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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2003 Commission File Number 0-16093
CONMED CORPORATION
(Exact name of the 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)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 126-2). Yes |x| No |_|
The number of shares outstanding of registrant's common stock, as of
August 1, 2003 is 29,019,623 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number Page
Item 1. Financial Statements
- Consolidated Condensed Statements
of Income 1
- Consolidated Condensed Balance Sheets 2
- Consolidated Condensed Statements
of Cash Flows 3
- Notes to Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2003 2002 2003
---- ---- ---- ----
Net sales .............................. $111,269 $124,540 $224,474 $242,574
Cost of sales .......................... 51,711 59,409 105,815 115,787
-------- -------- -------- --------
Gross profit ........................... 59,558 65,131 118,659 126,787
Selling and administrative ............. 35,141 39,353 69,609 76,498
Research and development ............... 4,078 4,378 7,902 8,081
Write-off of purchased in-process
research and development assets ...... -- -- -- 7,900
Other expense .......................... -- 11,222 -- 3,730
-------- -------- -------- --------
39,219 54,953 77,511 96,209
-------- -------- -------- --------
Income from operations ................. 20,339 10,178 41,148 30,578
Interest expense ....................... 6,355 5,861 12,983 11,399
-------- -------- -------- --------
Income before income taxes ............. 13,984 4,317 28,165 19,179
Provision for income taxes ............. 5,034 1,554 10,139 9,748
-------- -------- -------- --------
Net income ............................. $ 8,950 $ 2,763 $ 18,026 $ 9,431
======== ======== ======== ========
Per share data:
Net Income
Basic .............................. $ .34 $ .10 $ .70 $ .33
Diluted ............................ .33 .09 .68 .32
Weighted average common shares
Basic .............................. 26,584 28,910 25,735 28,892
Diluted ............................ 27,359 29,212 26,422 29,195
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December 31, June 30,
2002 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 5,626 $ 2,360
Accounts receivable, net ......................... 58,093 63,242
Inventories ...................................... 120,443 128,300
Deferred income taxes ............................ 6,304 5,936
Prepaid expenses and other current assets ........ 3,200 3,915
--------- ---------
Total current assets ........................... 193,666 203,753
--------- ---------
Property, plant and equipment, net ................. 95,608 97,186
Goodwill ........................................... 262,394 289,847
Other intangible assets, net ....................... 180,271 193,273
Other assets ....................................... 10,201 10,365
--------- ---------
Total assets ................................... $ 742,140 $ 794,424
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................ $ 2,631 $ 4,061
Accounts payable ................................. 22,074 21,315
Accrued compensation ............................. 10,463 10,539
Income taxes payable ............................. 5,885 5,321
Accrued interest ................................. 3,794 510
Other current liabilities ........................ 13,127 13,334
--------- ---------
Total current liabilities ...................... 57,974 55,080
--------- ---------
Long-term debt ..................................... 254,756 285,451
Deferred income taxes .............................. 28,446 39,670
Other long-term liabilities ........................ 14,025 12,350
--------- ---------
Total liabilities .............................. 355,201 392,551
--------- ---------
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 shares authorized; 28,646,027 and
28,970,378 shares issued and outstanding in
2002 and 2003, respectively .................. 288 291
Paid-in capital .................................. 231,832 234,489
Retained earnings ................................ 162,391 171,822
Accumulated other comprehensive loss ............. (7,153) (4,310)
Less 37,500 shares of common stock in treasury,
at cost ........................................ (419) (419)
--------- ---------
Total shareholders' equity ..................... 386,939 401,873
--------- ---------
Total liabilities and shareholders equity .... $ 742,140 $ 794,424
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2003
(in thousands)
(unaudited)
2002 2003
---- ----
Cash flows from operating activities:
Net income ............................................... $ 18,026 $ 9,431
-------- ---------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ....................................... 4,404 4,908
Amortization ....................................... 6,645 6,916
Deferred income taxes .............................. 5,477 5,653
Pension settlement charge .......................... -- 2,081
Write-off of deferred financing fees ............... -- 2,181
Write-off of purchased in-process research and
development assets ............................. -- 7,900
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable ...................... (1,856) (1,198)
Decrease in sale of accounts receivable .. (4,000) (1,000)
Inventories .............................. (9,756) (6,290)
Accounts payable ......................... 6,067 (2,110)
Income taxes payable ..................... (492) (179)
Accrued compensation ..................... (1,694) (888)
Accrued interest ......................... (1,347) (3,284)
Other assets/liabilities, net ............ (3,593) (5,565)
-------- ---------
(145) 9,125
-------- ---------
Net cash provided by operating activities .......... 17,881 18,556
-------- ---------
Cash flows from investing activities:
Payments related to business acquisitions,
net of cash acquired ............................... (1,359) (51,454)
Purchases of property, plant, and equipment ............ (8,428) (3,951)
-------- ---------
Net cash used by investing activities .............. (9,787) (55,405)
-------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............... 66,594 --
Net proceeds from exercise of stock options .............. 3,533 1,004
Repurchase of warrant on common stock .................... (2,000) --
Payments on debt ......................................... (78,196) (130,875)
Proceeds of debt ......................................... -- 163,000
Payments related to issuance of debt ..................... -- (1,217)
-------- ---------
Net cash used by financing activities .............. (10,069) 31,912
-------- ---------
Effect of exchange rate changes
on cash and cash equivalents ........................... 1,450 1,671
-------- ---------
Net increase (decrease) in cash and cash equivalents ....... (525) (3,266)
Cash and cash equivalents at beginning of period ........... 1,402 5,626
-------- ---------
Cash and cash equivalents at end of period ................. $ 877 $ 2,360
======== =========
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands except share amounts)
Note 1 - Organization and operations
The consolidated condensed 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,
such as drills and saws, for orthopedic, ENT, neuro-surgery and other surgical
specialties. We are a leading developer, manufacturer and supplier of 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. We also offer integrated
operating room systems and intensive care unit service managers. Our products
are used in a variety of clinical settings, such as operating rooms, surgery
centers, physicians' offices and critical care areas of hospitals. Our business
is organized, managed and internally reported as a single segment, since our
product offerings have similar economic, operating and other related
characteristics.
