired; and
o certain of our borrowings, including our borrowings under the credit
facility, are and will continue to be at variable rates of interest,
which exposes us to the risk of increased interest rates.
Our ability to satisfy our obligations will depend upon our future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, many of which are beyond our control.
There can be no assurance that our operating results will be sufficient for us
to meet our obligations. If we are unable to service our indebtedness, we will
be forced to adopt an alternative strategy that may include actions such as
forgoing acquisitions, reducing or delaying capital expenditures, selling
assets, restructuring or refinancing our indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
implemented on terms acceptable to us, if at all. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" for a discussion of our indebtedness and its
implications.
Effects of Acquisitions Generally
An element of our business strategy has been to expand through acquisitions
and we may seek, without further notice, to pursue acquisitions in the future.
In this regard, for confidentiality, competitive and other reasons, we may not
disclose that such acquisitions are being negotiated or are subject to
agreements until such acquisitions close. Our success is dependent in part upon
our ability to effectively integrate acquired operations with our operations.
While we believe that we have sufficient management and other resources to
accomplish the integration of our past and future acquisitions, there can be no
assurance in this regard or that we will not experience difficulties with
customers, suppliers, distributors, personnel or others. In addition, while we
are generally entitled to customary indemnification from sellers of businesses
for any difficulties that may have arisen prior to our acquisition of each
business, the amount and time for claiming under these indemnification
provisions is limited. There can be no assurance that we will be able to
identify and make acquisitions on acceptable terms or that we will be able to
obtain financing for such acquisitions on acceptable terms. As a result, our
financial performance is now and will continue to be subject to various risks
associated with the acquisition of businesses, including the financial effects
associated with any increased borrowing required to fund such acquisitions or
with the integration of such businesses.
-15-
Limitations Imposed by Certain Indebtedness
Our credit facility contains certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other
things, our ability to:
o incur indebtedness;
o make prepayments of certain indebtedness;
o make investments;
o engage in transactions with affiliates;
o pay dividends;
o sell assets;
o engage in mergers and acquisitions; and
o realize important elements of our business strategy.
Our credit facility also requires us to meet certain financial ratios and
tests. These covenants may prevent us from integrating our acquired businesses,
pursuing acquisitions, significantly limit our operating and financial
flexibility and limit our ability to respond to changes in our business or
competitive activities. Our ability to comply with such provisions may be
affected by events beyond our control. In the event of any default under our
credit facility, the credit facility lenders could elect to declare all amounts
borrowed under our credit facility, together with accrued interest, to be due
and payable. If we were unable to repay such borrowings, the credit facility
lenders could proceed against the collateral securing the credit facility, which
consists of substantially all of our property and assets, except for our
accounts receivable and related rights which are pledged in connection with the
accounts receivable sales agreement. (See "Item. 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a discussion of the accounts receivable sales agreement).
Significant Competition and Other Market Considerations
The market for our products is highly competitive. Many of these
competitors offer a range of products in areas other than those in which we
compete, which may make such competitors more attractive to surgeons, hospitals,
GPOs and others. In addition, many of our competitors are larger and have
greater financial resources than we do and offer a range of products broader
than our products. Competitive pricing pressures or the introduction of new
products by our competitors could have an adverse effect on our revenues and
profitability. Some of the companies with which we now compete or may compete in
the future have or may have more extensive research, marketing and manufacturing
capabilities and significantly greater technical and personnel resources than we
do, and may be better positioned to continue to improve their technology in
order to compete in an evolving industry. See "Item 1: Business - Competition"
for a further discussion of these competitive forces.
Demand for and use of our products may fluctuate as a result of:
-16-
o changes in surgeon preferences;
o the introduction of new products or new features to existing products;
o the introduction of alternative surgical technology; and
o advances in surgical procedures and discoveries or developments in the
health care industry.
In recent years, the health care industry has undergone significant change
driven by various efforts to reduce costs, including efforts at national health
care reform, trends toward managed care, cuts in Medicare, consolidation of
health care distribution companies and collective purchasing arrangements by
office-based health care practitioners. There can be no assurance that demand
for our products will not be adversely affected by such fluctuations and trends.
Patents and Proprietary Technology
Much of the technology used in the markets in which we compete is covered
by patents. We have numerous U.S. patents and corresponding foreign patents on
products expiring at various dates from 2002 through 2019 and have additional
patent applications pending. See "Item 1: Business - Research and Development
Activities" for a further description of our patents. Although we do not rely
solely on our patents to maintain our competitive position, the loss of our
patents could reduce the value of the related products and any related
competitive advantage. Competitors may also be able to design around our patents
and to compete effectively with our products. In addition, the cost to prosecute
infringements of our patents or the cost to defend our products against patent
infringement actions by others could be substantial. There can be no assurance
that pending patent applications will result in issued patents, that patents
issued to or licensed by us will not be challenged by competitors or that such
patents will be found to be valid or sufficiently broad to protect our
technology or provide us with a competitive advantage.
Government Regulation of Products
All of our products are classified as medical devices subject to regulation
by the FDA. As a manufacturer of medical devices, our manufacturing processes
and facilities are subject to on-site inspection and continuing review by the
FDA for compliance with their "Quality System Regulations". Failure to comply
with applicable domestic and/or foreign requirements can result in:
o fines or other enforcement actions;
o recall or seizure of products;
o total or partial suspension of production;
o withdrawal of existing product approvals or clearances;
o refusal to approve or clear new applications or notices;
o increased quality control costs; and
-17-
o criminal prosecution.
Many of our products are also subject to industry-set standards. The
failure to comply with Quality System Regulations or industry-set standards
could have a material adverse effect on our business, financial condition or
results of operations.
We are subject to product recall. Although no recall has had a material
adverse effect on our business, financial condition or results of operations,
there can be no assurance that regulatory issues may not have a material adverse
effect in the future.
Risks Relating to International Operations
A portion of our operations are conducted outside the United States.
Approximately 29% of our 2001 net sales constituted foreign sales. As a result
of our international operations, we are subject to risks associated with
operating in foreign countries, including:
o devaluations and fluctuations in currency exchange rates;
o imposition of limitations on conversions of foreign currencies into
dollars or remittance of dividends and other payments by foreign
subsidiaries;
o imposition or increase of withholding and other taxes on remittances
and other payments by foreign subsidiaries;
o trade barriers;
o political risks, including political instability;
o hyperinflation in certain foreign countries; and
o imposition or increase of investment and other restrictions by foreign
governments.
There can be no assurance that such risks will not have a material adverse
effect on our business and results of operations.
Risk of Product Liability Actions
The nature of our products as medical devices and today's litigious
environment in the United States should be regarded as potential risks that
could significantly and adversely affect our financial condition and results of
operations. We maintain insurance to protect against claims associated with the
use of our products, but there can be no assurance that our insurance coverage
would adequately cover the amount or nature of any claim asserted against us.
See "Item 3: Legal Proceedings" for a further discussion of the risk of product
liability actions and our insurance coverage.
-18-
Item 2. Properties
Facilities
The following table provides information regarding our primary manufacturing and
administrative facilities. We believe our facilities are adequate in terms of
space and suitability for our needs over the next several years.
Square Own or Lease
Location Feet Lease Expiration
-------- ---- ----- ----------
Utica, NY(two facilities) 650,000 Own --
Largo, FL 278,000 Own --
Rome,NY 120,000 Own --
Englewood,CO 65,000 Own --
Irvine, CA 31,000 Lease August 2003
El Paso, TX 29,000 Lease April 2005
Juarez, Mexico 25,000 Lease March 2002*
Santa Barbara, CA 18,000 Lease December 2003
* We are currently in negotiations with the landlord and expect to extend the
lease on our Juarez, Mexico facility through December 2004.
-19-
Item 3. Legal Proceedings
From time to time, we are a defendant in certain lawsuits alleging product
liability, patent infringement, or other claims incurred in the ordinary course
of business. These claims are generally covered by various insurance policies,
subject to certain deductible amounts and maximum policy limits. When there is
no insurance coverage, we establish sufficient reserves to cover probable losses
associated with such claims. We do not expect that the resolution of any pending
claims will have a material adverse effect on our financial condition or results
of operations. There can be no assurance, however, that existing or future
claims, the costs associated with claims, especially claims not covered by
insurance, will not have a material adverse effect on our future performance.
Manufacturers of medical products may face exposure to significant product
liability claims. To date, we have not experienced any material product
liability claims, but any such claims arising in the future could have a
material adverse effect on our business or results of operations. We currently
maintain commercial product liability insurance of $25,000,000 per incident and
$25,000,000 in the aggregate annually, which we, based on our experience,
believe is adequate. This coverage is on a claims-made basis. There can be no
assurance that claims will not exceed insurance coverage or that such insurance
will be available in the future at a reasonable cost to us.
Our operations are subject to a number of environmental laws and
regulations governing, among other things, air emissions, wastewater discharges,
the use, handling and disposal of hazardous substances and wastes, soil and
groundwater remediation and employee health and safety. In some jurisdictions
environmental requirements may be expected to become more stringent in the
future. In the United States certain environmental laws can impose liability for
the entire cost of site restoration upon each of the parties that may have
contributed to conditions at the site regardless of fault or the lawfulness of
the partys activities.
While we do not believe that the present costs of environmental compliance
and remediation are material, there can be no assurance that future compliance
or remedial obligations could not have a material adverse effect on our
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
-20-
PART II
Item 5. Market for the Registrants Common Stock and Related Stockholder Matters
Our common stock, par value $.01 per share, is traded on the Nasdaq Stock
Market (symbol - CNMD). At December 2001, there were 1,237 registered holders of
our common stock and approximately 6,100 accounts held in "street name".
The following table shows the high-low last sales prices for the years
ended December 2000 and 2001, as reported by the Nasdaq Stock Market. These
sales prices have been adjusted for a three-for-two split of our common stock
effected in the form of a common stock dividend and paid on September 7, 2001 to
shareholders of record on August 21, 2001.
2000
--------------------------
Period High Low
--------------------------
First Quarter $20.50 $15.04
Second Quarter 18.37 15.75
Third Quarter 17.41 8.08
Fourth Quarter 12.04 8.62
2001
--------------------------
Period High Low
--------------------------
First Quarter $15.92 $10.83
Second Quarter 18.00 13.08
Third Quarter 21.21 15.73
Fourth Quarter 21.01 16.53
We did not pay cash dividends on our common stock during 2000 and 2001. Our
Board of Directors presently intends to retain future earnings to finance the
development of our business and does not intend to declare cash dividends.
Should this policy change, the declaration of dividends will be determined by
the Board in light of conditions then existing, including our financial
requirements and condition and the prohibition on the declaration and payment of
cash dividends contained in debt agreements.
-21-
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December
---------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
Statements of Operations Data (1):
Net sales $ 139,632 $ 339,270 $ 376,226 $ 395,873 $ 428,722
Cost of sales (2) 74,220 169,599 178,480 188,223 204,374
Selling and administrative
expense (3) 36,661 96,475 110,842 128,316 140,560
Research and development expense 3,037 12,029 12,108 14,870 14,830
Unusual items (3) 37,242 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) from operations (11,528) 61,167 74,796 64,464 68,958
Interest income (expense), net 823 (30,891) (32,360) (34,286) (30,824)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item (10,705) 30,276 42,436 30,178 38,134
Provision (benefit) for
income taxes (3,640) 10,899 15,277 10,864 13,728
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item (7,065) 19,377 27,159 19,314 24,406
Extraordinary item,
net of income taxes (4) -- (1,569) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (7,065) $ 17,808 $ 27,159 $ 19,314 $ 24,406
========= ========= ========= ========= =========
Earnings (Loss) Per Share Before Extraordinary Item:
Basic $ (0.31) $ .86 $ 1.19 $ .84 $ 1.02
========= ========= ========= ========= =========
Diluted $ (0.31) $ .84 $ 1.17 $ .83 $ 1.00
========= ========= ========= ========= =========
Earnings (Loss) Per Share:
Basic $ (0.31) $ .79 $ 1.19 $ .84 $ 1.02
========= ========= ========= ========= =========
Diluted $ (0.31) $ .77 $ 1.17 $ .83 $ 1.00
========= ========= ========= ========= =========
Weighted Average Number of Common
Shares In Calculating:
Basic earnings (loss) per share 22,496 22,628 22,862 22,967 24,045
========= ========= ========= ========= =========
Diluted earnings (loss) per share 22,496 22,982 23,145 23,271 24,401
========= ========= ========= ========= =========
Other Financial Data:
Depreciation and amortization $ 6,954 $ 23,601 $ 26,291 $ 29,487 $ 30,148
Adjusted EBITDA(5) 32,668 86,576 100,110 94,044 99,121
Capital expenditures 8,178 12,924 9,352 14,050 14,443
Ratio of earnings to
fixed charges (6) N/A 1.95 2.27 1.85 2.20
December
1997 1998 1999 2000 2001
Balance Sheet Data(7):
Cash and cash equivalents $ 13,452 $ 5,906 $ 3,747 $ 3,470 $ 1,402
Total assets 561,637 628,784 662,161 679,571 701,608
Long-term debt (including
current portion) 365,000 384,872 394,669 378,748 335,929
Total shareholders equity 162,736 182,168 211,261 230,603 283,634
-22-
(1) Includes, based on the purchase method of accounting, the results of
(i) the surgical suction product line acquired from the Davol subsidiary of C.R.
