================================================================================ United States
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, 20022003 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 per share
(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 |_|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
formForm 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 126-2).
Yes |X| No |_|
The aggregate market value of the shares of the voting stock held by
non-affiliates of the Registrant was approximately $459,609,804$850,483,271 based upon the
closing price of the Company's common stock on the NASDAQ Stock Market, which
was $15.90$28.76 on March 17, 2003.5, 2004.
The number of shares of the Registrant's $0.01 par value common stock
outstanding as of March 17, 20035, 2004 was 28,906,277.29,571,741.
DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, scheduled to be mailed on or
aboutprior to April 15, 20035, 2004 for the annual meetingAnnual Meeting of stockholdersStockholders to be held May 20,
2003,18,
2004, are incorporated by reference into Part III.III of this report.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-K
Part I
Item Number Page
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Item 1. Business 2
Item 2. Properties 2324
Item 3. Legal Proceedings 2425
Item 4. Submission of Matters to a Vote of Security Holders 2425
Part II
Item 5. Market for the Registrant's Common StockEquity and Related
Stockholder Matters 2526
Item 6. Selected Financial Data 2627
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 2829
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 40
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes inIn and Disagreements with Accountants on
Accounting and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Part III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14 Controls14. Principal Accounting Fees and ProceduresServices 42
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 43
Signatures 44
Certifications 45
Exhibit Index 47
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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,
20022003 ("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", the "Company", "we" or "us" shall be deemed to include
our direct and indirect 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 cyclical customer purchasing patterns due to budgetary and other
constraints;
o changes in customer preferences;
o competition;
o changes in technology;
o the introduction and acceptance of new products, including our
PowerPro(R) battery-powered instrument product line;products;
o the success of our distribution arrangement with DePuy Orthopaedics;
o the integration of any acquisition;ability to evaluate, finance and integrate acquired businesses,
products and companies;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies mightmay initiate enforcement actions against us
or our distributors;
o our indebtedness;future levels of indebtedness and capital spending;
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-- 2 -
General
CONMED Corporation was incorporated in New York in 1970 by Eugene R.
Corasanti, the Company's founder, Chairman of the Board and Chief Executive
Officer. CONMED 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,otolaryngologic
("ENT"), neuro-surgery and other surgical specialties. We are a leading
developer, manufacturer and supplier of RFradio frequency ("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 ECGelectrocardiogram
("ECG") electrodes for heart monitoring and other patient care products. We also
offer integrated operating room systems and intensive care
unit service managers.equipment. 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 broadendiversify our product
offerings, to increase our market share in certain product lines and to realize
economies of scale. Since 1998,During the last five years, we have completed nineeleven
strategic business acquisitions. The completedacquisitions; these acquisitions, together withcomplemented by internal
growth, have resulted in a compound annual growth rate in net sales during that
period of 7.5% between 1998approximately 8%.
We are committed to offering products with the highest standards of
quality, technological excellence and 2002.customer service. Substantially all of our
facilities have attained certification under the ISO international quality
standards and other domestic and international quality accreditations.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports are made available free
of charge through the Investor Relations section of our Internet website
(http://www.conmed.com) as soon as practicable after such material is
electronically filed with the Securities and Exchange Commission.
Industry
TheMarket growth in the markets for our products is primarily driven by:
o Favorable Demographics. The number of surgical procedures performed
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 our surgical products represented over 85%aggregated approximately 90% of
our total 2002 sales.net revenues in 2003. See "--Our Products."Products."
o Continued Pressure to Reduce Health Care Costs. In response to
rising health care costs, managed care companies and other
third-party 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
- 3 -
ultimately the length of hospitalization. Many of our products are
designed for use in minimally invasive surgical procedures. See
"--Our Products."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 -3-
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") or
Integrated Health Networks ("IHNs"), whichwhose stated purpose is to
aggregate the purchasing volume of their members in order to
negotiate competitive pricing with suppliers, including
manufacturers of surgical products. We believe that these trends
will favor entities thatwhich offer a broaddiverse product portfolio. See
"--Business Strategy" below..
o Increased Global Medical Spending. We believe that foreign markets
offer significant growth opportunities for our products. We
currently distribute our products through our own sales subsidiaries
or through local dealers in over 100 foreign countries. InternationalExport sales
represented approximately 29%33% of our total salesrevenues in 2002.2003.
Competitive Strengths
We believe that we have a top two or three market share position in each
of our five key product areasareas: Arthroscopy, Powered Surgical Instruments,
Electrosurgery, Patient Care and Endoscopy. We have established our position as
a market leader by capitalizing on the following competitive strengths:
o Strong Brand Recognition. We are a leading provider of arthroscopic
surgery devices, electrosurgical systems, powered surgical
instruments and ECG electrodes. Our products are sold under leading brand
names, including CONMED(R), Linvatec(R)and Hall Surgical(R). These
brand names are well recognized by physicians for quality and
service. We believe that brand recognition helps drive demand for
our products by enabling us to build upon the reputation for quality
and service associated with these brands and gain faster acceptance
when introducing new branded products.
o Breadth of Product Offering. The breadth of our product lines in our
key product areas enables us to meet a wide range of customer
requirements and preferences. In three of our five key product
areas, we are one of only two providers that offers a full line of
products. For example, we offer a complete set
of the arthroscopy products a surgeon requires for most arthroscopic
procedures, including instrument and repair sets, implants, shaver
consoles and handpieces, video systems and related disposables. This
in turn has enhanced our ability to market our products to surgeons,
hospitals, surgery centers, GPOs, IHNs and other customers,
particularly as institutions seek to reduce costs and to minimize
the number of suppliers.
- 4 -
o Successful Integration of Acquisitions. Since 1998,During the last five years,
we have completed nineeleven acquisitions. These acquisitions have
enabled us to broaden our product categories, expand our sales and
distribution capabilities and increase our international presence.
Our management team which averages more than 15 years of experience in the health
care industry, has demonstrated a historical ability to
identify complementary acquisitions and to integrate acquired
companies into our operations.
o ExtensiveStrategic Marketing and Distribution Infrastructure.Channels. We market our
products domestically through ourfour distinct sales force groups
consisting of approximately 210120 employee sales representatives and
an additional 90230 sales professionals employed by eight non-stockingindependent sales
agent groups,
-4-
seven of which are exclusive.groups. All of our sales professionals are highly trained and
educated in the applications or procedures for the products they
sell. They call directly on surgeons, hospital departments,
outpatient surgery centers and physician offices. Additionally, we
have an internationalmaintain a global presence through sales subsidiaries and branches
located in key international markets. We sell direct to hospital
customers in these markets with an employee-based international
sales force of approximately 4060 sales representatives. We also
maintain distributor relationships domestically and in numerous
countries worldwide. See "--Marketing."
o Vertically Integrated Manufacturing. We manufacture most of our
products and components. 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 these 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, while seeking to improve quality.
o Technological Leadership. Research and Development Expertise. Our researchdevelopment efforts are
closely aligned with our key business objectives, namely developing
and development
effort is focused on introducing new products, enhancing existingimproving products and developingprocesses, applying technology to the
manufacture of products for new technologies.market sectors, and reducing the
cost of producing core business products. During the last twoseveral
years, we have introduced several new products and product enhancements. Our
reputation as an innovator is exemplified by our "first-to-market"recent new product
introductions, which include the
Envision(TM)our 4th generation Autoclavable Three
Chip Camera Head, Advantage(TM)
driveVideo System, the 10K(TM) Pump fluid management
system, the Trident(TM) resection ablator, the SureCharge(TM)
battery sterilizationPowerPro (R) Pneumatic powered instrument system and the
2.9 millimeter arthroscopy
scope.SmartNail(R) 2.4 mm bioresorbable nail. Research and development
expenditures were $16.1$17.3 million in 2002.2003 excluding the write-off of
acquired in-process research and development assets.