Stock-based Compensation
We account for our stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". 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 Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" , as amended, and has been determined as if we had accounted for
our employee stock options under the fair value method described in that
statement.
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:
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2003 2002 2003
---- ---- ---- ----
Net income - as reported ........ $ 8,950 $ 2,763 $ 18,026 $ 9,431
-------- -------- -------- --------
Pro forma stock-based employee
compensation expense, net of
related income tax effect ..... (550) (579) (1,024) (1,103)
-------- -------- -------- --------
Net income - pro forma .......... $ 8,400 $ 2,184 $ 17,002 $ 8,328
======== ======== ======== ========
EPS - as reported:
Basic ......................... $ .34 $ .10 $ .70 $ .33
Diluted ....................... .33 .09 .68 .32
EPS - pro forma:
Basic ......................... $ .32 $ .08 $ .66 $ .29
Diluted ....................... .31 .07 .64 .29
4
Note 2 - Interim financial information
The statements for the three and six months ended June 30, 2002 and 2003 are
unaudited; in our opinion such unaudited statements include all adjustments
(which comprise only normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations for the
three and six months ended June 30, 2003 are not necessarily indicative of the
results of operations to be expected for any other quarter nor for the year
ending December 31, 2003. The consolidated condensed financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended December 31, 2002 included in our Annual Report to the
Securities and Exchange Commission on Form 10-K.
Note 3 - Other comprehensive income (loss)
Comprehensive income (loss) consists of the following:
Three months ended Six months ended
June 30, June 30,
2002 2003 2002 2003
---- ---- ---- ----
Net income ........................ $ 8,950 $ 2,763 $ 18,026 $ 9,431
-------- -------- -------- --------
Other comprehensive income:
Foreign currency
translation adjustment ........ 1,441 875 1,477 2,188
Cash flow hedging
(net of income taxes) ......... (42) 262 438 655
-------- -------- -------- --------
Comprehensive income ............ $ 10,349 $ 3,900 $ 19,941 $ 12,274
======== ======== ======== ========
Accumulated other comprehensive income (loss) consists of the following:
Accumulated
Minimum Cumulative Cash Other
Pension Translation Flow Comprehensive
Liability Adjustments Hedges Income (loss)
--------- ----------- ------ -------------
Balance, December 31, 2002 ........ $ (5,086) $ (1,159) $ (908) $ (7,153)
Foreign currency translation
adjustments ................. -- 2,188 -- 2,188
Cash flow hedging (net of
income taxes) ............... -- -- 655 655
-------- -------- -------- --------
Balance, June 30, 2003 ............ $ (5,086) $ 1,029 $ (253) $ (4,310)
======== ======== ======== ========
Note 4 - Inventories
The components of inventory are as follows:
December 31, June 30,
2002 2003
---- ----
Raw materials ...................................... $ 44,701 $ 42,399
Work-in-process .................................... 12,869 14,610
Finished goods ..................................... 62,873 71,291
-------- --------
Total .................................. $120,443 $128,300
======== ========
5
Note 5 - 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):
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2003 2002 2003
---- ---- ---- ----
Shares used in the calculation
of Basic EPS(weighted average
shares outstanding) ............... 26,584 28,910 25,735 28,892
Effect of dilutive potential
securities ........................ 775 302 687 303
------- ------- ------- -------
Shares used in the calculation
of Diluted EPS .................... 27,359 29,212 26,422 29,195
======= ======= ======= =======
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 period. There were no options or warrants whose
exercise price exceeded the average market price of common shares for the three
and six months ended June 30, 2002. Such shares aggregated approximately $1.5
million for the three and six months ended June 30, 2003, respectively.
Note 6 - Business acquisitions
As more fully described in our report on Form 10-Q/A for the quarter ended March
31, 2003, we acquired Bionx Implants, Inc. on March 10, 2003 for $47.0 million
in cash (the "Bionx acquisition"). Bionx develops and manufactures
self-reinforced resorbable polymer implants for use in a variety of orthopedic
applications. In connection with the Bionx acquisition, during the quarter-ended
March 31, 2003, we wrote-off $7.9 million in purchased in-process research and
development assets. No benefit for income taxes was recorded on the write-off of
purchased in-process research and development assets as these costs are not
deductible for income tax purposes.
Pro forma statements of income for the three and six months ended June 30, 2003,
assuming the Bionx acquisition occurred as of January 1, 2002 are presented
below. The proforma net income and earnings per share for each period presented
exclude the $7.9 million write-off of purchased in-process research and
development assets.
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2003 2002 2003
---- ---- ---- ----
Net sales .................. $ 115,830 $ 124,540 $ 233,801 $ 246,256
Net income ................. $ 8,517 $ 2,763 $ 17,192 $ 16,766
Basic .................... $ .32 $ .10 $ .67 $ .58
Diluted .................. .31 .09 .65 .57
During the three and six months ended June 30, 2003, we incurred approximately
$1.5 million and $3.3 million, respectively, in other acquisition expenses
related primarily to the December 31, 2002 acquisition of CORE Dynamics, Inc.