Bard, Inc., from July 1997; (ii) Linvatec Corporation from December 31, 1997;
(iii) the arthroscopy product line acquired from 3M Company from November 1998;
(iv) the powered instrument product line acquired from 3M Company from August
1999; (v) the minimally invasive surgical product lines acquired from Imagyn
Medical Technologies, Inc. from November 2000 and July 2001; in each such case
from the date of acquisition.
(2) Includes for 1998, $3,000,000 of incremental expense related to the
excess of the fair value at the acquisition date of Linvatec inventory over the
cost to produce; includes for 1999, $1,600,000 of incremental expense related to
the excess of the fair value at the acquisition date over the cost to produce
inventory related to the powered instrument product line acquired from 3M;
includes for 2001, $1,567,000 of transition expenses related to the July 2001
acquisition from Imagyn.
(3) Included in unusual items for 1997, a $34,000,000 non-cash acquisition
charge for the write-off of all of the in-process research and development
products (comprised of products in the development stage) acquired in the
Linvatec acquisition, $914,000 write-off of deferred financing fees resulting
from refinancing our loan agreements in connection with the Linvatec
acquisition, and $2,328,000 charge for the closing of our Dayton, Ohio
manufacturing facility. Included in selling and administrative expense for 1999,
a $1,256,000 benefit related to a previously recorded litigation accrual which
was settled on favorable terms. Included in selling and administrative expense
for 2000, a severance charge of $1,509,000 related to the restructuring of the
Company's arthroscopy sales force.
(4) In March 1998, we recorded an extraordinary item of $1,569,000 net of
income taxes related to the write-off of deferred financing fees.
(5) Adjusted EBITDA represents earnings before interest expense, income
taxes, depreciation and amortization (except amortization of deferred financing
fees included in interest expense, unusual items and inventory adjustments
pursuant to purchase accounting). Adjusted EBITDA is included herein because
certain investors consider it to be a useful measure of our ability to service
our debt; however, adjusted EBITDA does not represent cash flow from operations,
as defined in generally accepted accounting principles, and should not be
considered in isolation or as a substitute for net income or cash flow from
operations or as a measure of profitability or liquidity.
(6) The ratio of earnings to fixed charges is calculated by dividing fixed
charges into income before income taxes and extraordinary items plus fixed
charges. Fixed charges include interest expense, amortization of deferred
financing fees and the estimated interest component of rent expense. In 1997,
the Company had a deficiency of earnings to cover fixed charges of $10,558,000.
(7) Linvatec is included in the Historical Balance Sheet Data as of
December 31, 1997, its date of acquisition, after a one-time non-cash
acquisition charge of $34,000,000.
-23-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with Selected
Financial Data (Item 6) and our consolidated financial statements, which are
included elsewhere or incorporated by reference in this Form 10-K.
General
CONMED Corporation is a medical technology company specializing in
instruments, implants and video equipment for arthroscopic sports medicine, and
powered surgical instruments (drills and saws), for orthopaedic, ENT,
neuro-surgery and other surgical specialties. We are also a leading developer,
manufacturer and supplier of advanced medical devices, including RF
electrosurgery systems used routinely to cut and cauterize tissue in nearly all
types of surgical procedures worldwide, endoscopy products such as trocars, clip
appliers, scissors and surgical staplers, and a full line of ECG electrodes for
heart monitoring and other patient care products. Our products are used in a
variety of clinical settings, such as operating rooms, surgery centers,
physicians offices and critical care areas of hospitals.
Critical Accounting Policies
The accounting policies discussed below are considered by management to be
critical to understanding the financial condition and results of operations of
CONMED Corporation.
Accounts receivable sale
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation
("CRC"), a wholly-owned special-purpose subsidiary of CONMED Corporation. CRC
may in turn sell up to an aggregate $50.0 million undivided percentage ownership
interest in such receivables to a commercial paper conduit (the "purchaser").
For receivables which have been sold, CONMED Corporation and its subsidiaries
retain collection and administrative responsibilities as agent for the
purchaser. As of December 2001, the undivided percentage ownership interest in
receivables sold by CRC to the purchaser aggregated $40.0 million, which has
been accounted for as a sale and reflected in the balance sheet as a reduction
in accounts receivable. We used the initial $40.0 million in proceeds from the
sale of accounts receivable to repay a portion of our loans under our credit
facility. Expenses associated with the sale of accounts receivable, including
the purchaser's financing cost of issuing commercial paper, were $.2 million in
2001.
There are certain statistical ratios which must be maintained relating to
the pool of receivables in order to continue selling to the purchaser.
Management believes that additional accounts receivable arising in the normal
course of business will be of sufficient quality and quantity to qualify for
sale under the accounts receivable sales agreement. In the event that new
accounts receivable arising in the normal course of business do not qualify for
sale, then collections on sold receivables will flow to the purchaser rather
than being used to fund new receivable purchases. If this were to occur, we
would need to access an alternate source of working capital.
-24-
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses. Other intangible assets
primarily represent allocations of purchase price to identifiable intangible
assets of acquired businesses. Goodwill and other intangible assets have been
amortized over periods ranging from 5 to 40 years. Because of our history of
growth through acquisitions, goodwill and other intangible assets comprise a
substantial portion (62.8% at December 2001) of our total assets.
In June 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangibles, including certain
intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142. In addition, goodwill and certain
intangibles recorded as a result of business combinations completed during the
six-month period ending December 2001 have not been amortized. All goodwill and
intangible assets are being tested for impairment in accordance with the
provisions of SFAS 142. No impairment losses are expected to be recognized as a
result of the tests. While we are still assessing the effect of the adoption of
SFAS 142, management believes that had SFAS 142 been in effect during 2001, net
income would have increased by approximately $5.5 million or $.22 per share.
Derivative financial instruments
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
("SFAS 133"). SFAS 133 requires that derivatives be recorded on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of the derivatives are accounted for
depending on whether the derivative qualifies for hedge accounting. Upon
adoption of SFAS 133, we recorded a net-of-tax cumulative-effect-type loss
adjustment of $1.0 million in accumulated other comprehensive income to
recognize at fair value an interest rate swap which we have designated as a
cash-flow hedge and which effectively converts $50.0 million of LIBOR-based
floating rate debt under our credit facility into fixed rate debt with a base
interest rate of 7.01%. Including the cumulative effect loss adjustment related
to the adoption of SFAS 133, total gross holding losses during 2001 related to
the interest rate swap aggregated $4.4 million before income taxes, of which
$1.3 million, before income taxes, has been reclassified and included in net
income. Management estimates approximately $2.0 million, before income taxes, of
gross holding losses will be reclassified and included in net income in 2002.
Revenue recognition
Revenue is recognized in accordance with agreed upon sales terms. Amounts
billed to customers related to shipping and handling are included in net sales.
We sell to a diversified base of customers around the world and, therefore,
believe there is no material concentration of credit risk. We assess the risk of
loss on accounts receivable and adjust the allowance for doubtful accounts based
on this risk assessment. Historically, losses on accounts receivable have not
been material. Management believes the allowance for doubtful accounts of $1.6
million
-25-
at December 2001 is adequate to provide for any potential losses from accounts
receivable.
Results of Operations
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the periods
indicated:
Years Ended December
1999 2000 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 47.4 47.5 47.7
----- ----- -----
Gross margin 52.6 52.5 52.3
Selling and administrative expense 29.5 32.4 32.8
Research and development expense 3.2 3.8 3.5
----- ----- -----
Income from operations 19.9 16.3 16.0
Interest expense, net 8.6 8.7 7.2
----- ----- -----
Income before income taxes 11.3 7.6 8.8
Provision for income taxes 4.1 2.7 3.1
----- ----- -----
Net Income 7.2% 4.9% 5.7%
===== ===== =====
2001 Compared to 2000
Sales for 2001 were $428.7 million, an increase of 8.3% compared to sales
of $395.9 million a year ago. Sales in our orthopaedic businesses grew 4.3% to
$269.9 million from $258.8 million last year. Arthroscopy sales, which represent
approximately 57.7% of total orthopaedic revenues, grew 7.2% to $155.6 million
from $145.1 million a year ago. Powered surgical instrument sales, which
represent approximately 42.3% of orthopaedic revenues, grew 1.0% to $114.3
million from $113.7 million last year. Adjusted for constant foreign currency
exchange rates, orthopaedic sales growth in 2001 would have been approximately
5.5% compared with 2000. Patient care sales for 2001 were $69.1 million, a 1.3%
increase from $68.2 million a year ago, reflecting modest increases in sales of
our ECG product lines. Electrosurgery sales for 2001 were $66.9 million, an
increase of 7.0% from $62.5 million last year, reflecting improved disposable
product sales. Endoscopy sales for 2001 were $22.8 million, an increase of 256%
from $6.4 million a year ago. Excluding the impact of the Imagyn acquisitions in
November 2000 and July 2001 (see Note 2 to consolidated financial statements),
the increase in endoscopy sales was approximately 13.0%.
Cost of sales increased to $204.4 million in 2001 compared to $188.2
million a year ago, primarily as a result of the increased sales volumes
described above. As discussed in Notes 2 and 11 to the consolidated financial
statements, during 2001, we incurred various non-recurring charges in connection
with the July 2001 Imagyn acquisition. These costs were primarily related to the
transition in manufacturing of the Imagyn product lines from Imagyn's Richland,
Michigan facility to our manufacturing plants in Utica, New York. Such costs
totaled approximately $1.6 million and are included in cost of sales. Excluding
the impact of these non-recurring expenses, cost of sales for 2001 was $202.8
million. Gross margin percentage for 2001, excluding the Imagyn-related charges,
was 52.7%, a slight improvement as a result of increased sales volumes, compared
with 52.5% a year ago. Including the Imagyn-related charges, gross margin
percentage for 2001 was 52.3%.
-26-
Selling and administrative expenses increased to $140.6 million in 2001 as
compared to $128.3 million in 2000. As a percentage of sales, selling and
administrative expenses totaled 32.8% in 2001 compared to 32.4% in 2000.
Excluding a non-recurring severance charge of $1.5 million recorded in 2000
related to the restructuring of our arthroscopy direct sales force (see Note 11
to the consolidated financial statements), selling and administrative expenses
as a percentage of sales were 32.0% in 2000. This restructuring involved
replacing our arthroscopy direct sales force with non-stocking exclusive sales
agent groups in certain geographic regions of the United States. This plan
resulted in greater sales force coverage in the affected geographic regions. The
increase in selling and administrative expense in 2001 as compared to 2000 is a
result of higher commission and other costs in 2001 as compared to 2000
associated with the change to exclusive sales agent groups as well as increased
spending on sales and marketing programs.
Research and development expense totaled $14.8 million in 2001, consistent
with $14.9 million in 2000. As a percentage of sales, research and development
expense decreased to 3.5% in 2001 compared to 3.8% in 2000, as a result of
higher sales levels.