Business Strategy
Our business strategy is to continue to strengthen our position as a
market leader in our key product areas. The elements of our strategy include:
o Introduce New Products and Product Enhancements. We will continue to
pursue organic growth by developing new products and enhancing
existing
- 5 -
products to respond to customer needs and preferences. We are
continually seeking to develop new technologies to improve
durability, performance and usability of existing products. In
addition to our research and development, we receive new ideas for
products and technologies, especially in procedure-specific areas,
from surgeons, inventors and operating room personnel.
o Pursue Strategic Acquisitions. We believe that strategic
acquisitions represent a cost-effective means of broadening our
product line.line
diversification. We have historically targeted companies with proven
technologies and established brand names thatwhich provide potential
sales, marketing and manufacturing synergies. Since 1998,During the last five
years, we have completed nineeleven acquisitions, expanding across all
of our arthroscopy, powered
surgical instruments
-5-
and endoscopyexisting product lines and most recently expanding intoadding a line of integrated
operating room systems and equipment.
o Realize Manufacturing and Operating Efficiencies. We will continue
to review opportunities for consolidating product lines and
streamlining production. We believe our vertically integrated
manufacturing processes can produce further opportunities to reduce
overhead and to increase operating efficiencies and capacity
utilization.
o Maintain Strong International Sales Growth. We believe there are
significant sales opportunities for our surgical products outside
the United States. We intend to maintain our international sales
growth and increase our penetration into international markets by
utilizing our relationships with foreign surgeons, hospitals and
third-party payers, as well as foreign distributors. In 2002,2003, our
international sales outside the United States grew by 8% and represented 29%33% of our 2002total net sales.
Our
Products
The following table sets forth the percentage of net sales for each category of our
products for 2000, 2001 and 2002:product lines during each of the three years ended December 31:
Year Ended December 31,
--------------------------------------
2000 2001 2002 -------- -------- --------2003
---- ---- ----
Arthroscopy ....................................... 36% 36% 36%
Powered surgical instruments ...... 29Surgical Instruments 27 25 25
Electrosurgery ................................. 16 1615 15
Patient Care ...................... 17............... 16 16 14
Endoscopy ......................... 2.................. 5 8 9
Integrated Operating Room
Systems ................. -- -- 1
-------- -------- --------
Total ............................................... 100% 100% 100%
======== ======== ========
Net salesSales (in thousands) .......... $395,873... $428,722 $453,062 $497,130
======== ======== ========
Arthroscopy
We offer a broad linecomprehensive range 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-invasiveminimally invasive arthroscopes
and related instruments. Minimally-invasiveMinimally 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 isArthroscopic procedures are performed
on the knee although arthroscopic procedures are increasingly performed on shouldersand shoulder, and smaller joints, such as the wrist and ankle.
- 6 -
Our arthroscopy products include powered resection instruments,
arthroscopes, reconstructive systems, tissue repair sets, fluid management
systems, imaging products, metal and bioabsorbable 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 bioabsorbable screws, ablators, "push-in" and
"screw-in" suture anchors, resection shavers and cartilage repair implants.
-6-
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 explainstraumas which is why arthroscopy is
sometimes referred to as "sports medicine."
Arthroscopy
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Product Description Brand Name
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Arthroscopy
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Product Description Brand Name
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Ablators and Shaver Ablators Electrosurgical ablators and Advantage(TM)
Ablators resection ablators to Advantage(TM)
resect ESA(TM) and remove soft tissue and Sterling(R) bone; used in knee, ESA(TM)
shoulder UltrAblator(TM) and small joint surgery. Sterling(R)
UltrAblator(TM)
Lightwave(TM)
Trident(TM)
Knee Reconstructive Systems Products used in cruciate reconstructive surgery; Paramax(R)
Systems reconstructive surgery; Pinn-ACL(R)
includes instrumentation, GraFix(TM) screws, pins and ligament Pinn-ACL(R)
harvesting and preparation devices. GraFix(TM)
Soft Tissue Repair Systems Instrument systems designed to Spectrum(R)
Systems attach specific torn Spectrum(R)
or Inteq(R) damaged soft tissue to bone or Shuttle Relay(TM) other soft tissue Inteq(R)
in the knee, Blitz(R) shoulder and wrist; includes Shuttle Relay(TM)
instrumentation, guides, hooks and suture devices. Blitz(R)
Fluid Management Systems Disposable tubing sets, disposable and reusable Apex(R)
inflow devices, pumps and suction/waste management Quick-Flow(R)
systems for use in arthroscopic and general surgeries. Quick-Connect(R)
Imaging Surgical video systems for endoscopic procedures; Apex(R)
Systems disposable and reusable inflow Quick-Flow(R)
devices, pumps and Quick-Connect(R)
suction/waste management
systems for use in
arthroscopic and general
surgeries.
Imaging Surgical video systems for Apex(R)
endoscopic procedures; 8180 Series
includes autoclavable single Envision(TM) and three-chip camera 8180 Series
heads Autoclavable and consoles, endoscopes, light sources, Envision(TM)Autoclavable
monitors, VCRs and printers. Three Chip
light sources, monitors, VCRs Camera Head
and printers.
Implants Products including BioScrew(R)
bioabsorbable and metal BioStinger(R)
interference screws and suture BioAnchor(R)
anchors for attaching soft BioTwist(R)
tissue to bone in the knee, Ultrafix(R)
shoulder and wrist as well as Revo(R)
miniscal repair. Super Revo(R)
Other Instruments Forceps, graspers, punches, Shutt(R)
and Accessories probes, sterilization cases Concept(R)
and other general instruments TractionTower(R)
for arthroscopic procedures.
-7-
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Arthroscopy
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Product Description Brand Name
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Implants Products including bioabsorbable and metal screws, BioScrew(R)
pins and suture anchors for attaching soft tissue to BioAnchor(R)
bone in the knee, shoulder and wrist as well as BioTwist(R)
miniscal repair. Ultrafix(R)
Revo(R)
Super Revo(R)
Bionx(R)
Meniscus Arrow(R)
Other Instruments and Forceps, graspers, punches, probes, sterilization Shutt(R)
Accessories cases and other general instruments for arthroscopic Concept(R)
procedures. TractionTower(R)
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Powered Surgical Instruments
PoweredElectric, battery or pneumatic powered surgical instruments are used to
perform orthopedic, arthroscopic and other surgical procedures, such as cutting,
drilling or reaming and are
driven by electric, battery or pneumatic power.reaming. 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. Specialty powered
instruments include surgical applicationsare utilized in procedures such as spine,spinal surgery, neurosurgery,
otolaryngology (ENT),ENT, oral/maxillofacial surgery, and cardiothoracic surgery.