(the "CORE acquisition") and the Bionx acquisition of which $1.2 million and
$2.6 million have been recorded in other
6
expense and $.3 million and $.7 million have been recorded to cost of sales.
Those expenses recorded to other expense consist of various acquisition
integration costs to wind down CORE operations in Jacksonville, Florida and
Bionx operations in Blue Bell, Pennsylvania. Those expenses recorded to cost of
sales consist of the step-up to fair value related to the sale of inventory
acquired as a result of the CORE and Bionx acquisitions as well as certain
training and transition-related costs related to the transfer of CORE's
manufacturing operations.
On June 30, 2003, we acquired an electrosurgery business for $2.9 million in
cash. Goodwill recognized in the transaction amounted to $2.4 million and is
expected to be fully deductible for income tax purposes. The cost of this
acquisition may require adjustment based upon information which is not currently
available principally related to the valuation of inventory and other intangible
assets.
Note 7 - Other expense
Other expense (income) consists of the following:
Three Months Six Months
Ended Ended
June 30, 2003
------------------------
Gain on settlement of a contractual dispute,
net of legal costs ............................ $ -- ($9,000)
Pension settlement costs ............................ 2,081 2,081
Acquisition-related costs ........................... 1,229 2,571
Loss on early extinguishments of debt ............... 7,912 8,078
------- -------
Other expense .................................... $11,222 $ 3,730
======= =======
On March 10, 2003, we entered into an agreement with Bristol-Myers Squibb
Company ("BMS") and Zimmer, Inc., ("Zimmer") to settle a contractual dispute
related to the 1997 sale by BMS and its then subsidiary, Zimmer, of Linvatec
Corporation to CONMED Corporation. As a result of the agreement, BMS paid us
$9.5 million in cash, which was recorded in the quarter ended March 31, 2003, as
a gain on settlement of a contractual dispute, net of $.5 million in legal
costs.
During the quarter ended June 30, 2003, we announced a plan to restructure our
orthopedic sales force by increasing our domestic sales force from 180 to 230
sales representatives. The increase is part of our integration plan for the
Bionx acquisition discussed in Note 6 to the consolidated condensed financial
statements. As part of the orthopedic sales force restructuring, we converted 90
direct employee sales representatives into nine independent sales agent groups.
Once the restructuring is complete, we will have 18 exclusive orthopedic sales
agent groups managing all 230 orthopedic sales representatives. As a result of
the termination of the 90 direct employee sales representatives, we incurred
costs of $2.1 million related to settlement losses of pension obligations,
pursuant to Statement of Financial Accounting Standards No. 88 , "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits".
During the three and six months ended June 30, 2003, we incurred approximately
$1.5 million and $3.3 million, respectively, in costs related primarily to the
CORE acquisition and the Bionx acquisition of which $1.2 million and $2.6
million, respectively, has been recorded in other expense as discussed in Note 6
to the consolidated condensed financial statements.
During the three and six months ended June 30, 2003 we purchased $127.4 million
and $130.0 million, respectively, of our 9% senior subordinated notes (the
"Notes") and recorded expense of $7.9 million and $8.1 million, respectively in
premium and
7
unamortized deferred financing costs to other expense related to these purchases
as discussed in Note 8 to the consolidated condensed financial statements.
Note 8 - Long-term debt restructuring
During the quarter ended June 30, 2003, we amended our existing $200.0 million
senior credit agreement, (the "amended senior credit agreement"), expanding the
existing term loan facility under the senior credit agreement by $160.0 million
(the "expanded term loan facility"). The proceeds of the expanded term loan
facility were used to reduce borrowings outstanding on the revolving credit
facility, to fund the purchase of $127.4 million in outstanding Notes and
related accrued interest, and fund payment of the 4.5% call premium on the
Notes. Proceeds of the expanded term loan facility were also used to fund
payment of bank and legal fees associated with amending the senior credit
agreement. In connection with the purchase of the Notes, we wrote off $5.7
million in 4.5% call premium and $2.2 million in unamortized deferred financing
costs to other expense.
The balance outstanding on the expanded term loan facility at June 30, 2003 was
$259.5 million. The expanded term loan facility extends for approximately 6
years, with scheduled principal payments of $2.6 million annually through
December 2007 increasing to $70.8 million in 2008 and the remaining balance
outstanding due in December 2009. We may be required, under certain
circumstances, to make additional principal payments based on excess cash flow
as defined in the amended senior credit agreement. There was $8.0 million in
borrowings outstanding on the revolving credit facility under the amended senior
credit agreement as of June 30, 2003 which are due and payable on August 28,
2007, the revolving credit facility termination date. Interest rates on the new
term facility are LIBOR plus 2.75% or 4.91% at June 30, 2003. Interest rates on
the revolving credit facility are LIBOR plus 2.50% or 3.84% at June 30, 2003.
The amended senior credit agreement is collateralized by substantially all of
our personal property and assets, except for our accounts receivable and related
rights which have been sold in connection with our accounts receivable sales
agreement. The amended senior credit 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. The amended senior credit agreement contains a material
adverse effect clause that could limit our ability to access additional funding
under our amended senior credit agreement should a material adverse change in
our business occur. We are also required, under certain circumstances, to make
mandatory prepayments from net cash proceeds from any issue of equity and asset
sales.
Note 9 - Goodwill and other intangible assets
The changes in the net carrying amount of goodwill for the six months ended June
30, 2003 are as follows:
Balance as of January 1, 2003 ..................................... $ 262,394
Goodwill acquired ................................................. 26,936
Foreign currency translation ...................................... 517
---------
Balance as of June 30, 2003 ....................................... $ 289,847
=========
8
Other intangible assets consist of the following:
December 31, 2002 June 30, 2003
----------------- -------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Customer relationships ................. $ 96,712 $(12,725) $105,712 $(14,057)
Patents and other intangible assets .... 23,674 (13,534) 29,480 (14,806)
Unamortized intangible assets:
Trademarks and tradenames .............. 86,144 -- 86,944 --
-------- -------- -------- --------
$206,530 $(26,259) $222,136 $(28,863)
======== ======== ======== ========
Other intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. The weighted average
amortization period for intangible assets which are amortized is 22 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 9 years.