Interest expense in 2001 was $30.8 million in 2001 compared to $34.3
million in 2000. The decrease in interest expense is primarily a result of lower
weighted average interest rates on the term loans and revolving credit facility
under our credit agreement (see Note 5 to the consolidated financial statements)
which have declined, to 4.43% and 3.93%, respectively, at December 2001 as
compared to 8.73% and 9.06%, respectively, at December 2000 resulting in
decreased interest expense. (See Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
2000 Compared to 1999
Sales for 2000 were $395.9 million, an increase of 5.2% compared to sales
of $376.2 million in 1999. Sales in our orthopaedic businesses grew 12.0% to
$258.8 million in 2000 from $231.0 million in 1999. Arthroscopy sales, which
represent approximately 56.1% of total orthopaedic revenues, grew 1.0% to $145.1
million in 2000 from $144.1 million in 1999. Powered surgical instrument sales,
which represent approximately 43.9% of orthopaedic revenues, grew 30.8% to
$113.7 million in 2000 from $86.9 million in 1999. Excluding the impact of the
acquisition of the powered surgical instrument business from 3M Company in
August 1999 (see Note 2 to the consolidated financial statements), the increase
in powered surgical instrument sales in 2000 compared to 1999 was approximately
12.1%. Adjusted for constant foreign currency exchange rates, orthopaedic sales
growth in 2000 would have been approximately 13.4% compared with 1999. Patient
care sales for 2000 were $68.2 million, a 12.6% decrease from $78.0 million in
1999, reflecting declines in sales of our ECG and surgical suction product lines
as a result of increased competition and pricing pressure. Electrosurgery sales
for 2000 were $62.5 million, consistent with the $62.4 million in 1999,
reflecting generally flat generator and disposable product sales. Endoscopy
sales for 2000 were $6.4 million, an increase of 33.3% from $4.8 million in
1999. Excluding the impact of the November 2000 Imagyn acquisition (see Note 2
to the consolidated financial statements), the increase in endoscopy sales in
2000 was approximately 20.8%.
Cost of sales increased to $188.2 million in 2000 compared to $178.5
million in 1999. Gross margin percentage for 2000 was 52.5%. In connection with
the August 1999 acquisition of the powered surgical instrument business from 3M
-27-
Company (see Note 2 to the consolidated financial statements), we increased the
acquired value of inventory by $1.6 million; this inventory was sold in 1999 and
served to increase cost of sales by $1.6 million. Excluding the impact of this
non-recurring purchase accounting adjustment, cost of sales was $176.9 million
in 1999 and gross margin percentage for 1999 was 52.9%. The slight decline in
gross margin percentage in 2000 as compared to 1999 is primarily a result of the
negative impact of foreign currency exchange rate fluctuations discussed above.
Excluding the negative impact of foreign currency exchange rate fluctuations,
gross margin percentage in 2000 would have been 52.8%.
Selling and administrative costs increased to $128.3 million in 2000 as
compared to $110.8 million in 1999. As a percentage of sales, selling and
administrative expenses totaled 32.4% in 2000 compared to 29.5% in 1999. During
2000, we recorded in selling and administrative expense, a non-recurring
severance charge of $1.5 million related to the restructuring of our arthroscopy
direct sales force (see Note 11 to the consolidated financial statements). This
restructuring involved replacing our arthroscopy direct sales force with
non-stocking exclusive sales agent groups in certain geographic regions of the
United States. This plan resulted in greater sales force coverage in the
affected geographic regions. During 1999, we recorded in selling and
administrative expense, the non-recurring $1.3 million benefit of a previously
recorded litigation accrual which was settled on favorable terms. Excluding
these non-recurring items, as a percentage of sales, selling and administrative
expense increased to 32.0% in 2000 as compared to 29.8% in 1999. This increase,
as a percentage of sales, is a result of increased spending on sales and
marketing programs, including higher commission and other costs associated with
the change to exclusive sales agent groups.
Research and development expense was $14.9 million in 2000 as compared to
$12.1 million in 1999. As a percentage of sales, research and development
expense increased to 3.8% in 2000 as compared to 3.2% in 1999. This increase
represents expanded research and development efforts primarily focused on new
product development in the orthopaedic product lines.
Interest expense in 2000 was $34.3 million compared to $32.4 million in
1999. The increase in interest expense is primarily a result of higher weighted
average interest rates on the term loans and revolving credit facility under our
credit agreement (see Note 5 to the consolidated financial statements) which
increased to 8.73% and 9.06%, respectively, at December 2000 as compared to
8.00% and 7.45%, respectively, at December 1999 resulting in increased interest
expense. (See Liquidity and Capital Resources section of Management's Discussion
and Analysis of Financial Condition and Results of Operations).
Liquidity and Capital Resources
Our net working capital position decreased $69.1 million or 60.7% to $44.7
million at December 2001 compared to $113.8 million at December 2000. The
decrease in net working capital is primarily a result of the classification in
the current portion of long-term debt of amounts owed on the revolving credit
facility (see Note 5 to the consolidated financial statements). On December 31,
2002, our $100.0 million revolving credit facility terminates. As of December
2001, we have outstanding $58.0 million under the revolving credit facility. We
have begun discussions with our bank group regarding extending the revolving
credit facility or, as an alternative, renegotiating the entire senior credit
facility. Based on our current discussions, we believe that we will be able to
successfully complete a senior credit arrangement which will provide sufficient
capital for our business. However, because of changed economic conditions
compared to market conditions in 1997 when our present senior credit facility
was completed, we expect that any new
-28-
facility will carry interest costs 75 to 100 basis points higher than our
present facility. Based on the amounts outstanding at December 2001 under the
senior credit facility, an increase of 75 to 100 basis points would result in an
increase in annual interest expense of approximately $1.4 million to $1.8
million.
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation, a
wholly-owned special-purpose subsidiary of CONMED Corporation (see Note 1 to the
consolidated financial statements). CRC may in turn sell up to an aggregate
$50.0 million undivided percentage ownership interest in such receivables to a
commercial paper conduit. As of December 2001, the undivided percentage
ownership interest in receivables sold by CRC to a commercial paper conduit
aggregated $40.0 million, which has been accounted for as a sale and reflected
in the balance sheet as a reduction in accounts receivable. We used the $40.0
million in proceeds from the sale to repay a portion of our term loans under our
credit facility (see Note 5 to the consolidated financial statements). The sale
of accounts receivable is expected to enable us to lower our cost of capital by
approximately $.5 million annually by effectively accessing the commercial paper
market.
Net cash provided by operations was $77.1 million in 2001. Operating cash
flow increased substantially in 2001 compared with 2000 and 1999 as a result of
the sale of accounts receivable as noted above, which increased operating cash
flows by $40.0 million. Excluding the effects of the receivable sale, operating
cash flow was $37.1 million in 2001. Operating cash flow in 2001 was positively
impacted primarily by depreciation, amortization and deferred income taxes.
Operating cash flow in 2001 was negatively impacted primarily as a result of
increases in inventory and accounts receivable (excluding the effects of the
receivable sale) as a result of the second Imagyn acquisition and overall
higher sales levels experienced in 2001. Net cash provided by operations was
$36.0 million in 2000. Operating cash flow in 2000 declined compared with $37.4
million in 1999 primarily as a result of lower net income in 2000 as compared to
1999. Operating cash flow in 2000 was positively impacted primarily by
depreciation, amortization and deferred income taxes. Operating cash flow in
2000 was negatively impacted primarily as a result of increased inventories and
accounts receivable as a result of overall higher sales levels in 2000 than
1999. Net cash provided by operations was $37.4 million in 1999. Operating cash
flow in 1999 was positively impacted primarily by depreciation, amortization and
deferred income taxes. Operating cash flow in 1999 was negatively impacted
primarily as a result of increases in accounts receivable and inventories. The
increase in accounts receivable and inventory was primarily related to the
increase in sales compared with the prior year.
Capital expenditures for 2001, 2000 and 1999 amounted to $14.4 million,
$14.1 million, and $9.4 million, respectively. Net cash used by investing
activities in 2000 also included $6.0 million paid related to the Imagyn
acquisition. Net cash used by investing activities in 1999 also included $40.6
million paid related to the acquisition of the powered surgical instrument
business from 3M Company in August 1999 (see Note 2 to the consolidated
financial statements).
Financing activities in 2001 include $11.0 million in borrowings under the
revolving credit facility,$36.4 million in scheduled payments on our term loans
and $40.0 million in additional payments on our term loans with the proceeds
from the accounts receivable sale discussed above. Financing activities in 2000
include $17.0 million in borrowings under the revolving credit facility and
$32.9 million in scheduled payments on our term loans. Financing activities
during 1999 include a $40.0 million term loan used to fund the acquisition of
the powered surgical instrument business from 3M Company in August 1999 (see
Note 2 to the consolidated
-29-
financial statements), scheduled payments of $23.1 million on our previously
existing term loans and $8.0 million in repayments on our revolving credit
facility.
During 2001 we purchased the real estate partnerships which own the Largo,
Florida property leased by our Linvatec subsidiary for an aggregate purchase
price of $22.7 million (see Note 2 to the consolidated financial statements). In
connection with the acquisition, we assumed the existing debt on the property
and financed the remainder with the seller (see Note 5 to the consolidated
financial statements).
Assuming the successful renegotiation of the revolving credit facility
discussed above, management believes that cash generated from operations, our
current cash resources and funds available under our revolving credit facility
will provide sufficient liquidity to ensure continued working capital for
operations, debt service and funding of capital expenditures in the foreseeable
future.
Contractual Obligations
There were no capital lease obligations or unconditional purchase
obligations as of December 2001. The following table summarizes our contractual
obligations related to operating leases and long-term debt as of December 2001:
(Amounts in thousands)
2002 2003 2004 2005 2006 Thereafter
------- ------- ------- ------- ------- --------
Long-term debt $73,429 $43,364 $36,749 $35,181 $1,943 $145,263
Operating lease
obligations 1,624 1,255 1,036 962 933 1,950
------- ------- ------- ------- ------- --------
Total contractual
cash obligations $75,053 $44,619 $37,785 $36,143 $ 2,876 $147,213
======= ======= ======= ======= ======= ========
Included in long-term debt obligations in 2002 is $58.0 million due under
our revolving credit facility, which we believe we will successfully extend or
renegotiate during 2002.
Foreign Operations
Our foreign operations are subject to special risks inherent in doing
business outside the United States, including governmental instability, war and
other international conflicts, civil and labor disturbances, requirements of
local ownership, partial or total expropriation, nationalization, currency
devaluation, foreign exchange controls and foreign laws and policies, each of
which may limit the movement of assets or funds or result in the deprivation of
contract rights or the taking of property without fair compensation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal market risks involve foreign currency exchange rates and
interest rates.
-30-
We manufacture our products primarily in the United States and distribute
our products throughout the world. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. As of December 2001, we
have not entered into any forward foreign currency exchange contracts to hedge
the effect of foreign currency exchange fluctuations. We have mitigated and will
continue to mitigate our foreign currency exposure by transacting the majority
of our foreign sales in United States dollars. During 2001, changes in foreign
currency exchange rates reduced our sales and income before income taxes by
approximately $3.2 million. We will continue to monitor and evaluate our foreign
currency exposure and the need to enter into a forward foreign currency exchange
contract or other hedging arrangement.
Our exposure to market risk for changes in interest rates relates to our
borrowings. We do not use derivative financial instruments for trading or other
speculative purposes. Interest rate swaps, a form of derivative, are used to
manage interest rate risk. Currently, we have entered into an interest rate swap
with a $50.0 million notional amount expiring in June 2003 which effectively
converts $50.0 million of the approximate $125.0 million of floating rate
borrowings under our credit facility into fixed rate borrowings with a base
interest rate of 7.01%. If market interest rates for similar borrowings average
1% more in 2002 than they did in 2001, our interest expense, after considering
the effects of our interest rate swap, would increase, and income before income
taxes would decrease by $1.8 million. Comparatively, if market interest rates
averaged 1% less in 2002 than they did during 2001, our interest expense, after
considering the effects of our interest rate swap, would decrease, and income
before income taxes would increase by $1.6 million. These amounts are determined
by considering the impact of hypothetical interest rates on our borrowing cost
and interest rate swap agreement and does not consider any actions by management
to mitigate our exposure to such a change.