Our line of powered instruments is sold principally under the Hall(R)
Surgical brand name, for use in large and small bone orthopedic, arthroscopic,
oral/maxillofacial, podiatric, plastic, otolaryngologic,ENT, neurological, spinespinal and
cardiothoracic surgeries. Large bone, neurosurgical, spinespinal 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 canwhich may be easily adapted and modified for new
procedures.
Our powered instruments line also includes oura recently introduced
PowerPro(R) Battery System, which is a full function orthopedic power system
specifically designed to meet the requirements of most orthopedic applications.
The PowerPro(R) Battery System has a SureCharge(TM) option thatwhich allows the user
to sterilize the battery before it is charged.charging. This ensures that the battery will be
fully charged when delivered to the operating room, unlike other battery systems
currently available on the market. The PowerPro(R) uses a proprietary process we
invented
for maintaining sterility during the charging, process, thus avoiding the loss of battery
charge during sterilization, which frequently results in competing battery
systems during sterilization.
Powered Surgical Instrumentssystems.
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Product Description Brand Name8 -
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Powered Surgical Instruments
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Product Description Brand Name
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Hall(R) Surgical
Large Bone Powered saws, drills and Hall(R) Surgical related disposable MaxiDriver(TM)
accessories MaxiDriver(TM) for use primarily in total VersiPower(R) Plus knee and hip VersiPower(R)Plus
joint Series 4(R) replacements and trauma PowerPro(R)
surgical procedures. Advantage(TM)
SureCharge(TM)
Small Bone Powered saws, drills and Hall(R)Surgical
related disposable accessories E9000(R)
for small bones and joint MiniDriver(TM) surgical procedures. Series 4(R)
PowerPro(R)
Advantage(TM)
SureCharge(TM)
Small Bone Powered saws, drills and related disposable Hall(R)Surgical
accessories for small bones and joint surgical E9000(R)
procedures. MiniDriver(TM)
MicroChoice(R)
Micro 100(TM)
Advantage(TM)
Otolaryngology Specialty powered saws, drills and related disposable Hall(R)Surgical
Neurosurgery accessories for use in neurosurgery, spine, and E9000(R)
Spine otolaryngologic procedures. UltraPower(R)
Hall Osteon(R)
Hall Ototome(R)
Cardiothoracic Powered sternum saws, drills, and related disposable Hall(R)Surgical
Oral/maxillofacial accessories for use by cardiothoracic and E9000(R)
oral/maxillofacial surgeons. UltraPower(R)
Micro 100(TM)
Advantage(TM)
-8-
Powered Surgical Instruments
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Product Description Brand Name
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Otolaryngology Specialty powered saws, drills Hall(R)Surgical
Neurosurgery and related disposable E9000(R)
Spine accessories for use in UltraPower(R)
neurosurgery, spine, and Hall Osteon(R)
otolaryngologic procedures. Hall Ototome(R)
Cardiothoracic Powered sternum saws, drills, Hall(R) Surgical
Oral/maxillofacial and related disposable E9000(R)
accessories for use by UltraPower(R)
cardiothoracic and Micro 100(TM)
oral/maxillofacial surgeons.
VersiPower(R) Plus
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Electrosurgery
Electrosurgery is thea technique of using a high-frequency electric current
which, when applied to tissue through special instruments, canmay be used to cut
tissue,and/or, coagulate or cut and coagulate simultaneously.tissue. 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, orthopedic, 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;open-heart, liver, spleen and trauma surgery.
Electrosurgery
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Product Description Brand Name9 -
--------------------------------------------------------------------------------
Pencils Disposable and reusable Hand-trol(R)
instruments designed to Gold Line(R)
deliver high-frequency Clear Vac(R)
electric current to cut and/or
coagulate tissue.
Ground Pads Disposable ground pads to Macrolyte(R)
safely return the current to Bio-gard(R)
the generator; available in SureFit(R)
adult, pediatric and infant
sizes.
-9-
Electrosurgery
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Product Description Brand Name
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Electrosurgery
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Product Description Brand Name
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Pencils Disposable and reusable surgical instruments designed Hand-trol(R)
to deliver high-frequency electric current to cut Gold Line(R)
and/or coagulate tissue. Clear Vac(R)
Ground Pads Disposable ground pads to safely return the current Macrolyte(R)
to the generator; available in adult, pediatric and Bio-gard(R)
infant sizes. SureFit(R)
Blades Surgical blades and accessory electrodes that Ultra Clean(TM)
electrodes that
use a proprietary coating to eliminate tissue
buildup on the blade during surgery.
Generators Monopolar and bipolar generators for surgical EXCALIBUR Plus PC(R)
generators for surgical SABRE(R)
procedures performed in a System 5000(R) hospital, physician's SABRE(R)
office System 2500(R) or clinic setting. System 5000(R)
System 2500(R)
Hyfrecator(R) 2000
Argon Beam Specialized electrosurgical ABC(R)
Coagulation generators, disposable ABC(R)
Coagulation Systems hand pieces and ground pads for enhanced non-contact Beamer Plus(R)
Systems pieces and ground pads for System 7500(R)
enhanced non-contact ABC Flex(R)
coagulation of tissue. System 7500(R)
ABC Flex(R)
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Patient Care
We manufacture a variety of patient care products for use in monitoring
cardiac rhythms, wound care management and IVintravenous ("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 categorySales are primarily derived
from the saledistribution of ECG electrodes and surgical suction instruments and
tubing. Although wound management and intravenousIV therapy product sales are comparatively
small, the application of these products in the operating room complements our
surgical product offerings.
During 2003, we entered into an agreement to become the exclusive North
American distributor for a full line of pulse oximetry products manufactured by
Dolphin Medical, Inc.
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Patient Care Products
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Product Description Brand Name
- ----------------------------------------------------------------------------------------------------------------------
ECG Monitoring Line of disposable electrodes, monitoring cables, lead CONMED(R)
wire products and accessories designed to transmit ECG Ultratrace(R)
signals from the heart to an ECG monitor or recorder. Cleartrace(R)
- --------------------------------------------------------------------------------
Product Description Brand Name10 -
--------------------------------------------------------------------------------
ECG Monitoring Line of disposable electrodes, CONMED(R)
monitoring cables, lead wire Ultratrace(R)
products and accessories Cleartrace(R)
designed to transmit ECG
signals from the heart to an
ECG monitor or recorder.
Wound Care Disposable transparent wound ClearSite(R)
dressings comprising Hydrogauze(R)
proprietary hydrogel; able to SportPatch(TM)
absorb 2 1/2 times its weight
in wound exudate.
Patient Positioners Products that properly and Airsoft(TM)
safely position patients while
in surgery.
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.
-10-
Patient Care Products
- --------------------------------------------------------------------------------
Product Description Brand Name
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Patient Care Products
- ----------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- ----------------------------------------------------------------------------------------------------------------------
Wound Care Disposable transparent wound dressings comprising ClearSite(R)
proprietary hydrogel; able to absorb 2 1/2 times its Hydrogauze(R)
weight in wound exudate. SportPatch(TM)
Patient Positioners Products that properly and safely position patients Airsoft(TM)
while in surgery.