The trademarks and tradenames intangible asset has been determined to have an
indefinite life and therefore is not amortized.
Amortization expense related to intangible assets which are subject to
amortization totaled $1,542 and $2,894 in the three and six months ended June
30, 2003, respectively, and $1,409 and $2,817 in the three and six months ended
June 30, 2002, respectively, and is included in selling and administrative
expense on the consolidated condensed statement of income.
The estimated amortization expense for the year ending December 31, 2003 and for
each of the five succeeding years is as follows:
2003 $5,978
2004 5,677
2005 4,773
2006 4,206
2007 4,194
2008 3,831
Note 10 -- Guarantees
We provide service and warranty policies on certain of our products at the time
of sale. Liability under service and warranty policies is based upon a review of
historical warranty and service claim experience. Adjustments are made to
accruals as claim data and historical experience warrant.
The changes in the carrying amount of service and product warranties for the six
months ended June 30, 2003 are as follows:
Balance as of January 1, 2003 .......... $ 3,213
Provision for warranties ............... 2,299
Claims made ............................ (2,077)
-------
Balance as of June 30, 2003 ............ $ 3,435
=======
Note 11 - New Accounting Pronouncements
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities" was
issued. The interpretation provides guidance on consolidating variable interest
entities and
9
applies immediately to variable interests created after January 31, 2003. The
guidelines of the interpretation will become applicable for us in our third
quarter 2003 financial statements for variable interest entities created before
February 1, 2003. The interpretation requires variable interest entities to be
consolidated if the equity investment at risk is not sufficient to permit an
entity to finance its activities without support from other parties or the
equity investors lack certain specified characteristics. We do not currently
anticipate any material accounting or disclosure requirement under the
provisions of the interpretation.
In April 2003, SFAS No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 149 will be
applicable for us in our third quarter 2003. We do not currently anticipate any
material accounting or disclosure requirement under the provisions of the
statement.
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" was issued. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability, many of which were previously classified as equity. SFAS No. 150
will be applicable for us in our third quarter 2003. We do not currently
anticipate any material accounting or disclosure requirement under the
provisions of the statement.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which updates, clarifies, and simplifies certain existing accounting
pronouncements beginning at various dates in 2002 and 2003. This Statement
rescinds SFAS 4 and SFAS 64, which required net gains or losses from the
extinguishment of debt to be classified as an extraordinary item in the income
statement. These gains and losses will now be classified as extraordinary only
if they meet the criteria for such classification as outlined in Accounting
Principles Board ("APB") Opinion 30, which allows for extraordinary treatment if
the item is material and both unusual and infrequent in nature. We adopted this
pronouncement during 2003. As a result we will reclassify the extraordinary loss
recognized in the third quarter of 2002 related to the refinancing of debt to
ordinary income in the 2003 annual and interim financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This Statement supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. This
pronouncement has not had an impact on our financial condition or results of
operations during 2003.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. We have
adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that we record a liability for the fair value of
such guarantees in the balance sheet. FIN 45 has not had a material accounting
impact on our financial condition or results of operations.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements Made in this Form 10-Q
In this Form 10-Q, we make forward-looking statements about our financial
condition, results of operations and business. Forward-looking statements are
statements made by us concerning events that may or may not occur in the future.
These statements may be made directly in this document or may be "incorporated
by reference" from other documents. You can find many of these statements by
looking for words like "believes," "expects," "anticipates," "estimates" or
similar expressions.
Forward-Looking Statements are not Guarantees of Future Performance
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, including those 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 those identified under "Risk
Factors" in our Annual Report on Form 10-K for the year-ended December 31, 2002
and the following, among others:
o general economic and business conditions;
o cyclical customer purchasing patterns due to budgetary and other
constraints;
o changes in customer preferences;
o competition;
o changes in technology;
o our ability to manufacture product consistently and in a timely manner,
especially those products involving delicate or complex manufacturing
processes;
o the introduction and acceptance of new products, including our
PowerPro(R)battery-powered instrument product line;
o the success of our distribution arrangement with DePuy Orthopaedics;
o the integration of any acquisition, including the Bionx 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 risk of litigation, especially patent litigation as well as the cost
associated with patent and other litigation;
o changes in regulatory requirements; and
o the availability, terms and deployment of capital.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and "Business" in our Annual Report on Form 10-K for the
year-ended December 31, 2002 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-Q or to reflect the occurrence of
unanticipated events.
11
Critical Accounting Estimates
Preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Note 1 to the consolidated financial statements in our Annual
Report on Form 10K for the year-ended December 31, 2002 describes the
significant accounting policies used in preparation of the consolidated
financial statements. The most significant areas involving management judgments
and estimates are described below and are considered by management to be
critical to understanding the financial condition and results of operations of
CONMED Corporation.