Item 8. Financial Statements and Supplementary Data
Our 2001 Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP dated February 5, 2002, are included elsewhere
herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
We have had no disagreements with PricewaterhouseCoopers LLP that would be
required to be reported under this Item 9.
-31-
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Executive Officers is
incorporated herein by reference to the sections captioned "Proposal One:
Election of Directors" and "Directors, Executive Officers and Senior Officers"
in CONMED Corporation's definitive Proxy Statement to be mailed on or about
April 5, 2002 for the annual meeting of shareholders to be held on May 14, 2002.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated herein
by reference to the sections captioned "Compensation of Executive Officers","
Stock Option Plans", "Pension Plans" and "Board of Directors Interlocks and
Insider Participation; Certain Relationships and Related Transactions" in CONMED
Corporation's definitive Proxy Statement to be mailed on or about April 5, 2002
for the annual meeting of shareholders to be held on May 14, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to the section captioned
"Security Ownership of Certain Beneficial Owners and Management" in CONMED
Corporation's definitive Proxy Statement to be mailed on or about April 5, 2002
for the annual meeting of shareholders to be held on May 14, 2002.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
incorporated herein by reference to the section captioned "Board of Directors
Interlocks and Insider Participation; Certain Relationships and Related
Transactions" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 5, 2002 for the annual meeting of shareholders to be held on May
14, 2002.
-32-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements
(a)(1) List of Financial Statements Form 10-K Page
--------------
Report of Independent Accountants F-1
Consolidated Balance Sheets at December F-2
2000 and 2001
Consolidated Statements of Income for the F-3
Years Ended December 1999, 2000 and 2001
Consolidated Statements of Shareholders' F-4
Equity for the Years Ended December
1999, 2000 and 2001
Consolidated Statements of Cash Flows for F-6
the Years Ended December 1999, 2000 and
2001
Notes to Consolidated Financial Statements F-8
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule F-30
VIII)
All other schedules have been omitted
because they are not applicable, or the
required information is shown in the
financial statements or notes thereto.
(3) List of Exhibits
The exhibits listed on the accompanying
Exhibit Index on page 35 below are filed
as part of this Form 10-K.
(b) Reports on Form 8-K
None
-33-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the date indicated
below.
CONMED CORPORATION
March 27, 2002
By: /s/ Eugene R. Corasanti
-----------------------
Eugene R. Corasanti
(Chairman of the Board, Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrants and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ EUGENE R. CORASANTI Chairman of the Board
- ----------------------- Chief Executive Officer
Eugene R. Corasanti and Director March 27, 2002
/s/ ROBERT D. SHALLISH, JR Vice President-Finance
- ------------------------ and Chief Financial Officer
Robert D. Shallish, Jr. (Principal Financial Officer) March 27, 2002
/s/ JOSEPH J. CORASANTI President, Chief Operating
- ----------------------- Officer and Director March 27, 2002
Joseph J. Corasanti
/s/ LUKE A. POMILIO Vice President Corporate
- ------------------- Controller (Principal
Luke A. Pomilio Accounting Officer) March 27, 2002
/s/ BRUCE F. DANIELS
- --------------------
Bruce F. Daniels Director March 27, 2002
/s/ ROBERT E. REMMELL
- ---------------------
Robert E. Remmell Director March 27, 2002
/s/ WILLIAM D. MATTHEWS
- -----------------------
William D. Matthews Director March 27, 2002
/s/ STUART J. SCHWARTZ
- ----------------------
Stuart J. Schwartz Director March 27, 2002
-34-
Exhibit Index
Exhibit
No. Description of Instrument
- --- -------------------------
2.1 The Asset Purchase Agreement, dated June 29, 1999 by and between
Linvatec Corporation and Minnesota Mining and Manufacturing
Company, as amended by an amendment dated August 11, 1999
incorporated herein by reference to Exhibit 10.1 of our report
on Form 10-Q filed on August 13, 1999.
2.2 The Asset Purchase Agreement, dated as of June 11, 2001 by and
between CONMED Corporation and Imagyn Medical, Inc. et al
incorporated herein by reference to Exhibit 10.1 of our report
on Form 10-Q filed on August 13, 2001.
2.3 The Agreement of Purchase and Sale, dated as of February 5, 2001
by and between Linvatec Corporation and Largo Lakes, I, II and
IV, Inc., et al incorporated herein by reference to Exhibit 10.2
of our report on Form 10-Q filed on August 13, 2001.
2.4 The Purchase and Sale Agreement dated November 1, 2001 among
CONMED Corporation, et al and CONMED Receivables Corporation
incorporated herein by reference to Exhibit 10.2 of our report
on Form 10-Q filed on November 14, 2001.
2.5 The Receivables Purchase Agreement dated November 1, 2001 among
CONMED Receivables Corporation, Blue Keel Funding, LLC and Fleet
National Bank incorporated herein by reference to Exhibit 10.2
of our report on Form 10-Q filed on November 14, 2001.
3.1 Amended and Restated By-Laws, as adopted by the Board of
Directors on December 26, 1990 incorporated herein by reference
to the exhibit in our Current Report on Form 8-K, dated March 7,
1991 (File No. 0-16093).
3.2 1999 Amendment to Certificate of Incorporation and Restated
Certificate of Incorporation of CONMED Corporation incorporated
herein by reference to our Annual Report on Form 10-K for the
year ended December 31, 1999.
4.1 See Exhibit 3.1.
4.2 See Exhibit 3.2.
4.3 Amended and Restated Credit Agreement, dated August 11, 1999,
among CONMED Corporation and the several banks and other
financial institutions or entities from time to time parties
thereto, incorporated herein by reference to Exhibit 10.2 of our
report on Form 10-Q filed on August 13, 1999.
-35-
Exhibit
No. Description of Instrument
- --- -------------------------
4.4 Guarantee and Collateral Agreement, dated December 31, 1997,
made by CONMED Corporation and certain of its subsidiaries in
favor of The Chase Manhattan Bank incorporated herein by
reference to Exhibit 10.2 in our Current Report on Form 8-K
filed on January 8, 1998.
4.5 Indenture, dated as of March 5, 1998, by and among CONMED
Corporation, the Subsidiary Guarantors named therein and First
Union National Bank, as Trustee incorporated by reference to the
exhibit in our Registration Statement on Form S-8 filed on March
26, 1998 (File No. 333-48693).
4.6 Acknowledgement and Consent, dated August 11, 1999, among CONMED
Corporation and each of its subsidiaries incorporated herein by
reference to Exhibit 10.3 of our report on Form 10-Q filed on
August 13, 1999.
10.1 Employment Agreement between the Company and Eugene R.
Corasanti, dated December 16, 1996 incorporated herein by
reference to the exhibit in our Annual Report on Form 10-K for
the year ended December 31, 1996.
10.2 Amended and Restated Employee Stock Option Plan (including form
of Stock Option Agreement) incorporated herein by reference to
the exhibit in our Annual Report on Form 10-K for the year ended
December 25, 1992 and incorporated herein by reference to the
exhibit in our Annual Report on Form 10-K for the year ended
December 31, 1996.
10.3 (a) Eugene R. Corasanti disability income plans with
Northwestern Mutual Life Insurance Company, dated January
14, 1980 and March 7, 1981 policy specification sheets
incorporated herein by reference to Exhibit 10.0(a) of our
Registration Statement on Form S-2 (File No. 33-40455).
(b) William W. Abraham disability income plan with
Northwestern Mutual Life Insurance Company, dated March
24, 1981 policy specification sheet incorporated
herein by reference to Exhibit 10.0(b) of our Registration
Statement on Form S-2 (File No. 33-40455).
(c) Eugene R. Corasanti life insurance plan with
Northwestern Mutual Life Insurance Company, dated October
6, 1979 policy specification sheet incorporated herein
by reference to Exhibit 10.0(c) of our Registration
Statement on Form S-2 (File No. 33-40455).
10.4 Eugene R. Corasanti life insurance plans with Northwestern
Mutual Life Insurance Company dated August 25, 1991 Statements
of Policy Cost and Benefit Information, Benefits and Premiums,
Assignment of Life Insurance Policy as Collateral incorporated
herein by reference to our Annual Report on Form 10-K for the
year ended December 27, 1991.
-36-
Exhibit
No. Description of Instrument
- --- -------------------------
10.5 1992 Stock Option Plan (including form of Stock Option
Agreement) incorporated herein by reference to the exhibit in
our Annual Report on Form 10-K for the year ended December 25,
1992.
10.6 Stock Option Plan for Non-Employee Directors of CONMED
Corporation incorporated by reference to our Annual Report on
Form 10-K for the year ended December 31, 1996.
10.7 Amendment to 1992 Stock Option Plan incorporated by reference to
our Annual Report on Form 10-K for the year ended December 31,
1996.
10.8 CONMED Corporation 1999 Long-Term Incentive Plan incorporated by
reference to the Definitive Proxy Statement for the 1999 annual
meeting as filed on April 16, 1999.
10.9 Employment Agreement between the Company and Joseph J.
Corasanti, dated May 2, 2000 incorporated herein by reference to
the exhibit in our Annual Report on Form 10-K for the year ended
December 31, 2000.
10.10 Amendment to December 16, 1996 Employment Agreement between the
Company and Eugene R. Corasanti, dated March 7, 2002.
12 Statement re: Computation of Ratios of Earnings to Fixed
Charges.
21 Subsidiaries of the Registrant.
23 Consent, dated March 27, 2002, of PricewaterhouseCoopers LLP,
independent auditors for CONMED Corporation.
-37-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of CONMED Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) on Page 33 present fairly, in all material
respects, the financial position of CONMED Corporation and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14 (a)(2) on Page 33 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Syracuse, New York
February 5, 2002
F-1
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 2000 and 2001
(In thousands except share amounts)
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 3,470 $ 1,402
Accounts receivable, less allowance for doubtful
accounts of $1,479 in 2000 and $1,553 in 2001 ..... 78,626 51,188
Inventories ........................................... 104,612 107,390
Deferred income taxes ................................ 1,761 1,105
Prepaid expenses and other current assets ............. 3,562 3,464
--------- ---------
Total current assets .................................. 192,031 164,549
--------- ---------
Property, plant and equipment, net .................... 62,450 91,026
Goodwill, net ......................................... 225,801 251,140
Other intangible assets, net .......................... 195,008 189,752
Other assets .......................................... 4,281 5,141
--------- ---------
Total assets .......................................... $ 679,571 $ 701,608
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................... $ 36,068 $ 73,429
Accounts payable ...................................... 20,350 19,877
Accrued compensation .................................. 9,913 11,863
Income taxes payable .................................. 1,979 2,507
Accrued interest ...................................... 5,130 4,954
Other current liabilities ............................. 4,836 7,207
--------- ---------
Total current liabilities ............................. 78,276 119,837
--------- ---------
Long-term debt ........................................ 342,680 262,500
Deferred income taxes ................................. 12,154 18,655
Other long-term liabilities ........................... 15,858 16,982
--------- ---------
Total liabilities ..................................... 448,968 417,974
--------- ---------
Shareholders' equity:
Preferred stock, par value $.01 per share; authorized
500,000 shares, none outstanding ...................... -- --
Common stock, par value $.01 per share; 100,000,000
authorized; 23,028,279 and 25,261,590, issued and
outstanding in 2000 and 2001, respectively ........... 230 253
Paid-in capital ....................................... 127,985 160,757
Retained earnings ..................................... 103,834 128,240
Accumulated other comprehensive loss ................. (1,027) (5,197)
Less 37,500 shares of common stock in treasury, at cost (419) (419)
--------- ---------
Total shareholders' equity ............................ 230,603 283,634
--------- ---------
Total liabilities and shareholders'equity ............. $ 679,571 $ 701,608
========= =========
See notes to consolidated financial statements.
F-2
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 1999, 2000 and 2001
(In thousands except per share amounts)
1999 2000 2001
-------- -------- --------
Net sales ............................... $376,226 $395,873 $428,722
-------- -------- --------
Cost of sales ........................... 178,480 188,223 204,374
Selling and administrative expense ...... 110,842 128,316 140,560
Research and development expense ........ 12,108 14,870 14,830
-------- -------- --------
301,430 331,409 359,764
-------- -------- --------
Income from operations .................. 74,796 64,464 68,958
Interest expense, net ................... 32,360 34,286 30,824
-------- -------- --------
Income before income taxes .............. 42,436 30,178 38,134
Provision for income taxes .............. 15,277 10,864 13,728
-------- -------- --------
Net income .............................. $ 27,159 $ 19,314 $ 24,406
======== ======== ========
Per share data:
Net income
Basic ................................... $ 1.19 $ .84 $ 1.02
Diluted ................................. 1.17 .83 1.00
See notes to consolidated financial statements.