Surgical Suction Instruments Disposable surgical suction instruments and CONMED(R)
and Tubing connecting 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 controller and VENI-GARD(R)
gravity controller and MasterFlow(R)
disposable catheter Stat 2(R) stabilization dressing designed to MasterFlow(R)
hold and secure an IV needle or catheter for use in IV Stat 2(R)
therapy.
Defibrillator Pads and Stimulation electrodes for use PadPro(TM)
and Accessories in emergency cardiac PadPro(TM)
Accessories response and for conduction studies of the heart.
Pulse Oximetry Used in critical care to continuously monitor a Dolphin(R)
patient's arterial blood oxygen saturation and pulse
rate.
- ----------------------------------------------------------------------------------------------------------------------
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 shorter recovery times and
reduced hospitalization and
therapy.hospitalization. Endoscopic surgery is performed on organs in the
abdominal cavity such as the gallbladder, appendix and female reproductive
organs. During a procedure,such procedures, devices called "trocars" are used to puncture
the abdominal wall and are 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
- 11 -
laparoscopic surgery. Disposable skin staplers are used to close large skin
incisions with surgical staples eliminating the time consuming suturing process.
Endoscopy
- --------------------------------------------------------------------------------
Product Description Brand Name
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Endoscopy
- ----------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- ----------------------------------------------------------------------------------------------------------------------
Trocars Disposable and reposable devices used to puncture the Finesse(R)
devices used to puncture the Reflex(R)
abdominal wall to provide Detach a Port(R) access to the abdominal Reflex(R)
cavity for camera systems and instruments. Detach a Port(R)
One Port(R)
Multi-functional Instruments for cutting and coagulating tissue by Universal(TM)
Electrosurgery and delivering high-frequency current. Instruments that Universal Plus(TM)
Suction/Irrigation instruments deliver irrigating fluid to the tissue and remove FloVac(R)
blood and fluids from the internal operating field.
Clip Appliers Disposable devices for ligating blood vessels and Reflex(R)
ducts by placing a titanium clip on the vessel
Laparoscopic Instruments Scissors, graspers Detach a Tip(R)
Skin Staplers Disposable devices that place surgical staples to Reflex(R)
close a surgical incision.
Microlaparoscopy scopes and Small laparoscopes and instruments for performing MicroLap(R)
instruments surgery through very small incisions.
- ----------------------------------------------------------------------------------------------------------------------
Integrated operating room systems
Our line of integrated operating room systems and instruments.
Multi-functional Instrumentsequipment provides
fully-integrated turn-key solutions for cuttingoperating rooms and Universal(TM)
Electrosurgeryother patient
critical care environments, enabling increased efficiency and coagulating tissue by Universal Plus(TM)
Suction/Irrigation delivering high-frequency FloVac(R)
instruments current. Instruments that
deliver irrigating fluid to
the tissueoperating cost
savings. Our product offering includes design and remove blood
and fluids from the internalconsulting services, as well
as our unique centralized operating field.
-11-room control system.
- ----------------------------------------------------------------------------------------------------------------------
Integrated Operating Room Systems
- ----------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- ----------------------------------------------------------------------------------------------------------------------
Surgical Lights Surgical lighting for use in the operating room. CM 570 Series(R)
Service Arms Articulating ceiling-mounted service arms for mounting CONMED(R)
various types of service managers and surgical
equipment.
- 12 -
Endoscopy
- --------------------------------------------------------------------------------
Product Description Brand Name
- --------------------------------------------------------------------------------
Clip Appliers Disposable devices for Reflex(R)
ligating blood vessels and
ducts by placing a titanium
clip on the vessel
Laparoscopic Scissors, graspers Detach a Tip(R)
Instruments
Skin Staplers Disposable devices that place Reflex(R)
surgical staples to close a
surgical incision.
Microlaparoscopy Small laparoscopes and MicroLap(R)
scopes and instruments for doing surgery
instruments through very small incisions.
- ----------------------------------------------------------------------------------------------------------------------
Integrated Operating Room Systems
- ----------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- ----------------------------------------------------------------------------------------------------------------------
Service Managers Units mounted on service arms which provide shelving SM14
for surgical equipment and house electrical, gas and SM20
video connections. SM30
SM40
Operating room control system Centralized operating room management and control Nurse's Assistant(R)
system for lighting, video, surgical equipment and
generators, camera systems and interhospital and web
conferencing.
- ----------------------------------------------------------------------------------------------------------------------
Marketing
In the United States, mostMost of our products in the continental United States are marketed
directly to more than 6,000 hospitals, and to surgeons and other health care
facilities.
A substantial portion of our sales are to customers affiliated with GPOs,
IHNs, other large national or regional accounts, the Veterans Administration and
to other hospitals operated by the Federal government. For hospital inventory
management purposes, certain of our customers prefer to purchase our products
through independent third-party medical product distributors.
In order to provide a high level of expertise to the medical specialties
we serve, our domestic sales force consists of the following:
o 180230 sales representatives selling arthroscopy and orthopedic powered surgical
instrument products including 90 employee sales representatives
and 90 sales professionals employed by eightindependent 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 hasis assigned 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 to sell our orthopedic products in their geographic territories. All of
these sales agent groups, except one, sell CONMED products exclusively. None
stock product for resale to customers as we ship product directly to customersarthroscopy and carry the receivable for that group.powered
surgical instrument products. The sales agent groups are all paid a commission for
sales made to customers in their exclusive geographic areas. Homewhile home office sales and marketing management provide
the overall direction for the sales of our products.
We also have a corporate sales department that is responsible for
interacting with GPOs and IHNs. We have contracts with many such organizations
and believe that, with certain exceptions, the lack of any individual group
purchasing contract will not adversely impact our competitiveness in the
marketplace. Our sales professionals are required to
-12-
work closely with
distributors where applicable and to maintain close relationships with
end-users.
The sale of our products is accompanied by initial and ongoing in-service
training of the end user.end-user. Our sales professionals are trained in the technical
aspects of our products and their uses and the procedures in which they are
used. Our sales professionals, in turn, provide surgeons and medical personnel
with information relating to the technical features and benefits of our
products.
- 13 -
Our international sales accounted for approximately 29%33% of total revenues
in 2002.2003. 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, the
Netherlands, Spain and the United Kingdom. In these countries, our sales are
denominated in the local currency. In the remaining countries where our products
are sold through independent distributors, sales are denominated in United
States dollars.
We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit risk.
Manufacturing
We manufacture most of our products and assemble them primarily from
components we produce. 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 use a variety of raw materials in our manufacturing processes. We work
to maintain multiple suppliers for each of our raw materials and components.
None of our critical raw materials are sourced from a single supplier.
All of our products are classified as medical devices subject to
regulation by the United States Food and Drug Administration.Administration ("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 its Quality System Regulations. Manufacturing and sales of our products
outside the United States are also subject to foreign regulatory requirements
that vary from country to country. The time required to obtain approvals from
foreign countries may be longer or shorter than that required for FDA approval
and requirements for foreign approvals may differ from FDA requirements.
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.
-13-
Research and Development
Activities
During the years ended December 31, 2000, 2001New and 2002, we spent
approximately $14.9 million, $14.8 million and $16.1 million for research and
development. Ourimproved products play a critical role in our continued sales
growth. Internal research and development department has 117 employees.