Revenue Recognition
We recognize revenue upon shipment of product and passage of title to our
customers. Factors considered in our revenue recognition policy are as follows:
o Sales to customers are evidenced by firm purchase orders. Title and
the risks and rewards of ownership are transferred to the customer
when product is shipped.
o Payment by the customer is due under fixed payment terms. Even when
the sale is to a distributor, payment to us is not contractually or
implicitly delayed until the product is resold by the distributor.
o We place certain of our capital equipment with customers in return
for commitments to purchase disposable products over time periods
generally ranging from one to three years. In these circumstances,
no revenue is recognized upon capital shipment and we recognize
revenue upon the disposable product shipment.
o Product returns are only accepted at the discretion of the Company
and in keeping with our "Returned Goods Policy". Product returns
have not been significant historically. We accrue for sales returns,
rebates and allowances based upon analysis of historical data.
o The terms of the Company's sales to customers do not involve any
obligations for the Company to perform future services. Limited
warranties are generally provided for capital equipment sales and
provisions for warranty are provided at the time of product
shipment.
o Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs are included in
selling and administrative expense.
o We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit
risk.
o 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 $.9
million at June 30, 2003 is adequate to provide for any probable
losses from accounts receivable.
Business Acquisitions
We completed acquisitions in 2003 with purchase prices totaling approximately
$50.0 million and have a history of growth through acquisitions. The assets and
liabilities
12
of acquired businesses are recorded under the purchase method at their estimated
fair values at the dates of acquisition. Goodwill represents costs in excess of
fair values assigned to the underlying net assets of acquired businesses. Other
intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. We have accumulated
goodwill of $289.8 million and other intangible assets of $193.3 million at June
30, 2003.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142"), goodwill and intangible
assets deemed to have indefinite lives are not amortized, but are subject to
annual impairment testing. The identification and measurement of goodwill
impairment involves the estimation of the fair value of our business. The
estimates of fair value are based on the best information available as of the
date of the assessment, which primarily incorporate management assumptions about
expected future cash flows and contemplate other valuation techniques. Future
cash flows can be affected by changes in industry or market conditions or the
rate and extent to which anticipated synergies or cost savings are realized with
newly acquired entities. Intangible assets with a finite life are amortized over
the estimated useful life of the asset. Intangible assets which continue to be
subject to amortization are also evaluated on an annual basis to determine
whether events and circumstances warrant a revision to the remaining period of
amortization. An intangible asset is determined to be impaired when estimated
future cash flows indicate the carrying amount of the asset may not be
recoverable. Although no goodwill or other intangible asset impairment has been
recorded to date, there can be no assurances that future impairment will not
occur.
In connection with the Bionx acquisition, significant estimates were made in the
valuation of the purchased in-process research and development assets. The
purchased in-process research and development value relates to next generation
sports medicine and orthopedic products, which are expected to be released
between the second quarter of 2003 and fourth quarter of 2004. The acquired
projects include enhancements and upgrades to existing device technology,
introduction of new device functionality and the development of new materials
technology for sports medicine and orthopedic applications.
The value of the in-process research and development was calculated using a
discounted cash flow analysis of the anticipated net cash flow stream associated
with the in-process technology of the related product sales. The estimated net
cash flows were discounted using a discount rate of 22%, which was based on the
weighted-average cost of capital for publicly-traded companies within the
medical device industry and adjusted for the stage of completion of each of the
in-process research and development projects. The risk and return considerations
surrounding the stage of completion were based on costs, man-hours and
complexity of the work completed versus to be completed and other risks
associated with achieving technological feasibility. In total, these projects
were approximately 40% complete as of the acquisition date. The total budgeted
costs for the projects were approximately $5.5 million and the remaining costs
to complete these projects were approximately $3.3 million as of the acquisition
date.
The major risks and uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm the safety and
efficacy of the technologies and products based on the data from clinical trials
and obtaining the necessary regulatory approvals. In addition, no assurance can
be given that the underlying assumptions used to forecast the cash flows or the
timely and successful completion of such projects will materialize, as
estimated. For these reasons, among others, actual results may vary
significantly from the estimated results.
Pension Plans
We sponsor defined benefit pension plans for the Company and its subsidiaries.
Major assumptions used in the accounting for these plans include the discount
rate, expected return on plan assets and rate of increase in employee
compensation levels. Assumptions are determined based on Company data and
appropriate market indicators, and are evaluated each year as of the plans'
measurement date. A change in any of these
13
assumptions would have an effect on net periodic pension costs reported in the
consolidated financial statements.
Lower market interest rates and plan asset returns have resulted in declines in
pension plan asset performance and funded status and higher pension expense. The
discount rate used in determining pension expense in 2003 is 6.75%.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is approximately $11.0 million at June 30,
2003. Management believes that our earnings during the periods when the
temporary differences become deductible will be sufficient to realize the
related future income tax benefits.
In assessing the need for a valuation allowance, we estimate future taxable
income, considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets can be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels. In the event we were to determine
that we would not be able to realize all or a portion of our deferred tax assets
in the future, we would reduce such amounts through a charge to income in the
period that such determination was made.
Results of Operations
Three months ended June 30, 2003 compared to three months ended June 30, 2002
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
Three Months Ended
June 30,
2002 2003
---- ----
(unaudited)
Net sales ........................................... 100.0% 100.0%
Cost of sales ....................................... 46.5 47.7
------- -------
Gross profit ................................... 53.5 52.3
Selling and administrative .......................... 31.6 31.6
Research and development ............................ 3.7 3.5
Other expense ....................................... -- 9.0
------- -------
Income from operations ......................... 18.2 8.2
Interest expense .................................... 5.7 4.7
------- -------
Income before income taxes ..................... 12.5 3.5
Provision for income taxes .......................... 4.5 1.3
------- -------
Net income ..................................... 8.0% 2.2%
======= =======
Sales for the quarter ended June 30, 2003 were $124.5 million, an increase of
11.9% compared to sales of $111.3 million in the same quarter a year ago.