F-3
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 1999, 2000 and 2001
(In thousands)
Accumulated
Common Stock Other
---------------------- Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ ------ ------- -------- ------------- ----- ------
Balance at December 1998 .......... 22,775 $228 $124,963 $57,361 $35 $(419) $182,168
Exercise of stock options.......... 182 2 1,610 1,612
Tax benefit arising from
exercise of stock
options ........................... 744 744
Comprehensive income:
Foreign currency
translation adjustments ........... (422)
Net income 27,159
Total comprehensive income ........ 26,737
------ --- ------- ------- ------ ---- -------
Balance at December 1999 .......... 22,957 230 127,317 84,520 (387) (419) 211,261
Exercise of stock options ......... 72 449 449
Tax benefit arising from
exercise of stock
options ........................... 219 219
Comprehensive income:
Foreign currency
translation adjustments ........... (640)
Net income 19,314
Total comprehensive income ........ 18,674
------ --- ------- ------- ------ ---- -------
Balance at December 2000 .......... 23,029 230 127,985 103,834 (1,027) (419) 230,603
(continued)
See notes to consolidated financial statements.
F-4
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 1999, 2000 and 2001
(In thousands)
Accumulated
Common Stock Other
---------------------- Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ ------ ------- -------- ------------- ----- ------
Exercise of stock options ......... 259 3 1,827 1,830
Tax benefit arising
from exercise of
stock options ..................... 604 604
Stock issued in connection
with business acquisitions......... 1,974 20 30,341 30,361
Comprehensive income:
Foreign currency
translation adjustments ........... (1,142)
Cash flow hedging
(net of income tax
benefit of $1,106) ................ (1,966)
Minimum pension liability
(net of income tax
benefit of $597) .................. (1,062)
Net income ........................ 24,406
Total comprehensive income ........ 20,236
------ ----- -------- -------- ------- ------ --------
Balance at December 2001 .......... 25,262 $ 253 $160,757 $128,240 $(5,197) $ (419) $283,634
====== ===== ======== ======== ======= ====== ========
See notes to consolidated financial statements.
F-5
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 1999, 2000 and 2001
(In thousands)
1999 2000 2001
------- ------- -------
Cash flows from operating activities:
Net income .............................. $ 27,159 $ 19,314 $ 24,406
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................ 9,207 9,434 9,055
Amortization ............................ 17,084 20,053 21,093
Deferred income taxes ................... 8,978 7,974 8,562
Increase (decrease) in cash flows from
changes in assets and liabilities, net
of effects from acquisitions:
Proceeds from the sale of accounts
receivable............................... -- -- 40,000
Accounts receivable ..................... (9,192) (2,166) (12,508)
Inventories ............................. (9,086) (18,035) (4,235)
Prepaid expenses and other current
assets .................................. (799) 1,811 46
Accounts payable ........................ (3,060) 3,824 (516)
Income taxes payable .................... 1,242 2,295 (281)
Income tax benefit of stock
option exercises ........................ 744 219 604
Accrued compensation .................... (7) 255 1,950
Accrued interest ........................ (1,481) 542 (290)
Other assets/liabilities, net ........... (3,348) (9,570) (10,737)
------- ------- -------
10,282 16,636 52,743
------- ------- -------
Net cash provided by operations ......... 37,441 35,950 77,149
------- ------- -------
Cash flows from investing activities:
Payments related to business acquisitions (40,585) (6,042) --
Purchases of property, plant and
equipment ............................... (9,352) (14,050) (14,443)
------- ------- -------
Net cash used by investing activities ... (49,937) (20,092) (14,443)
------- ------- -------
Cash flows from financing activities:
Proceeds of long-term debt .............. 40,900 -- --
Borrowings (repayments)under revolving
credit facility.......................... (8,000) 17,000 11,000
Proceeds from issuance of common stock .. 1,612 449 1,830
Payments related to issuance of long-
term debt ............................... (661) -- --
Payments on long-term debt .............. (23,103) (32,921) (76,423)
------- ------- -------
Net cash provided (used)by financing
activities .............................. 10,748 (15,472) (63,593)
------- ------- -------
(continued)
See notes to consolidated financial statements.
F-6
1999 2000 2001
------- ------- -------
Effect of exchange rate changes
on cash and cash equivalents ................... (411) (663) (1,181)
Net decrease in cash and cash equivalents ..... (2,159) (277) (2,068)
Cash and cash equivalents at beginning
of year ..................................... 5,906 3,747 3,470
------- ------- --------
Cash and cash equivalents at end of year ...... $ 3,747 $ 3,470 $ 1,402
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ..................................... $32,662 $33,788 $31,135
Income taxes .................................. 4,502 4,141 2,098
Supplemental disclosures of non-cash investing and financing activities:
As more fully described in Note 2, we acquired a business in 2001 through
the exchange of 1,950,000 shares of our common stock valued at $29.9 million.
As more fully described in Note 2, we acquired certain property in 2001
through the assumption of approximately $22.7 million of debt and accrued
interest.
See notes to consolidated financial statements.
F-7
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Operations and Significant Accounting Policies
Organization and operations
The consolidated financial statements include the accounts of CONMED
Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). All
intercompany accounts and transactions have been eliminated. CONMED Corporation
is a medical technology company specializing in instruments, implants and video
equipment for arthroscopic sports medicine, and powered surgical instruments
(drills and saws), for orthopaedic, ENT, neuro-surgery and other surgical
specialties. We are also a leading developer, manufacturer and supplier of
advanced medical devices, including RF electrosurgery systems used routinely to
cut and cauterize tissue in nearly all types of surgical procedures worldwide,
endoscopy products such as trocars, clip appliers, scissors and surgical
staplers, and a full line of ECG electrodes for heart monitoring and other
patient care products. Our products are used in a variety of clinical settings,
such as operating rooms, surgery centers, physicians' offices and critical care
areas of hospitals.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the 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.
Cash equivalents
We consider all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts receivable sale
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation
("CRC"), a wholly-owned special-purpose subsidiary of CONMED Corporation. CRC
may in turn sell up to an aggregate $50.0 million undivided percentage ownership
interest in such receivables to a commercial paper conduit (the "purchaser").
For receivables which have been sold, CONMED Corporation and its subsidiaries
retain collection and administrative responsibilities as agent for the
purchaser. As of December 2001, the undivided percentage ownership interest in
receivables sold by CRC to a commercial paper conduit aggregated $40.0 million,
which has been accounted for as a sale and reflected in the balance sheet as a
reduction in accounts receivable. We used the initial $40.0 million in proceeds
from the sale of accounts receivable to repay a portion of our loans under our
credit facility. Expenses associated with the sale of accounts receivable,
including the purchaser's financing cost of issuing commercial paper, were $.2
million in 2001.
F-8
There are certain statistical ratios which must be maintained relating to
the pool of receivables in order to continue selling to the purchaser.
Management believes that additional accounts receivable arising in the normal
course of business will be of sufficient quality and quantity to qualify for
sale under the accounts receivable sales agreement. In the event that new
accounts receivable arising in the normal course of business do not qualify for
sale, then collections on sold receivables will flow to the purchaser rather
than being used to fund new receivable purchases. If this were to occur, we
would need to access an alternate source of working capital.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out basis.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the following estimated useful lives:
Building and improvements 40 years
Leasehold improvements Remaining life of lease
Machinery and equipment 2 to 15 years
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses. Other intangible assets
primarily represent allocations of purchase price of acquired businesses.
Goodwill and other intangible assets have been amortized over periods ranging
from 5 to 40 years. Because of our history of growth through acquisitions,
goodwill and other intangible assets comprise a substantial portion (62.8% at
December 2001) of our total assets.
In June 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangibles, including certain
intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142. In addition, goodwill and certain
intangibles recorded as a result of business combinations completed during the
six-month period ending December 2001 have not been amortized. All goodwill and
intangible assets are being tested for impairment in accordance with the
provisions of SFAS 142. No impairment losses are expected to be recognized as a
result of the tests. While we are still assessing the effect of the adoption of
SFAS 142, management believes that had SFAS 142 been in effect during 2001, net
income would have increased by approximately $5.5 million or $.22 per share.
Accumulated amortization of goodwill amounted to $23,340,000 and $29,941,000 at
December 2000 and 2001, respectively. Other intangible assets are comprised of
the following (in thousands):
F-9
2000 2001
--------- ---------
Customer relationships ..................... $ 96,712 $ 96,712
Trademarks and tradenames .................. 95,715 95,715
Patents and other intangible assets ........ 31,479 35,465
--------- ---------
223,906 227,892
Less: Accumulated amortization ............. (28,898) (38,140)
--------- ---------
Other intangible assets, net ............... $ 195,008 $ 189,752
========= =========
Derivative financial instruments
We do not trade in derivative securities. We do use interest rate swaps to
manage the interest risk associated with our variable rate debt. We accounted
for our interest rate swaps on the accrual method at December 2000, whereby the
net interest receivable or payable is recognized on a periodic basis and
included as a component of interest expense.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standard No. 133, Accounting for Derivative Instruments and Hedging Activities,
("SFAS 133"). SFAS 133 requires that derivatives be recorded on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of the derivatives are accounted for
depending on whether the derivative qualifies for hedge accounting. Upon
adoption of SFAS 133, we recorded a net-of-tax cumulative-effect-type loss
adjustment of $971,000 in accumulated other comprehensive income to recognize at
fair value an interest rate swap which we have designated as a cash-flow hedge
and which effectively converts $50,000,000 of LIBOR-based floating rate debt
under our credit facility into fixed rate debt with a base interest rate of
7.01%. Including the cumulative effect loss adjustment related to the adoption
of SFAS 133, total gross holding losses during 2001 related to the interest rate
swap aggregated $4,415,000 before income taxes, of which $1,343,000, before
income taxes, has been reclassified and included in net income. Management
estimates approximately $2,000,000, before income taxes, of gross holding losses
will be reclassified and included in net income in 2002.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable, accounts
payable, and interest rate swaps approximates their carrying amount. The
estimated fair values and carrying amounts of long-term debt are as follows (in
thousands):
2000 2001
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Long-term debt (including
current maturities).......... $(378,748) $(352,748) $(335,929) $(338,529)
Fair values were determined from quoted market prices or discounted cash
flow analysis.
F-10
Translation of foreign currency financial statements
Assets and liabilities of foreign subsidiaries have been translated into
United States dollars at the applicable rates of exchange in effect at the end
of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected in accumulated other
comprehensive income (loss). Any transaction gains and losses are included in
net income.
Revenue recognition
Revenue is recognized in accordance with agreed upon sales terms. Amounts
billed to customers related to shipping and handling are included in net sales.
Shipping and handling costs were $9,450,000, $8,125,000 and $8,559,000 for the
years ended December 1999, 2000 and 2001, respectively, and are included in
selling and administrative expense. We sell to a diversified base of customers
around the world and, therefore, believe there is no material concentration of
credit risk. We assess the risk of loss on accounts receivable and adjust the
allowance for doubtful accounts based on this risk assessment. Historically,
losses on accounts receivable have not been material. Management believes the
allowance for doubtful accounts of $1,553,000 at December 2001 is adequate to
provide for any potential losses from accounts receivable.
Earnings per share
Basic earnings per share ("EPS") is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS gives effect to
all dilutive potential shares outstanding (i.e., options and warrants) during
the period. The following is a reconciliation of the weighted average shares
used in the calculation of basic and diluted EPS (in thousands):
1999 2000 2001
------ ------ ------
Shares used in the calculation of basic EPS
(weighted average shares outstanding) ......... 22,862 22,967 24,045
Effect of dilutive potential securities........ 283 304 356
------ ------ ------
Shares used in the calculation of diluted EPS . 23,145 23,271 24,401
====== ====== ======
The shares used in the calculation of diluted EPS exclude warrants and
options to purchase shares where the exercise price was greater than the average
market price of common shares for the year. Such shares aggregated 1,989,000,
3,396,000 and 2,842,000 at December 1999, 2000 and 2001, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation used in 2001.