Our research and development programsefforts focus on the development of
new products as well as the enhancement ofand product technological and design improvements aimed at
complementing and expanding existing products with the latest
technology and updated designs.product lines. We are continually seekingseek to
developleverage new technologies towhich improve the durability, performance and
usability of existing products. In addition, to our own researchwe maintain close working
relationships with surgeons, inventors and development, we receiveoperating room personnel who often
make new product and technology disclosures, especiallyprincipally in procedure-specific
areas, from
surgeons, inventors and operating room personnel.areas. For disclosures that we deem
promising from a clinical and commercial perspective,commercially promising disclosures, we seek to obtain
rights to these ideas by negotiatingthrough negotiated agreements.
- 14 -
Such agreements which typically compensate the originator of the idea through royalty payments
based onupon a percentage of licensed product net sales of licensed products.sales. Royalty expense was
approximately $2.4 million, $2.9 million and $3.5 million in 2001, 2002 and
2003, respectively.
We spent approximately $14.8 million, $16.1 million and $17.3 million
during 2001, 2002, and 2003, respectively, for research and development
activities.
We have rights to numerous U.S.significant intellectual property, including United
States patents and corresponding foreign equivalent patents coveringwhich cover a wide range of our
products. We own a majority of these patents and have licensedexclusive and
non-exclusive licensing rights to the remainder, both on an exclusive and non-exclusive
basis.remainder. In addition, certain of these
patents arehave currently been 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 weWe believe that the development of new products and improvement oftechnological and design
improvements to existing ones is andproducts will continue to be more
important than patent protectionof primary importance in
maintaining our competitive position.
Competition
The market for our products is highly competitive and our customers
generally have numerous alternatives of supply. Many of our 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, group purchasing
organizations and others. In addition, manyseveral of our competitors are larger and
have greater financial resources than we do and offer a range of products
broader than our products. Because our customers are not bound by long-term
supply arrangementslarge,
technically-competent firms with us, we may not be able to shift our production to other
products following a loss of customers to our competitors.substantial assets.
The following chart identifies our principal competitors in each of our
key business areas:
Business Area Competitor
------------- ----------
Arthroscopy Smith & Nephew plc
Arthrex
Stryker Corporation
Arthrocare
Johnson & Johnson's Mitek division
Powered Surgical Stryker Corporation
Instruments Medtronic, Inc.'s Midas Rex and Xomed divisions
Anspach
-14-
MicroAire
Electrosurgery Tyco International Ltd.'s Valleylab division
3M Company
ERBE Elektromedizin GmbH
Patient Care Tyco International Ltd.'s Kendall division
3M Company
Endoscopy Tyco International Ltd.'s U.S.
Surgical division
Johnson & Johnson's Ethicon division
We believe thatTyco International Ltd.'s U.S.Surgical division
- 15 -
Factors which affect our competitive posture include product design,
development and improvement, customer acceptance, marketing strategy, customer service and price are critical elements
to compete in our industry.delivery capabilities, pricing and product
development/improvement. Other alternatives, such as new medical procedures or
pharmaceuticals, could at some point prove to be interchangeable alternatives to
our products.
Government Regulation
Most if not allA significant number of our products are classified as medical devices
subject to regulation by the Food and Drug Administration. Our new productsFDA. New product introductions generally require
FDA clearance under a procedure knownreferred to as 510(k) premarketing notification.
A 510(k) premarketing notification clearance indicates FDA agreement with an
applicant's 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
classified as either Class I or Class II products with the FDA, meaning that
our productsthey 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 result in restrictions on a product's marketing
or withdrawal of the product from the market.
We have quality control/regulatory compliance groups that arewhich have been
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 foreigninternational
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 ensure 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 in all material respects. We market our products in a number of
foreignmany international
markets. Requirements pertaining to our products vary widely from country to
country, ranging from simple product registrations to detailed submissions such
as those
-15-
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 and have made product recalls in the
past. 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 anresult in a material adverse effect on our
financial condition or results of operations.
- 16 -
Employees
As of December 31, 2002,2003, we had 2,541approximately 2,600 full-time employees,
of whom 1,7031,840 were in manufacturing, 117115 in research and development, and the
balance were in sales, marketing, executive and administrative positions. We
believe that we have good relations with our employees and have never
experienced a strike or similar work stoppage. 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.labor union.
Risk Factors
An investment in our common stock involves a high degree of risk.
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.
Our financial performance is subject to the risk of business acquisitions,
including the effects of increased borrowing and the integration of
businesses.
A key element of our business strategy has been to expand through
acquisitions and we may seek to pursue additional acquisitions in the
future. Our success is dependent in part upon our ability to integrate
acquired companies or product lines into our existing operations. We may
not have sufficient management and other resources to accomplish the
integration of our past and future acquisitions and implementing our
acquisition strategy may strain our relationship with customers,
suppliers, distributors, manufacturing personnel or others. 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. 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, acquisitions may involve exposure to unknown liabilities and the
amount and time for claiming under these indemnification provisions is
often limited. 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.
Failure to comply with regulatory requirements could result in recalls,
fines or materially adverse implications.
-16-
All of our products are classified as medical devices subject to
regulation by the Food and Drug Administration.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 the Quality System
Regulations. Manufacturing and sales of our products outside the United
States are also subject to foreign regulatory requirements that vary from
country to country. The time required to obtain approvals from foreign
countries may be longer or shorter than that required for FDA approval,
and requirements for foreign approvals may differ from FDA requirements.
Failure to comply with applicable domestic and/or foreign requirements can
result in:
- 17 -
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; or
o criminal prosecution.
The failure to comply with Quality System Regulations and applicable
foreign regulations could haveresult in a material adverse effect on our
business, financial condition or results of operations.
If we are not able to manufacture products in compliance with regulatory
standards, we may decide to cease manufacture of those products and may be
subject to product recall.
In addition to the Quality System Regulations, many of our products are
also subject to industry-set standards. We may not be able to comply with
these regulations and standards due to deficiencies in component parts or
our manufacturing processes. If we are not able to comply with the Quality
System Regulations or industry-set standards, we may not be able to fill
customer orders and we may decide to cease production of non-compliant
products. Failure to produce products could affect our profit margins and
could lead to loss of customers.
Our products are subject to product recall and product recalls have been
made in the past. Although no recall has had a material adverse effect on
our business, financial condition or results of operations, we cannot
assure you that regulatory issues will not have a material adverse effect
in the future or that product recall will not harm our reputation and our
relationships with our customers.
The highly competitive market for our products may create adverse pricing
pressures.
The market for our products is highly competitive and our customers have
numerous alternatives of supply. Many of our 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, group purchasing
organizations and others. In addition, manyseveral of our competitors are
larger
and have greater financial resources than we do and offer a range of
products broader than our products.large, technically-competent firms with substantial assets. Competitive
pricing pressures or the introduction of new products by our competitors
could have an adverse effect on our revenues. Because our customers are not bound by long-term
supply
-17-
arrangements with us, we may not be able to shift our production to other
products following a loss of customers to our competitors, leading to an
accompanying adverse effect on our profitability. See "Business --
Competition""Competition" for a
further discussion of these competitive forces.