Favorable changes in foreign currency exchange rates accounted for 2.5% of our
sales growth.
o Sales in our orthopedic businesses increased 8.7% to $74.1 million
from $68.2 million in the same quarter last year.
o Arthroscopy sales, which represented 59.9% of total second quarter
2003 orthopedic revenues, grew 7.8% to $44.4 million from $41.2
million in the same quarter last year, including $4.1 million as a
result of the Bionx acquisition (Note 6 to the consolidated
condensed financial statements).
14
o Powered surgical instrument sales, which represented 40.1% of
orthopedic revenues, increased 10.0% to $29.7 million from $27.0
million in the same quarter last year on higher sales of our
newly-introduced PowerPro(R) battery powered instrument product
line.
o Patient care sales for the three months ended June 30, 2003 were
$17.7 million, an increase of 3.5% when compared to $17.1 million in
the same quarter last year on higher sales of our ECG products.
o Electrosurgery sales for the three months ended June 30, 2003 were
$18.9 million, an increase of 11.2% when compared to $17.0 million
in the same quarter last year, as we gained sales as a result of our
newly-introduced System 5000(R) electrosurgical generator.
o Sales of endoscopy products increased 32.2% to $11.9 million in the
three months ended June 30, 2003 from $9.0 million in the same
quarter last year, including $1.8 million as a result of the CORE
acquisition (See Note 6 to the consolidated condensed financial
statements).
o Sales of integrated operating room systems were $1.9 million in the
second quarter of 2003. This business is the result of our fourth
quarter 2002 acquisitions of ValMed Corporation and Nortrex Medical
Corporation.
Cost of sales increased to $59.4 million in the second quarter 2003 as compared
to $51.7 million in the same quarter last year, primarily as a result of the
increased sales volumes described above while gross margin percentage was 52.3%
in the second quarter of 2003, as compared to 53.5% in the second quarter of
2002. Included in cost of sales during the quarter ended June 30, 2003 were
approximately $.3 million in acquisition-related costs.
Selling and administrative expense increased to $39.4 million in the second
quarter of 2003 as compared to $35.1 million in the second quarter of 2002. As a
percentage of sales, selling and administrative expense totaled 31.6% in the
second quarter of 2003, the same as in the second quarter of 2002.
Research and development expense increased to $4.4 million in the second quarter
of 2003 as compared to $4.1 million in the second quarter of 2002. As a
percentage of sales, research and development expense decreased to 3.5% in the
current quarter compared to 3.7% in the same quarter a year ago but remains
within the range of our historical percentages.
As discussed in Note 7 to the consolidated condensed financial statements, other
expense is comprised of pension settlement costs of $2.1 million,
acquisition-related costs of $1.2 million and the loss of $7.9 million on the
early extinguishment of debt. There was no comparable expense in the second
quarter in 2002.
Interest expense in the second quarter of 2003 was $5.9 million compared to $6.4
million in the second quarter of 2002. The decrease in interest expense is
primarily a result of lower weighted average interest rates on our borrowings,
which have declined to 4.39% at June 30, 2003 as compared to 7.03% at June 30,
2002, offsetting an increase in borrowings at June 30, 2003 compared to June 30,
2002 of approximately $31.8 million.
Provision for income taxes has been recorded at an effective rate of 36% for the
second quarter 2003 and 2002. A reconciliation of the United States statutory
income tax rate to our effective tax rate is included in Note 7 to the Company's
financial statements for the year ended December 31, 2002 included in our Annual
Report to the Securities and Exchange Commission on Form 10-K.
15
Results of Operations
Six months ended June 30, 2003 compared to six months ended June 30, 2002
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
Six Months Ended
June 30,
2002 2003
---- ----
(unaudited)
Net sales ............................................ 100.0% 100.0%
Cost of sales ........................................ 47.1 47.7
------- -------
Gross profit .................................... 52.9 52.3
Selling and administrative ........................... 31.1 31.5
Research and development ............................. 3.5 3.4
In-process R & D write-off ........................... -- 3.3
Other expense ........................................ -- 1.5
------- -------
Income from operations .......................... 18.3 12.6
Interest expense ..................................... 5.8 4.7
------- -------
Income before income taxes ...................... 12.5 7.9
Provision for income taxes ........................... 4.5 4.1
------- -------
Net income ...................................... 8.0% 3.8%
======= =======
Sales for the six months ended June 30, 2003 were $242.6 million, an increase of
8.1% compared to sales of $224.5 million in the same period a year ago.
Favorable changes in foreign currency exchange rates accounted for 2.4% of our
sales growth.
o Sales in our orthopedic businesses increased 6.5% to $146.8 million
from $137.9 million in the same period last year.
o Arthroscopy sales, which represented 58.7% of total first half 2003
orthopedic revenues, grew 4.4% to $86.1 million from $82.5 million
in the same period last year, including $4.9 million as a result of
the Bionx acquisition (Note 6 to the consolidated condensed
financial statements).
o Powered surgical instrument sales, which represented 41.3% of
orthopedic revenues, increased 9.6% to $60.7 million from $55.4
million in the same period last year on higher sales of our
newly-introduced PowerPro(R) battery powered instrument product
line.
o Patient care sales for the six months ended June 30, 2003 were $35.0
million, compared to $34.4 million in the same period last year as
increases in sales of our ECG and automatic defibrillator pad
products offset decreases in the suction instrument product line.
o Electrosurgery sales for the six months ended June 30, 2003 were
$35.7 million, compared to $33.8 million in the same period last
year as we gained sales as a result of our newly-introduced System
5000(R) electrosurgical generator compared with the same period last
year.
o Sales of endoscopy products increased 22.8% to $22.6 million in the
six months ended June 30, 2003 from $18.4 million in the same period
last year, including $3.5 million as a result of the CORE
acquisition (Note 6 to the consolidated condensed financial
statements).