Note 2 Business Acquisitions
On August 11, 1999, we purchased certain assets of the powered surgical
instrument business of 3M Company (the"Powered Instrument acquisition")for a
F-11
purchase price of $40.0 million. The purchase price was funded through
borrowings under our credit facility (Note 5). The Powered Instrument
acquisition was accounted for using the purchase method in which the results of
operations of the acquired business are included in our consolidated results
from the date of acquisition. The acquired products, with annual revenues of
approximately $20.0 million, complement our existing powered surgical instrument
business. Goodwill associated with the Powered Instrument acquisition aggregated
approximately $34.0 million and is being amortized on a straight-line basis over
a 40-year period. In connection with the Powered Instrument acquisition, we
increased the acquired value of inventory by $1.6 million. This inventory was
sold during the quarter ended September 1999 resulting in a non-recurring
adjustment to increase cost of sales during 1999 by $1.6 million. As a result of
the adoption of SFAS 142, amortization of goodwill associated with the Powered
Instrument acquisition has been discontinued effective January 1, 2002 (Note 1).
On November 20, 2000 we acquired certain assets of the disposable minimally
invasive surgical business of Imagyn Medical Technologies, Inc. (the "Imagyn
acquisition") for a purchase price of $6.0 million. The Imagyn acquisition was
accounted for using the purchase method in which the results of operations of
the acquired business are included in our consolidated results from the date of
acquisition. The acquisition was funded through borrowings under our revolving
credit facility (Note 5). The acquired products, with annual sales of
approximately $5.0 million, complement our existing minimally invasive surgical
products business. Goodwill associated with the Imagyn acquisition aggregated
approximately $4.8 million and is being amortized on a straight-line basis over
a 40-year period. The Imagyn acquisition did not have a material effect on
earnings per share in the year ended December 2000. As a result of the adoption
of SFAS 142, amortization of goodwill associated with the Imagyn acquisition has
been discontinued effective January 1, 2002 (Note 1).
On June 11, 2001, we reached a definitive agreement to acquire the
remaining assets of the minimally invasive surgical business of Imagyn Medical
Technologies, Inc. that we did not acquire in November 2000 (the "second Imagyn
acquisition"). The results of operations of the acquired business are included
in our consolidated results from July 6, 2001, the date of acquisition. The new
products, with expected annual revenues of $18.0 to $20.0 million, complement
our existing minimally invasive surgical products business. Under the terms of
the acquisition agreement, we issued Imagyn 1,950,000 shares of CONMED common
stock, valuing the transaction at $29.9 million based on the average market
price of our common stock over the 2-day period before and after the terms of
the acquisition were agreed to and announced. Goodwill associated with the
second Imagyn acquisition aggregated approximately $26.7 million. In accordance
with the transition provisions of SFAS 142, this goodwill has not been
amortized. As discussed in Note 11, during the third and fourth quarters of 2001
we incurred certain nonrecurring costs aggregating approximately $1.5 million in
connection with the second Imagyn acquisition which are included in cost of
sales. The second Imagyn acquisition did not have a material effect on earnings
per share in the year ended December 2001.
On August 3, 2001, we purchased the real estate partnerships which own the
Largo, Florida property leased by our Linvatec subsidiary for an aggregate
purchase price of $22.7 million (the "Largo acquisition"). In connection with
the acquisition, we assumed the existing debt on the property and financed the
remainder with the seller (Note 5).
F-12
Note 3 Inventories
The components of inventory are as follows (in thousands):
2000 2001
-------- --------
Raw materials ..... $ 38,278 $ 38,101
Work in process..... 12,612 11,921
Finished goods...... 53,722 57,368
-------- --------
$104,612 $107,390
======== ========
Note 4 Property, Plant and Equipment
Details of property, plant and equipment are as follows (in thousands):
2000 2001
--------- ---------
Land ........................... $ 1,511 $ 4,004
Building and improvements ...... 27,686 67,951
Machinery and equipment ........ 63,970 68,284
Construction in progress ....... 12,283 1,955
--------- ---------
105,450 142,194
Less: Accumulated depreciation.. (43,000) (51,168)
--------- ---------
$ 62,450 $ 91,026
========= =========
We lease various manufacturing and office facilities and equipment under
operating leases. Rental expense on these operating leases was approximately
$2,935,000, $3,376,000 and $2,756,000 for the years ended December 1999, 2000
and 2001, respectively. The aggregate future minimum lease commitments for
operating leases at December 2001 are as follows:
Year ending December (in thousands):
2002 .................. $ 1,624
2003 .................. 1,255
2004 .................. 1,036
2005 .................. 962
2006 .................. 933
Thereafter .................. 1,950
Note 5 Long Term Debt
We have a credit agreement with several banks providing for a $490,000,000
senior credit facility. The senior credit facility is comprised of four
sub-facilities: (i) a $210,000,000 five-year term loan with quarterly principal
repayments; (ii) a $140,000,000 seven-year term loan with quarterly principal
repayments; (iii) a $40,000,000 six-year term loan with quarterly principal
F-13
repayments; and (iv) a $100,000,000 revolving credit facility. The
revolving credit facility expires on December 30, 2002 and therefore has been
classified in the current portion of long-term debt; it is expected to be
renegotiated during 2002. During the commitment period, we are obligated to pay
a fee of .375% per annum on the unused portion of the revolving credit facility.
As of December 2001, we had $13,300,000, $77,220,000, $34,340,000 and
$58,000,000 outstanding under the five-year term loan, the seven-year term loan,
the six year term loan and the revolving credit facility, respectively.
The borrowings under the senior credit facility carry interest rates based
on a spread over LIBOR or an alternative base interest rate. The covenants of
the senior credit facility provide for increases and decreases to this interest
rate spread based on our operating results. Additionally, certain events of
default under the credit facility limit interest rate options available to us.
The weighted average interest rates at December 2001 under the five-year term
loan, the seven-year term loan, the six year term loan and the revolving credit
facility, were 4.00%, 4.43%, 4.60% and 3.93%, respectively.
The term debt and revolving credit facility are collateralized by
substantially all of our personal property and assets, except for our accounts
receivable and related rights which are pledged in connection with the accounts
receivable sales agreement discussed in Note 1. The agreement contains covenants
and restrictions which, among other things, require maintenance of certain
working capital levels and financial ratios, prohibit dividend payments and
restrict the incurrence of certain indebtedness and other activities, including
acquisitions and dispositions. We are also required to make mandatory
prepayments from net cash proceeds from any issue of equity and asset sales.
Mandatory prepayments are to be applied first to the prepayment of the term
loans and then to reduce borrowings under the revolving credit facility.
The debt assumed in connection with the Largo acquisition (Note 2),
consists of a note bearing interest at 7.50% per annum with semiannual payments
of principal and interest through June 2009 (the "Class A note"); and a note
bearing interest at 8.25% per annum compounded semiannually through June 2009,
after which semiannual payments of principal and interest will commence,
continuing through June 2019 (the "Class C note"). Additionally, there is a
seller-financed note which bears interest at 6.50% per annum with monthly
payments of principal and interest through July 2013 (the "Seller note"). The
principal balances assumed on the Class A note, Class C note and Seller note
aggregate $12,185,000, $6,191,000 and $4,228,000, respectively, at the date of
acquisition. The principal balances outstanding related to the Largo
acquisition, aggregated $11,724,000, $6,402,000 and $4,157,000, at December 2001
on the Class A note, Class C note and Seller note respectively. The Largo
acquisition related debt is collateralized by, among other things, recorded and
unrecorded mortgage liens on the Largo property.
We have $130,000,000 of 9% Senior Subordinated Notes (the "Notes")
outstanding. The Notes mature on March 15, 2008, unless previously redeemed by
us. Interest on the Notes is payable semi-annually on March 15 and September 15
of each year. The Notes are redeemable for cash at anytime on or after March 15,
2003, at our option, in whole or in part, at the redemption prices set forth
therein, plus accrued and unpaid interest to the date of redemption.
As discussed in Note 1, we use an interest rate swap, a form of derivative
financial instrument, to manage interest rate risk. We have designated as a
cash-flow hedge, an interest rate swap which effectively converts $50,000,000 of
LIBOR-based floating rate debt under our senior credit facility into fixed rate
debt with a base interest rate of 7.01%. The interest rate swap expires in
F-14
June 2003 and is included in liabilities on the balance sheet with a fair value
approximating $3,072,000.
Excluding the revolving credit facility which expires and is expected to be
renegotiated in 2002, the scheduled maturities of long-term debt outstanding at
December 2001 are as follows:
Year ending December (in thousands):
2002 .......... $ 15,429
2003 .......... 43,364
2004 .......... 36,749
2005 .......... 35,181
2006 .......... 1,943
Thereafter .......... 145,263
Note 6 Income Taxes
The provision for income taxes consists of the following (in thousands):
1999 2000 2001
------- ------- -------
Current tax expense:
Federal ................... $ 5,027 $ 1,634 $ 3,565
State ..................... 350 300 400
Foreign ................... 922 956 1,201
------- ------- -------
6,299 2,890 5,166
Deferred income tax expense.. 8,978 7,974 8,562
------- ------- -------
Provision for income taxes... $15,277 $10,864 $13,728
======= ======= =======
A reconciliation between income taxes computed at the statutory federal
rate and the provision for income taxes follows (in thousands):
1999 2000 2001
------- ------- -------
Tax provision at statutory rate based
on income before income taxes and
extraordinary item ...................... $14,853 $10,562 $13,347
Foreign sales corporation ................. (543) (725) (894)
State taxes ............................... 257 180 270
Nondeductible intangible amortization ..... 320 321 320
Other nondeductible permanent differences . 270 200 220
Other, net ................................ 120 326 465
------- ------- -------
$15,277 $10,864 $13,728
======= ======= =======
F-15
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 2000 and 2001 are as follows (in
thousands):
2000 2001
-------- --------
Assets:
Receivables .................................... $ 138 $ 225
Inventory ...................................... 1,115 870
Deferred compensation .......................... 761 943
Employee benefits .............................. 221 428
Deferred rent .................................. 570 --
Additional minimum pension liability ........... -- 597
Interest rate swap ............................. -- 1,106
Other .......................................... 1,011 164
Net operating losses of acquired subsidiary .... 3,834 3,410
Valuation allowance for deferred tax assets .... (3,834) (3,410)
-------- --------
3,816 4,333
-------- --------
Liabilities:
Goodwill and intangible assets ................. 11,559 17,757
Depreciation ................................... 2,650 4,126
-------- --------
14,209 21,883
-------- --------
Net liability .................................. $(10,393) $(17,550)
======== ========
Net operating losses related to an acquisition are subject to certain
limitations and expire over the period 2008 to 2010. Management has established
a valuation allowance of $3,410,000 to reflect the uncertainty of realizing the
benefit of certain of these carryforwards.
Note 7 Shareholders Equity
The shareholders have authorized 500,000 shares of preferred stock, par
value $.01 per share, which may be issued in one or more series by the Board of
Directors without further action by the shareholders. As of December 2001, no
preferred stock had been issued.
On August 8, 2001, our Board of Directors declared a three-for-two split of
our common stock to be effected in the form of a common stock dividend. This
dividend was payable on September 7, 2001 to shareholders of record on August
21, 2001. Accordingly, common stock, the number of shares outstanding, earnings
per share, incentive stock option activity and the number of shares used in the
calculation of earnings per share have all been restated to retroactively
reflect the split.
In connection with the 1997 acquisition of Linvatec Corporation, we issued
to Bristol-Myers Squibb Company a ten-year warrant to purchase 1.5 million
shares of our common stock at a price of $22.82 per share.
F-16
We have reserved shares of common stock for issuance to employees and
directors under four stock option plans (the "Plans"). The exercise price on all
outstanding options is equal to the quoted fair market value of the stock at the
date of grant. Stock options are non-transferable other than on death and
generally become exercisable over a five year period from date of grant and
expire ten years from date of grant.