Factors that could leadwhich may influence our customers to choosecustomers' choice of competitor products offered by our
competitors
include:
o changes in surgeon preferences;
o increases or decreases in health care spending related to medical
devices;
o our inability to furnishsupply products to them, such as a result of product
recall or back-order;
o the introduction by competitors of new products or new features to
existing products;
- 18 -
o the introduction by competitors of alternative surgical technology;
and
o advances in surgical procedures and discoveries or developments in
the health care industry.
Cost reduction efforts in the health care industry could put pressures on
our prices and margins.
In recent years, the health care industry has undergone significant change
driven by various efforts to reduce costs, includingcosts. Such efforts atinclude national
health care reform, trends towardtowards managed care, cuts in Medicare,
consolidation of health care distribution companies and collective
purchasing arrangements by GPOs and IHNs. Demand and prices for our
products may be adversely affected by thesesuch trends.
We may not be able to keep pace with technological change or to
successfully develop new products with wide market acceptance, which could
cause us to lose business to competitors.
The market for our products is characterized by rapidly changing
technology. Our future financial performance will depend in part on our
ability to develop and manufacture new products on a cost-effective basis,
to introduce them to the market on a timely basis, and to have them
accepted by surgeons.
We may not be able to keep pace with technology or to develop viable new
products. Factors which could cause delay in releasing new products or
even cancellation of our plans to produce and market these new products
include:
o research and development delays;
o delays in securing regulatory approvals; or
o changes in the competitive landscape, including the emergence of
alternative products or solutions which reduce or eliminate the
markets for pending products.
Our new products may fail to achieve expected levels of market acceptance.
-18-
Any new products we launchNew product introductions may fail to achieve market acceptance. The
degree of market acceptance offor any of our products will depend onupon a
number of factors, including:
o our ability to develop and introduce new products and product
enhancements in the time frames we currently estimate;
o our ability to successfully implement new technologies;
o the market's readiness to accept new products, such as our
PowerPro(R) Battery System;
o having adequate financial and technological resources for future
product development and promotion;
o the efficacy of our products; and
o the prices of our products compared to the prices of our
competitors' products.
If our new products do not achieve market acceptance, we may be unable to
recoup our investments and may lose business to competitors.
In addition, some of the companies with which we now compete or may
compete in the future have or may have more extensive research, marketing
and
- 19 -
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 "Business--Competition" for a further discussion of these competitive
forces.
Our credit agreement contains covenants that may limit our flexibility or
prevent us from taking actions.
Our credit agreement contains, and future credit facilities are expected
to contain, 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; and
o pursue acquisitions.
These covenants, unless waived, may prevent us from 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
agreement, the credit agreement lenders could elect to declare all amounts
borrowed under our credit agreement, together with accrued interest, to be
due and payable. If we were unable to repay such borrowings, the credit
agreement lenders could proceed against the collateral securing the credit
agreement, which consists of substantially all of our property and assets,
except for our accounts receivable and related rights which are sold in
connection with the accounts receivable sales agreement. See "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. -19-
Our credit agreement also contains a
material adverse effect clause that could limit our ability to access
additional funding under our credit agreement should a material adverse
change in our business occur.
Our substantial leverage and debt service requirements may force us to
adopt alternative business strategies.
We have indebtedness that 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 31,
2002,2003, we had $257.4$264.6 million of debt outstanding, representing 40%38% of total
capitalization and which does not include the $37$44 million of receivablesaccounts
receivable sold to a conduit purchaser under the accounts receivable sales agreement described below
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
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;
- 20 -
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate
purposes may be limited or impaired, or may be at higher interest
rates;
o we may be at a competitive disadvantage when compared to competitors
that are less leveraged;
o we may be hindered in our ability to adjust rapidly to market
conditions;
o our degree of leverage could make us more vulnerable in the event of
a downturn in general economic conditions or other adverse
circumstances applicable to us; and
o our interest expense could increase if interest rates in general
increase because somemost of our borrowings, including our borrowings
under our credit agreement, are and will continue to be at variable
rates of interest.
We may not be able to generate sufficient cash to service our
indebtedness, which could require us to reduce our expenditures, sell
assets, restructure our indebtedness or seek additional equity capital.
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. We may not have sufficient cash flow available to
enable 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 foregoing acquisitions, reducing or delaying
capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital. We cannot assure you
that any of these strategies could be implemented on terms acceptable to
us, if at all. See "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.
We may be unable to continue to sell our accounts receivable, which could
require us to seek alternative sources of financing.
-20-
Under our accounts receivable sales agreement, there are certain
statistical ratios which must be maintained relating to the pool of
receivables in order for us to continue selling to the conduit.purchaser. These
ratios relate to sales dilution and losses on accounts receivable. If new
accounts receivable arising in the normal course of business do not
qualify for sale or the conduit purchaser otherwise ceases itsto purchase of our
receivables, we would need to access alternate sources of working capital,
which could be more expensive or difficult to obtain. Our receivablesaccounts
receivable sales agreement, as amended, also requires us to enter intoobtain a
liquidity agreement
with certain banks under whichcommitment (the "purchaser commitment"), on an annual basis from the
banks agree to commitpurchaser to fund the
conduit's purchase of our accounts receivable in the event that the
conduit is unable to fund such purchases through the sale of commercial
paper. These liquidity agreements are typically for a period of 364 days
which requires us to renew our liquidity agreements on an annual basis.receivable. The purchaser
commitment expires October 21, 2004. In the event we wereare unable to renew
our liquidity agreement,purchaser commitment, we would need to access alternate sources of
working capital which could be more expensive or difficult to obtain.
- 21 -
The loss or invalidity of our patents may reduce our competitive
advantage.
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 20032004 through 20202021 and
have additional patent applications pending. See "Business -- Research and
Development Activities"" for a further description of our patents. 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. Also, our
competitors may allege that our products infringe their patents, leading
to voluntary or involuntary loss of sales from those 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. We cannot assure you that:
o pending patent applications will result in issued patents,
o patents issued to or licensed by us will not be challenged by
competitors,
o our patents will be found to be valid or sufficiently broad to
protect our technology or provide us with a competitive advantage,
or
o we will be successful in defending against pending or future patent
infringement claims asserted against our products.
Ordering patterns of our customers may change resulting in reductions in
sales.
Our hospital and surgery center customers purchase our products in
quantities sufficient to meet their anticipated demand. Likewise, our
health care distributor customers purchase our products for ultimate
resale to health care providers in quantities sufficient to meet the
anticipated requirements of the distributors' customers. Should
inventories of our products owned by our hospital, surgery center and
distributor customers grow to levels higher than their requirements, our
customers may reduce the ordering of products from us. This could cause a
reduction in our sales in a financial accounting period.
-21-
Our significant international operations subject us to risks associated
with operating in foreign countries.
A portion of our operations are conducted outside the United States.
About
29%Approximately 33% of our 20022003 net sales constituted foreigninternational 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
foreigninternational subsidiaries;
o imposition or increase of withholding and other taxes on remittances
and other payments by foreigninternational subsidiaries;
o trade barriers;
o political risks, including political instability;
o reliance on third parties to distribute our products;
o hyperinflation in certain foreign countries; and
- 22 -
o imposition or increase of investment and other restrictions by
foreign governments.