16
o Sales of integrated operating room systems were $2.4 million in the
six months ended June 30, 2003. This business is the result of our
fourth quarter 2002 acquisitions of ValMed Corporation and Nortrex
Medical Corporation.
Cost of sales increased to $115.8 million in the first half of 2003 as compared
to $105.8 million in the same period a year ago, primarily as a result of the
increased sales volumes described above while gross margin percentage was 52.3%
in the first half of 2003, compared with the 52.9% experienced in the first half
of 2002. Included in cost of sales during the six months ended June 30, 2003
were approximately $.7 million in acquisition-related costs.
Selling and administrative expense increased to $76.5 million in the first half
of 2003 as compared to $69.6 million in the first half of 2002. As a percentage
of sales, selling and administrative expense totaled 31.5% in the first half of
2003 compared to 31.1% in the first half of 2002. The increase in selling and
administrative expense as a percentage of sales is due principally to increased
marketing costs associated with recently launched product lines including the
integrated operating room systems product lines, PowerPro(R), and new
electrosurgical generators.
Research and development expense amounted to $8.1 million in the first half of
2003 as compared to $7.9 million in the first half of 2002. As a percentage of
sales, research and development expense was 3.4% in the first half of 2003,
consistent with 3.5% in the same period a year ago.
As discussed in Note 6 to the consolidated condensed financial statements, we
wrote off purchased in-process research and development assets in connection
with the Bionx acquisition of $7.9 million in the first quarter of 2003.
As discussed in Note 7 to the consolidated condensed financial statements, other
expense is comprised of a net gain on settlement of a contractual dispute of
$9.0 million, pension settlement costs of $2.1 million, acquisition related
costs of $2.6 million and the loss of $8.1 million on the early extinguishment
of debt. There was no comparable expense in the first half of 2002.
Interest expense in the first half of 2003 was $11.4 million compared to $13.0
million in the first half of 2002. The decrease in interest expense is primarily
a result of lower weighted average interest rates on our borrowings, which have
declined to 4.39% at June 30, 2003 as compared to 7.03% at June 30, 2002,
offsetting an increase in borrowings at June 30, 2003 compared to June 30, 2002
of approximately $31.8 million, related to the Bionx acquisition.
Provision for income taxes has been recorded at an effective rate of 51% for the
first half of 2003 and 36% for the first half of 2002. The effective rate of 51%
for the first half of 2003 is substantially higher than the 36% which we have
experienced historically as a result of the non-deductibility for income tax
purposes of the $7.9 million in-process research and development write-off
recorded in the first quarter 2003 in conjunction with the Bionx acquisition. A
reconciliation of the United States statutory income tax rate of 35% to our
historical effective tax rate of 36% (excluding the effect of the in-process
research and development write-off) is included in Note 7 to the Company's
financial statements for the year ended December 31, 2002 included in our Annual
Report to the Securities and Exchange Commission on Form 10-K.
Liquidity and Capital Resources
Cash generated from our operations and borrowings under our revolving credit
facility provide the working capital for our operations, debt service under our
credit facility and the funding of our capital expenditures. In addition, we
have used term borrowings, including:
17
o borrowings under our senior credit agreement;
o Senior Subordinated Notes issued to refinance borrowings under our
senior credit agreement, in the case of the acquisition of Linvatec
Corporation in 1997;
o borrowings under separate loan facilities, in the case of real
property acquisitions, to finance our acquisitions.
During the quarter ended June 30, 2003, we amended our existing $200.0 million
senior credit agreement, (the "amended senior credit agreement"), expanding the
existing term loan facility under the senior credit agreement by $160.0 million
(the "expanded term loan facility"). The proceeds of the expanded term loan
facility were used to reduce borrowings outstanding on the revolving credit
facility, to fund the purchase of $127.4 million in outstanding 9% senior
subordinated notes (the "Notes") and related accrued interest, and fund payment
of the 4.5% call premium on the Notes. Proceeds of the expanded term loan
facility were also used to fund payment of bank and legal fees associated with
amending the senior credit agreement. In connection with the purchase of the
Notes, we wrote off $5.7 million in 4.5% call premium and $2.2 million in
unamortized deferred financing costs to other expense. The balance outstanding
on the expanded term loan facility at June 30, 2003 was $259.5 million. The
expanded term loan facility extends for approximately 6 years, with scheduled
principal payments of $2.6 million annually through December 2007 increasing to
$70.8 million in 2008 and the remaining balance outstanding due in December
2009. We may be required, under certain circumstances, to make additional
principal payments based on excess cash flow as defined in the amended senior
credit agreement. There was $8.0 million in borrowings outstanding on the
revolving credit facility under the amended senior credit agreement as of June
30, 2003 which are due and payable on August 28, 2007, the revolving credit
facility termination date. Interest rates on the new term facility are LIBOR
plus 2.75% or 4.91% at June 30, 2003. Interest rates on the revolving credit
facility are LIBOR plus 2.50% or 3.84% at June 30, 2003.
The amended senior credit agreement is collateralized by substantially all of
our personal property and assets, except for our accounts receivable and related
rights which have been sold in connection with our accounts receivable sales
agreement. The amended senior credit 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. The amended senior credit agreement contains a material
adverse effect clause that could limit our ability to access additional funding
under our senior credit agreement should a material adverse change in our
business occur. We are also required, under certain circumstances, to make
mandatory prepayments from net cash proceeds from any issue of equity and asset
sales.