The following is a summary of incentive stock option activity under the
Plans (in thousands, except per share amounts):
Weighted-
Number Average
of Exercise
Shares Price
----- ---------
Outstanding at December 1998 ................... 2,250 $ 11.93
Granted during 1999 ........................ 602 19.75
Forfeited .................................. (14) 15.27
Exercised .................................. (182) 8.88
----- ---------
Outstanding at December 1999 ................... 2,656 13.96
Granted during 2000 ........................ 684 14.05
Forfeited .................................. (209) 17.20
Exercised .................................. (72) 6.23
----- ---------
Outstanding at December 2000 ................... 3,059 13.91
Granted during 2001 ........................ 709 15.59
Forfeited .................................. (75) 18.86
Exercised .................................. (259) 7.07
----- ---------
Outstanding at December 2001 ................... 3,434 $ 14.69
===== =========
Exercisable:
December 1999 .............................. 1,418 $ 10.89
December 2000 .............................. 1,674 12.31
December 2001 ............................... 1,954 13.59
Stock
Weighted Options Weighted
Stock Options Weighted Average Exercisable Average
Range of Outstanding at Average Remaining Exercise at December Exercise
Exercise Prices December 2001 Life (Years) Price 2001 Price
- --------------- ------------- ------------ ----- ---- -----
Less than $5.00 42,000 1.6 $ 3.57 42,000 $ 3.57
$5.00 to $7.50 392,000 1.5 7.05 392,000 7.05
$7.50 to $10.00 287,000 7.8 9.01 224,000 8.97
$10.00 to $15.00 905,000 8.0 13.83 287,000 13.25
$15.00 to $17.50 1,000,000 6.6 16.36 638,000 16.34
$17.50 to $20.00 471,000 7.6 19.05 222,000 19.31
$20.00 to $23.00 337,000 7.4 21.07 149,000 20.87
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") defines a fair value based method of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the fair value of the award and is recognized over the
service
F-17
period. A company may elect to adopt SFAS 123 or elect to continue accounting
for its stock option or similar equity awards using the method of accounting
prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", where compensation cost is measured at the date
of grant based on the excess of the market value of the underlying stock over
the exercise price. We have elected to continue to account for our stock-based
compensation plans under the provisions of APB No. 25. No compensation expense
has been recognized in the accompanying financial statements relative to our
stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if we had accounted for our
employee stock options under the fair value method of that statement. The
weighted average fair value of options granted in 1999, 2000 and 2001 was $8.85,
$8.55 and $7.39, respectively. The fair value of these options was estimated at
the date of grant using a Black-Scholes options pricing model with the following
weighted-average assumptions for options granted in 1999, 2000 and 2001,
respectively: Risk-free interest rates of 6.46%, 5.06% and 4.38%; volatility
factors of the expected market price of the Company's common stock of 39.23%,
68.01% and 48.04%; a weighted-average expected life of the option of five years;
and that no dividends would be paid on common stock.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
1999 2000 2001
------- ------- -------
Net income as reported ........ $27,159 $19,314 $24,406
Net income pro forma .......... 24,678 16,167 21,561
EPS as reported:
Basic ........................ 1.19 .84 1.02
Diluted....................... 1.17 .83 1.00
EPS pro forma:
Basic ........................ 1.08 .70 .90
Diluted....................... 1.07 .69 .88
Note 8 Business Segments, Geographic Areas and Major Customers
CONMED's business is organized, managed and internally reported as a single
segment comprised of medical instruments and systems used in surgical and other
medical procedures. We believe our product lines have similar economic,
operating and other related characteristics.
The following is net sales information for geographic areas (in thousands):
1999 2000 2001
-------- -------- --------
United States .................. $285,048 $288,514 $306,306
All other countries ............ 91,178 107,359 122,416
-------- -------- --------
Total .......................... $376,226 $395,873 $428,722
======== ======== ========
F-18
There were no significant investments in long-lived assets located outside
the United States at December 2000 and 2001.
Note 9 Pension Plans
We maintain defined benefit plans covering substantially all employees. We
make annual contributions to the plans equal to the maximum deduction allowed
for federal income tax purposes.
Net pension cost for 1999, 2000 and 2001 included the following components
(in thousands):
1999 2000 2001
------- ------- -------
Service cost benefits earned during
the period ......................................... $ 2,592 $ 2,658 $ 3,622
Interest cost on projected benefit obligation ......... 1,349 1,608 1,785
Expected return on plan assets ........................ (1,090) (1,121) (1,211)
Net amortization and deferral ......................... 41 21 166
------- ------- -------
Net pension cost ...................................... $ 2,892 $ 3,166 $ 4,362
======= ======= =======
The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheets at December 2000 and 2001 (in
thousands):
2000 2001
-------- --------
Change in benefit obligation
Projected benefit obligation at beginning of year .. $ 19,737 $ 22,949
Service cost ....................................... 2,658 3,622
Interest cost ...................................... 1,608 1,785
Actuarial loss (gain) .............................. 2,834 4,597
Benefits paid ...................................... (3,888) (3,205)
-------- --------
Projected benefit obligation at end of year ........ $ 22,949 $ 29,748
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year ..... $ 12,759 $ 13,077
Actual return on plan assets ....................... 312 432
Employer contribution .............................. 3,894 6,659
Benefits paid ...................................... (3,888) (3,205)
-------- --------
Fair value of plan assets at end of year ........... $ 13,077 $ 16,963
-------- --------
Change in funded status
Funded status ...................................... $ 9,872 $ 12,785
Unrecognized net actuarial loss .................... (3,837) (9,062)
Unrecognized transition liability .................. (60) (56)
Unrecognized prior service cost .................... (151) (140)
Additional minimum pension liability ............... -- 1,659
-------- --------
Accrued pension cost ............................... $ 5,824 $ 5,186
======== ========
F-19
For 1999, 2000 and 2001 actuarial calculation purposes, the weighted
average discount rate was 7.0%, 7.5% and 7.0%, respectively, the expected long
term rate of return was 8.0% and the rate of increase in future compensation
levels was 4.5%.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $16,447,000, $11,672,000 and $8,087,000
respectively, as of December 2001. CONMED common stock valued at $315,000 and
$550,000 was held by the plans at December 2000 and 2001, respectively.
Note 10 Legal Matters
From time to time, we have been named as a defendant in certain lawsuits
alleging product liability, patent infringement, or other claims incurred in the
ordinary course of business. Certain of these claims are covered by various
insurance policies, subject to deductible amounts and maximum policy limits.
Ultimate liability with respect to these contingencies, if any, is not
considered to be material to the consolidated financial statements of the
Company.
Note 11 Unusual Items
During the quarter ended December 1999, we recognized a benefit related to
a previously recorded litigation accrual which was settled on favorable terms.
This nonrecurring benefit amounted to $1,256,000, before income taxes, or $.03
per diluted share and is included in selling and administrative expense.
During the quarter ended June 2000, we announced we would replace our
arthroscopy direct sales force with non-stocking, exclusive sales agent groups
in certain geographic regions of the United States. As a result, we incurred a
severance charge of $1,509,000, before income taxes, or $.04 per diluted share,
in the second quarter of 2000. This nonrecurring charge is included in selling
and administrative expense.
As discussed in Note 2, during the third and fourth quarters of 2001, we
incurred certain charges related to the second Imagyn acquisition. These costs
were primarily related to the transition in manufacturing of the Imagyn product
lines from Imagyn's Richland, Michigan facility to our manufacturing plants in
Utica, New York. Such costs totaled $886,000 and $681,000, respectively, before
income taxes, or $.02 per diluted share in each of the third and fourth quarters
of 2001. These nonrecurring charges are included in cost of sales.
Note 12 Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2000 and 2001 are as follows (in
thousands, except per share amounts):
Three Months Ended
------------------
March June September December
----- ---- --------- --------
2000
Net sales ................ $102,811 $97,878 $92,838 $102,346
Gross profit ............. 54,150 50,551 48,702 54,247
Net income ............... 7,409 3,516 2,729 5,660
Earnings per share:
Basic .................. 0.32 0.15 0.12 0.25
Diluted ................ 0.32 0.15 0.12 0.24
F-20
Three Months Ended
------------------
March June September December
----- ---- --------- --------
2001
Net sales .................. $105,909 $104,171 $105,318 $113,324
Gross profit ............... 56,235 54,206 53,986 59,921
Net income ................. 6,003 5,734 5,015 7,654
Earnings per share:
Basic .................... 0.26 0.25 0.20 0.30
Diluted .................. 0.26 0.25 0.20 0.30
As discussed in Note 11, during the quarter ended June 2000, we incurred a
severance charge of $1,509,000, before income taxes, or $.04 per diluted share,
related to a restructuring of our arthroscopy sales force. This nonrecurring
charge is included in selling and administrative expense.
As discussed in Notes 2 and 11, during the third and fourth quarters of
2001, we incurred certain transition charges related to the second Imagyn
acquisition. Such costs totaled $886,000 and $681,000, respectively, before
income taxes, or $.02 per diluted share in each of the third and fourth quarters
of 2001. These nonrecurring charges are included in cost of sales.
Note 13 Guarantor Financial Statements
Our credit facility and subordinated notes (the "Notes") are guaranteed
(the "Subsidiary Guarantees") by each of our subsidiaries (the "Subsidiary
Guarantors") except CRC (the "Non-Guarantor Subsidiary"). The Subsidiary
Guarantees provide that each Subsidiary Guarantor will fully and unconditionally
guarantee our obligations under the credit facility and the Notes on a joint and
several basis. Each Subsidiary Guarantor and Non-Guarantor Subsidiary is
wholly-owned by CONMED Corporation. The following supplemental financial
information sets forth on a condensed consolidating basis, consolidating balance
sheet, statement of income and statement of cash flows for the Parent Company
Only, Subsidiary Guarantors and Non-Guarantor Subsidiary and for the Company as
of December 2000 and 2001 and for the years ended December 1999, 2000 and 2001.