We cannot assure you that such risks will not have a material adverse
effect on our business and results of operations.
We can be sued for producing defective products and our insurance coverage
may be insufficient to cover the nature and amount of any product
liability claims.
The nature of our products as medical devices and today's litigious
environment should be regarded as potential risks that could significantly
and adversely affect our financial condition and results of operations.
The insurance we maintain to protect against claims associated with the
use of our products may not adequately cover the amount or nature of any
claim asserted against us and we are exposed to the risk that our claims
may be excluded and that our insurers may become insolvent or that
premiums may increase substantially. See "Item 3: Legal Proceedings" for a
further discussion of the risk of product liability actions and our
insurance coverage.
-22-- 23 -
Item 2. Properties
Facilities
The following table providessets forth certain information regardingwith respect to our
primary
manufacturing and administrativeprincipal operating facilities. We believe that our facilities are generally
well maintained, are suitable to support our business and adequate in terms of spacefor present
and suitability for our needs over the next several
years.
Leaseanticipated needs.
Location Square Feet Own or Lease Lease Expiration
- ------------------------------------------------------------ ----------- ------------ --------------------------------
Utica, NY (two facilities) 650,000 Own _--
Largo, FL 278,000 Own _--
Rome, NY 120,000 Own _--
Centennial, CO 65,000 Own _--
El Paso, TX 29,000 Lease April 2004May 2005
Juarez, Mexico 25,000 Lease December 2007
Montreal, Canada 23,000 Lease March 2009
Tampere, Finland 20,000 Lease June 2004
Santa Barbara, CA 18,000 Lease December 20032008
Frenchs Forest, Australia 17,000 Lease August 2005
Brussels, Belgium 15,000 Lease August 2012
Anaheim, CA 14,000 Lease AugustOctober 2012
Montreal, Quebec 7,200Mississauga, Canada 14,000 Lease March 2009May 2008
Swindon, Wiltshire, UK 10,000 Lease November 2015
Seoul, Korea 7,000 Lease July 2004
Portland, OR 6,6007,000 Lease September 2005
-23-Frankfurt, Germany 7,000 Lease December 2012
Rungis Cedex, France 3,000 Lease October 2005
Barcelona, Spain 3,000 Lease May 2009
Graz, Austria 2,000 Lease October 2009
San Juan Capistrano, CA 2,000 Lease January 2005
- 24 -
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, as would typically be the case primarily in lawsuits
alleging patent infringement, 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 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 million per incident and
$25 million 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 party's 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.
As discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources", on March
10,In November 2003, we settled a contractual disputecommenced litigation against Johnson & Johnson and
several of its subsidiaries, including Ethicon, Inc. for violation of federal
and state antitrust laws. The lawsuit claims that Johnson & Johnson engaged in
illegal and anticompetitive conduct with Bristol-Myers Squibb Companyrespect to sales of product used in
endoscopic surgery, resulting in higher prices to consumers and Zimmer, Inc.; on March 11, 2003the exclusion of
competition. We have sought relief which includes an injunction restraining
Johnson & Johnson from continuing its anticompetitive practice as well as
receiving the maximum amount of damages allowed by law. While we settled a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd.believe that
our claims are well-grounded in fact and law, there can be no assurance that we
will be successful in our claim.
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, 2002.
-24-2003.
- 25 -
PART II
Item 5. Market for the Registrant's Common StockEquity and Related Stockholder
Matters
Our common stock, par value $.01 per share, is traded on the Nasdaq Stock
Market (symbol - CNMD). At December 31, 2002,2003, there were 1,1651,166 registered
holders of our common stock and approximately 6,000 accounts held in "street
name".
The following table shows the high-low lastsets forth quarterly high and low sales prices for the
years ended December 31, 20012002 and 2002,2003, 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.
2001
-------------------2002
----------------------------
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
2002
-------------------
Period High Low
------ ------
First Quarter $25.00 $19.29$ 25.00 $ 19.29
Second Quarter 27.00 22.25
Third Quarter 22.72 15.60
Fourth Quarter 21.52 18.10
2003
----------------------------
Period High Low
----------------------------
First Quarter $ 20.74 $ 13.95
Second Quarter 20.83 16.69
Third Quarter 22.00 18.21
Fourth Quarter 24.30 19.52
We did not pay cash dividends on our common stock during 20012002 and 2002.2003.
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 limitation on the declaration and payment of
cash dividends contained in debt agreements.
Information relating to compensation plans under which equity securities
of CONMED Corporation are authorized for issuance is set forth in the section
captioned "Stock Option Plans" in CONMED Corporation's definitive Proxy
Statement for our 20032004 Annual Meeting of ShareholdersStockholders to be held on May 20, 200318, 2004
and all such information is incorporated herein by reference.
-25-- 26 -
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for the years
ended December 31, 1999, 2000, 2001, 2002 and 2003. The financial data set forth
below should be read in conjunction with the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 of this Form 10-K and the Financial Statements of the Company
and the notes thereto.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December 31,
-----------------------------------------------------
1998----------------------------------------------------------
1999 2000 2001 2002 2003
----------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data (1):
Net sales $339,270 $376,226 $395,873 $428,722 $453,062$ 376,226 $ 395,873 $ 428,722 $ 453,062 $ 497,130
Cost of sales (2) 169,599 178,480 188,223 204,374 215,891 237,433
--------- --------- --------- --------- ---------
Gross profit 197,746 207,650 224,348 237,171 259,697
--------- --------- --------- --------- ---------
Selling and administrative expense (3) 96,475 110,842 128,316112,098 126,807 140,560 141,735139,735 157,453
Research and development expense 12,029 12,108 14,870 14,830 16,087 -------- -------- -------- -------- --------17,306
Write-off of in-process
research and development (3) -- -- -- -- 7,900
Other expense (income)(4) (1,256) 1,509 -- 2,000 (2,917)
--------- --------- --------- --------- ---------
Income from operations 61,167 74,796 64,464 68,958 79,349 79,955
Loss on early extinguishment
of debt (5) -- -- -- 1,475 8,078
Interest expense net 30,891 32,360 34,286 30,824 24,513 -------- -------- -------- -------- --------18,868
--------- --------- --------- --------- ---------
Income before income taxes and extraordinary loss 30,276 42,436 30,178 38,134 54,83653,361 53,009
Provision for income taxes 10,899 15,277 10,864 13,728 19,741
-------- -------- -------- -------- --------
Income before
extraordinary loss (4) 19,377 27,159 19,314 24,406 35,095
Extraordinary loss,
net of income taxes (5) (1,569) -- -- -- (944)
-------- -------- -------- -------- --------19,210 20,927
--------- --------- --------- --------- ---------
Net income (4) $ 17,808(6) $ 27,159 $ 19,314 $ 24,406 $ 34,151 ======== ======== ======== ======== ========$ 32,082