We used term loans to purchase the property in Largo, Florida utilized by our
Linvatec subsidiary. The term loans consist of a Class A note bearing interest
at 7.50%, a Class C note bearing interest at 8.25% and a seller-financed note
bearing interest at 6.50%. The principal balances outstanding on the Class A
note, Class C note and seller-financed note aggregate $10.2 million, $7.2
million and $3.9 million, respectively, at June 30, 2003. These loans are
secured by our Largo, Florida property.
We have 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. 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 "conduit purchaser"). As of December 31, 2002 and June 30,
2003, the undivided percentage ownership interest in receivables sold by CRC to
the conduit purchaser aggregated $37.0 million and $36.0 million, respectively,
which has been accounted for as a sale and reflected in the balance sheet as a
reduction in accounts receivable.
18
Our net working capital position was $148.7 million at June 30, 2003. Net cash
provided by operations increased to $18.6 million in the six months ended June
30, 2003 compared to $17.9 million for the same period a year ago.
Net cash provided by operations in the first half of 2003 was positively
impacted by depreciation, amortization, deferred income taxes, the non-cash
pension settlement charge, the non-cash write-off of the remaining unamortized
deferred financing fees related to the extinguishment of our 9% senior
subordinated notes and the non-cash write-off of purchased in-process research
and development assets. Net cash provided by operations in the first half of
2003 was negatively impacted by the increase in working capital as a result of
the Bionx acquisition (discussed in Note 6 to the consolidated condensed
financial statements) and the overall growth in our business.
Capital expenditures in the six months ended June 30, 2003 were $4.0 million
compared to $8.4 million in the same period a year ago. These capital
expenditures represent the ongoing capital investment requirements of our
business and are expected to continue at the rate of approximately $12.0 to
$14.0 million annually. Net cash used by investing activities in the six months
ended June 30, 2003 also included $51.5 million in payments related to business
acquisitions, net of cash acquired, of which $46.5 million related to the Bionx
acquisition and the remainder related to the CORE acquisition and the
acquisition of an electrosurgery business as discussed in Note 6 to the
consolidated condensed financial statements.
Financing activities in the six months ended June 30, 2003 consist primarily of
$160.0 million in borrowings under the expanded term loan facility of the
amended senior credit agreement and the retirement of $130.0 million in 9.0%
senior subordinated notes. The remaining borrowings under the expanded term loan
facility were used to reduce borrowings outstanding on the revolving credit
facility as a result of the Bionx acquisition and to fund payment of bank and
legal fees associated with amending the senior credit agreement. Based on the
interest rates in effect at June 30, 2003, annual savings in interest costs as a
result of this debt restructuring are estimated at approximately $6.0 million.
Management believes that cash generated from operations, our current cash
resources and funds available under our amended senior credit agreement 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 June 30, 2003. The following table summarizes our contractual obligations
related to operating leases and long-term debt as of June 30, 2003:
(Amounts in thousands)
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Long-term debt ....... $ 2,016 $ 4,149 $ 4,336 $ 4,538 $ 12,759 $261,714
Operating lease
obligations ........ 891 1,589 1,310 1,238 1,259 3,173
-------- -------- -------- -------- -------- --------
Total contractual
cash obligations ... $ 2,907 $ 5,738 $ 5,646 $ 5,776 $ 14,018 $264,887
======== ======== ======== ======== ======== ========
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in our exposures to market risk during the
three and six months ended June 30, 2003. For a detailed discussion of market
risk, see our Annual Report on Form 10K for the year-ended December 31, 2002,
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
19
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Shareholders of CONMED Corporation (the "Company")
was held on May 20, 2003.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with respect
to such matters are as follows:
Proposals and Vote Tabulations
Votes Cast
------------------ Broker
Management Proposals For Against Abstain Non-votes
--- ------- ------- ---------
To ratify the appointment of
Independent accountants for the
Company for 2003; 23,162,728 1,293,586 10,816 --
Election of Directors
Director Votes Received Votes Withheld
- -------- -------------- --------------
Eugene R. Corasanti 24,409,881 57,249
Joseph J. Corasanti 24,411,482 55,648
Bruce F. Daniels 24,411,408 55,722
Jo Ann Golden 24,411,684 55,446
Steve Mandia 24,412,059 55,071
William D. Matthews 24,411,609 55,521
Robert E. Remmell 24,411,012 56,118
Stuart J. Schwartz 24,411,333 55,797
20
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Amended and Restated Credit Agreement, dated June 30, 2003,
among CONMED Corporation, JPMorgan Chase Bank and the several
banks and other financial institutions or entities from time
to time parties thereto.
10.2 First Amendment to Guarantee and Collateral Agreement, dated
June 30, 2003, made by CONMED Corporation and certain of its
subsidiaries in favor of JPMorgan Chase Bank and the several
banks and other financial institutions or entities from time
to time parties thereto.
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
On July 18, 2003, the Company filed a Report on Form 8-K furnishing as Exhibit
99.1 under Item 7, a July 17, 2003 press release announcing second quarter and
first half 2003 results.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONMED CORPORATION
(Registrant)
Date: August 11, 2003
/s/ Robert D. Shallish, Jr.
----------------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
22
Exhibit Index
Exhibit Sequential
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10.1 Amended and Restated Credit Agreement, dated June 30, (included in EDGAR
2003, among CONMED Corporation, JPMorgan Chase Bank filing only)
and the several banks and other financial
institutions or entities from time to time parties
thereto.
10.2 First Amendment to Guarantee and Collateral (included in EDGAR
Agreement, dated June 30, 2003, made by CONMED filing only)
Corporation and certain of its subsidiaries in favor
of JPMorgan Chase Bank and the several banks and
other financial institutions or entities from time to
time parties thereto.
31.1 Certification pursuant to 18 U.S.C. Section 1350, as E-1
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as E-2
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as E-3
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
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