F-21
CONSOLIDATING CONDENSED BALANCE SHEET
December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
--------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........ $ -- $ 3,470 $ -- $ 3,470
Accounts receivable, net ......... 35,218 43,408 -- 78,626
Inventories ...................... 20,174 84,438 -- 104,612
Deferred income taxes ............ 1,761 -- -- 1,761
Prepaid expenses and other
current assets ................. 598 2,964 -- 3,562
--------- --------- --------- ---------
Total current assets ......... 57,751 134,280 -- 192,031
--------- --------- --------- ---------
Property, plant and equipment, net . 38,275 24,175 -- 62,450
Goodwill, net ...................... 61,651 164,150 -- 225,801
Other intangible assets, net ....... 7,498 187,510 -- 195,008
Other assets ....................... 473,408 5,217 (474,344) 4,281
--------- --------- --------- ---------
Total assets .................. $ 638,583 $ 515,332 $(474,344) $ 679,571
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 36,068 $ -- $ -- $ 36,068
Accounts payable ................. 4,398 15,952 -- 20,350
Accrued compensation ............. 2,147 7,766 -- 9,913
Income taxes payable ............. 1,338 641 -- 1,979
Accrued interest ................. 5,130 -- -- 5,130
Other current liabilities ........ 1,890 2,946 -- 4,836
--------- --------- --------- ---------
Total current liabilities ..... 50,971 27,305 -- 78,276
--------- --------- --------- ---------
Long-term debt ..................... 342,680 -- -- 342,680
Deferred income taxes .............. 12,154 -- -- 12,154
Other long-term liabilities ........ 2,175 349,295 (335,612) 15,858
--------- --------- --------- ---------
Total liabilities ............ 407,980 376,600 (335,612) 448,968
--------- --------- --------- ---------
Shareholders' equity:
Preferred stock .................. -- -- -- --
Common stock ..................... 230 1 (1) 230
Paid-in capital .................. 127,985 -- -- 127,985
Retained earnings ................ 103,834 139,758 (139,758) 103,834
Accumulated other comprehensive
loss ........................... (1,027) (1,027) 1,027 (1,027)
Less common stock in
treasury, at cost .............. (419) -- -- (419)
--------- --------- --------- ---------
Total shareholders' equity ......... 230,603 138,732 (138,732) 230,603
--------- --------- --------- ---------
Total liabilities and
shareholders' equity ........ $ 638,583 $ 515,332 $(474,344) $ 679,571
========= ========= ========= =========
F-22
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
--------- --------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........ $ -- $ 1,181 $ 221 $ -- $ 1,402
Accounts receivable, net ......... -- 7,198 43,990 -- 51,188
Inventories ...................... 23,045 84,345 -- -- 107,390
Deferred income taxes ............ 1,105 -- -- -- 1,105
Prepaid expenses and other
current assets ................. 831 2,633 -- -- 3,464
--------- --------- --------- --------- ---------
Total current assets ......... 24,981 95,357 44,211 -- 164,549
--------- --------- --------- --------- ---------
Property, plant and equipment, net . 45,856 45,170 -- -- 91,026
Goodwill, net ...................... 86,412 164,728 -- -- 251,140
Other intangible assets, net ....... 8,177 181,575 -- -- 189,752
Other assets ....................... 477,798 2,376 -- (475,033) 5,141
--------- --------- --------- --------- ---------
Total assets ................. $ 643,224 $ 489,206 $ 44,211 $(475,033) $ 701,608
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 72,241 $ 1,188 $ -- $ -- $ 73,429
Accounts payable ................. 5,078 14,799 -- -- 19,877
Accrued compensation ............. 3,979 7,884 -- -- 11,863
Income taxes payable ............. 2,372 135 -- -- 2,507
Accrued interest ................. 4,760 37 157 -- 4,954
Other current liabilities .......... 4,634 2,573 -- -- 7,207
--------- --------- --------- --------- ---------
Total current liabilities .... 93,064 26,616 157 -- 119,837
--------- --------- --------- --------- ---------
Long-term debt ..................... 241,404 21,096 -- -- 262,500
Deferred income taxes .............. 18,655 -- -- -- 18,655
Other long-term liabilities ........ 6,467 285,329 41,947 (316,761) 16,982
--------- --------- --------- --------- ---------
Total liabilities .................. 359,590 333,041 42,104 (316,761) 417,974
--------- --------- --------- --------- ---------
Shareholders' equity:
Preferred stock .................. -- -- -- -- --
Common stock ..................... 253 1 -- (1) 253
Paid-in capital .................. 160,757 -- 2,000 (2,000) 160,757
Retained earnings ................ 128,240 158,333 107 (158,440) 128,240
Accumulated other comprehensive
loss ........................... (5,197) (2,169) -- 2,169 (5,197)
Less common stock in
treasury, at cost .............. (419) -- -- -- (419)
--------- --------- --------- --------- ---------
Total shareholders' equity ....... 283,634 156,165 2,107 (158,272) 283,634
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity ........... $ 643,224 $ 489,206 $ 44,211 $(475,033) $ 701,608
========= ========= ========= ========= =========
F-23
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 1999
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
--------- --------- --------- ---------
Net sales .......................... $ 83,612 $ 292,614 $ -- $ 376,226
--------- --------- --------- ---------
Cost of sales ...................... 47,178 131,302 -- 178,480
Selling and administrative expense . 26,338 84,504 -- 110,842
Research and development expense ... 1,626 10,482 -- 12,108
--------- --------- --------- ---------
75,142 226,288 -- 301,430
--------- --------- --------- ---------
Income from operations ............. 8,470 66,326 -- 74,796
Interest expense, net .............. -- 32,360 -- 32,360
--------- --------- --------- ---------
Income before income taxes ......... 8,470 33,966 -- 42,436
Provision for income taxes ......... 3,049 12,228 -- 15,277
--------- --------- --------- ---------
Income before equity in earnings
of unconsolidated subsidiaries .. 5,421 21,738 -- 27,159
Equity in earnings of unconsolidated
subsidiaries .................... 21,738 -- (21,738) --
--------- --------- --------- ---------
Net Income ......................... $ 27,159 $ 21,738 $ (21,738) $ 27,159
========= ========= ========= =========
F-24
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
--------- --------- --------- ---------
Net sales ........................... $ 73,632 $ 322,241 $ -- $ 395,873
--------- --------- --------- ---------
Cost of sales ....................... 42,461 145,762 -- 188,223
Selling and administrative expense .. 20,015 108,301 -- 128,316
Research and development expense .... 1,907 12,963 -- 14,870
--------- --------- --------- ---------
64,383 267,026 -- 331,409
--------- --------- --------- ---------
Income from operations .............. 9,249 55,215 -- 64,464
Interest expense, net ............... -- 34,286 -- 34,286
--------- --------- --------- ---------
Income before income taxes .......... 9,249 20,929 -- 30,178
Provision for income taxes .......... 3,330 7,534 -- 10,864
--------- --------- --------- ---------
Income before equity in earnings
of unconsolidated subsidiaries .. 5,919 13,395 -- 19,314
Equity in earnings of unconsolidated
subsidiaries .................... 13,395 -- (13,395) --
--------- --------- --------- ---------
Net income .......................... $ 19,314 $ 13,395 $ (13,395) $ 19,314
========= ========= ========= =========
F-25
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 2001
(in thousands)
Parent
Company Subsidiary Non-Guarantor Company
Only Guarantors Subsidiary Eliminations Total
------- -------- --------- --------- ---------
Net sales ..................... $91,609 $337,113 $ -- $ -- $ 428,722
------- -------- --------- --------- ---------
Cost of sales ................. 53,534 150,840 -- -- 204,374
Selling and administrative
expense ....................... 27,620 113,302 (362) -- 140,560
Research and development
expense ....................... 1,511 13,319 -- -- 14,830
------- -------- --------- --------- ---------
82,665 277,461 (362) -- 359,764
------- -------- --------- --------- ---------
Income from operations ........ 8,944 59,652 362 -- 68,958
Interest expense, net ......... -- 30,629 195 -- 30,824
------- -------- --------- --------- ---------
Income before income taxes .... 8,944 29,023 167 -- 38,134
Provision for income taxes .... 3,220 10,448 60 -- 13,728
------- -------- --------- --------- ---------
Income before equity in
earnings of unconsolidated
subsidiaries .............. 5,724 18,575 107 -- 24,406
Equity in earnings of
unconsolidated subsidiaries 18,682 -- -- (18,682) --
------- -------- --------- --------- ---------
Net income .................... $24,406 $ 18,575 $ 107 $ (18,682) $ 24,406
======= ======== ========= ========= =========
F-26
CONMED CORPORATION
CONSOLIDATING CONDENSED STATMENT OF CASH FLOWS
Year Ended December 1999
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- -------- --------
Net cash flows from operating
activities .................................... $ 11,784 $25,657 $ -- $ 37,441
-------- -------- -------- --------
Cash flows from investing activities:
Distributions to subsidiaries ................ (21,885) -- 21,885 --
Payments related to business
acquisitions ............................... -- (40,585) -- (40,585)
Purchases of property, plant and
equipment .................................. (4,801) (4,551) -- (9,352)
-------- -------- -------- --------
Net cash provided (used)
by investing activities .............. (26,686) (45,136) 21,885 (49,937)
-------- -------- -------- --------
Cash flows from financing:
Proceeds of long-term debt ................... 40,900 -- -- 40,900
Distributions from parent .................... -- 21,885 (21,885) --
Repayments under revolving
credit facility ............................ (8,000) -- -- (8,000)
Proceeds from issuance of
common stock ............................... 1,612 -- -- 1,612
Payments related to issuance
of long-term debt .......................... (661) -- -- (661)
Payments on long-term debt ................. (23,103) -- -- (23,103)
-------- -------- -------- --------
Net cash provided (used)by
financing activities ................. 10,748 21,885 (21,885) 10,748
-------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents .......................... -- (411) -- (411)
-------- -------- -------- --------
Net decrease in cash and
cash equivalents .............................. (4,154) 1,995 -- (2,159)
Cash and cash equivalents at
beginning of period ........................... 4,752 1,154 -- 5,906
-------- -------- -------- --------
Cash and cash equivalents at
end of period ................................. $ 598 $ 3,149 $ -- $ 3,747
======== ======== ======== ========
F-27
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
------- ------- ------ -------
Net cash flows from operating
activities .......................... $ 18,238 $ 17,712 $ -- $ 35,950
------- ------- ------ -------
Cash flows from investing activities:
Distributions from subsidiaries ..... 13,618 -- (13,618) --
Payments related to business
acquisitions ...................... (6,042) -- -- (6,042)
Purchases of property, plant and
equipment ......................... (10,940) (3,110) -- (14,050)
------- ------- ------ -------
Net cash provided (used)
by investing activities ..... (3,364) (3,110) (13,618) (20,092)
------- ------- ------ -------
Cash flows from financing:
Distributions to parent ............. -- (13,618) 13,618 --
Borrowings under revolving
credit facility ................... 17,000 -- -- 17,000
Proceeds from issuance of
common stock ...................... 449 -- -- 449
Payments on long-term debt .......... (32,921) -- -- (32,921)
------- ------- ------ -------
Net cash provided (used)by
financing activities ........ (15,472) (13,618) 13,618 (15,472)
------- ------- ------ -------
Effect of exchange rate changes on cash
and cash equivalents ................ -- (663) -- (663)
------- ------- ------ -------
Net increase (decrease) in cash and
cash equivalents .................... (598) 321 -- (277)
Cash and cash equivalents at
beginning of period ................. 598 3,149 -- 3,747
------- ------- ------ -------
Cash and cash equivalents at
end of period ....................... $ -- $ 3,470 $ -- $ 3,470
======== ======== ======== ========
F-28
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
-------- -------- -------- -------- --------
Net cash flows from operating
activities .......................... $ 44,301 $ 74,574 $ 40,264 $(81,990) $ 77,149
-------- -------- -------- -------- --------
Cash flows from investing activities:
Distributions from subsidiaries ..... 71,629 -- -- (71,629) --
Note payable from subsidiary ........ (41,947) -- -- 41,947 --
Net purchases of
accounts receivable ................ -- -- (81,990) 81,990 --
Purchases of property, plant and
equipment .......................... (10,390) (4,053) -- -- (14,443)
-------- -------- -------- -------- --------
Net cash provided (used)
by investing activities .... 19,292 (4,053) (81,990) 52,308 (14,443)
-------- -------- -------- -------- --------
Cash flows from financing:
Distributions to parent ............. -- (71,629) -- 71,629 --
Note payable to parent company ...... -- -- 41,947 (41,947) --
Borrowings under revolving
credit facility .................... 11,000 -- -- -- 11,000
Proceeds from issuance of
common stock ....................... 1,830 -- -- -- 1,830
Payments on long-term debt .......... (76,423) -- -- -- (76,423)
-------- -------- -------- -------- --------
Net cash provided (used) by
financing activities ....... (63,593) (71,629) 41,947 29,682 $(63,593)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents ............... -- (1,181) -- -- $ (1,181)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................... -- (2,289) 221 -- (2,068)
-------- -------- -------- -------- --------
Cash and cash equivalents at
beginning of period ................ -- 3,470 -- -- 3,470
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period ...................... $ -- $ 1,181 $ 221 $ -- $ 1,402
======== ======== ======== ======== ========
F-29
SCHEDULE VIII--Valuation and Qualifying Accounts
(in thousands)
Column C
--------------------------
Additions
--------------------------
Column B (1) (2)
------------ Column E
Column A Balance at Charged to Charged to Column D --------------
------------ Beginning of Costs and Other --------- Balance at End
Description Period Expenses Accounts Deductions of Period
----------- ------ -------- -------- ---------- ---------
2001
- ----
Allowance for bad debts.. $ 1,479 $ 514 $ (440) $1,553
Inventory reserves....... $ 5,221 $ 620 $ 4,373 $ (1,522) $8,692
Deferred tax asset
valuation allowance... $ 3,834 $ (424) $3,410
2000
- ----
Allowance for bad debts.. $ 1,434 $246 $ (201) $1,479
Inventory reserves....... $ 7,175 $520 $ 100 $ (2,574) $5,221
Deferred tax asset
valuation allowance... $ 4,258 $ (424) $3,834
1999
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Allowance for bad debts.. $2,213 $263 $ (1,042) $ 1,434
Inventory reserves....... $6,618 $220 $ 1,500 $ (1,163) $ 7,175
Deferred tax asset
valuation allowance... $4,681 $ (423) $ 4,258
F-30