========= ========= ========= ========= =========
Earnings Per Share Before
Extraordinary Loss:(7)
Basic $ 0.86 $ 1.19 $ 0.84 $ 1.02 $ 1.28
======== ======== ======== ======== ========
Basic adjusted for SFAS 142 $ 1.07 $ 1.41 $ 1.08 $ 1.25
======== ======== ======== ========
Diluted $ 0.84 $ 1.17 $ 0.83 $ 1.00 $ 1.26
======== ======== ======== ======== ========
Diluted adjusted for SFAS 142 $ 1.05 $ 1.39 $ 1.07 $ 1.23
======== ======== ======== ========
Earnings Per Share:
Basic $ 0.79 $ 1.19 $ 0.84 $ 1.02 $ 1.25 ======== ======== ======== ======== ========$ 1.11
========= ========= ========= ========= =========
Basic adjusted for SFAS 142 $ 1.00(6) $ 1.41 $ 1.08 $ 1.25 ======== ======== ======== ========1.25 $ 1.11
========= ========= ========= ========= =========
Diluted $ 0.77 $ 1.17 $ 0.83 $ 1.00 $ 1.23 ======== ======== ======== ======== ========$ 1.10
========= ========= ========= ========= =========
Diluted adjusted for SFAS 142 $ 0.98(6) $ 1.39 $ 1.07 $ 1.23 ======== ======== ======== ========$ 1.23 $ 1.10
========= ========= ========= ========= =========
Weighted Average Number of Common Shares In
Calculating:Calculating (7):
Basic earnings per share 22,628 22,862 22,967 24,045 27,337 ======== ======== ======== ======== ========28,930
========= ========= ========= ========= =========
Diluted earnings per share 22,982 23,145 23,271 24,401 27,827 ======== ======== ======== ======== ========29,256
========= ========= ========= ========= =========
Other Financial Data:
Depreciation and amortization $ 23,601 $ 26,291 $ 29,487 $ 30,148 $ 22,370 $ 24,854
Capital expenditures 12,924 9,352 14,050 14,443 13,384 Ratio of earnings to
fixed charges (6) 1.95 2.27 1.85 2.20 3.18
December 31,
-----------------------------------------------------
1998 1999 2000 2001 2002
9,309
Balance Sheet Data:Data (at period end):
Cash and cash equivalents $ 5,906 $ 3,747 $ 3,470 $ 1,402 $ 5,626 $ 5,986
Total assets 628,784 662,161 679,571 701,608 742,140 805,058
Long-term debt (including
current portion) 384,872 394,669 378,748 335,929 257,387 264,591
Total shareholders' equity 182,168 211,261 230,603 283,634 386,939 433,490
-26-- 27 -
(1) Includes, based on the purchase method of accounting, the results of
(i)
the arthroscopy business lineoperations of acquired from 3M Company from November 1998;
(ii) the powered instrument business acquired from 3M Company from
August 1999; (iii) the minimally invasive surgical businesses acquired
from Imagyn Medical Technologies, Inc. from November 2000 and July 2001;
(iv) the businesses acquired in March and July 2002 related to our
Patient Care and Endoscopy product lines; (v) the businesses acquired in
October and November 2002 engaged in the design, manufacture and
installation of integrated operating room systems and related equipment;
in each such case from the date of acquisition. See
additional discussion in Note 2 to the consolidated financial statements.
(2) Includes for 1998, $3.0an acquisition-related charge of $1.6 million of incremental expensein 1999 related to
the excess of thestep-up to fair value at the acquisition date of Linvatec inventory
over the cost to produce; includes for 1999, $1.6 million of incremental
expenserecorded related to the excesssale of the fair value at the acquisition date
over the cost to produce inventory
relatedacquired as a result of a business acquisition; includes
acquisition-related charges of $1.6 million in 2001 and $1.3 million in
2003 as discussed in Note 2 to the powered instrument
businessconsolidated financial statements.
(3) During 2003, we recorded a $7.9 million charge to write-off in-process
research and development assets ("IPRD") acquired from 3M; includes for 2001, $1.6 millionas a result of transition expenses relatedour
purchase of Bionx Implants, Inc. (the "Bionx acquisition") discussed in
Note 2 to the July 2001 acquisition from Imagyn.
(3) Included in selling and administrative expenseconsolidated financial statements.
(4) Includes for 1999, a $1.3 million benefit related to a previously recorded
litigation accrual which was settled on favorable terms. Included in selling and administrative expenseterms; for 2000, a
severance charge of $1.5 million related to the restructuring of our
arthroscopy sales force. Included in selling and administrative
expenseforce; for 2002, a $2.0 million charge related to the
settlement of a patent infringement case.
(4)case; for 2003, a $9.0 million gain on
the settlement of a contractual dispute, $2.8 million in pension
settlement charges, $3.2 million in acquisition-related charges. See
additional discussion in Note 12 to the consolidated financial statements.
(5) Includes in 2002 and 2003, charges of $1.5 million and $8.1 million,
respectively, related to losses on the early extinguishment of debt. See
additional discussion in Note 6 to the consolidated financial statements.
(6) Effective January 1, 2002, the provisions of SFAS 142 were adopted
relative to the cessation of amortization for goodwill and certain
intangibles. Had we accounted for goodwill and certain intangibles in
accordance with SFAS 142 for all periods presented, income before
extraordinary loss would have been $24,153 in 1998, $32,227 in 1999,
$24,889 in 2000 and $30,058 in 2001; net income would have
been $22,584 in
1998, $32,227$32.2 million in 1999, $24,889$24.9 million in 2000 and $30,058$30.1 million in
2001.
(5) In March 1998(7) Earnings per share and August 2002, we recorded extraordinary lossesthe number of $1.6
million and $.9 million, respectively, related toshares used in the write-off of
deferred financing fees on the early extinguishment of debt.
(6) The ratiocalculation of
earnings per share have been restated to fixed charges is calculated by dividing fixed
charges into income before income taxesretroactively reflect a
three-for-two split of our common stock effected in the form of a common
stock dividend and extraordinary items plus fixed
charges. Fixed charges include interest expense, amortization of deferred
financing fees and the estimated interest component of rent expense.
-27-paid on September 7, 2001.
- 28 -
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 in this Form 10-K.
GeneralOverview of CONMED Corporation
CONMED Corporation ("CONMED", the "Company", "we" or "us")is a medical
technology manufacturing company specializingwith six major product lines. These product
lines and the percentage of consolidated revenues associated with each of them,
are as follows:
2001 2002 2003
Arthroscopy 36% 36% 36%
Powered Surgical Instruments 27 25 25
Electrosurgery 16 15 15
Patient Care 16 16 14
Endoscopy 5 8 9
Integrated Operating Room Systems -- -- 1
--- --- ---
Consolidated Net Sales 100% 100% 100%
=== === ===
Most of our products are used in instruments, implantssurgeries with about 75% of our sales
coming from sales of disposable products. We manufacture most of our products in
plants in the United States. We sell in the United States and video equipment for arthroscopic sports medicineinternationally
both direct to customers and powered surgical instruments, such as drillsthrough distributors. International sales
approximated 29% of total net sales in 2001 and saws, for orthopedic, ENT,
neuro-surgery2002 and other surgical specialties. We are33% of total net sales
in 2003.
Business Environment, Opportunities and Challenges
As a leading developer,
manufacturerresult of an aging population and supplier of RF electrosurgery systems used routinely to cut and
cauterize tissue in nearly all types ofimproved surgical procedures, worldwide, endoscopywe
believe the overall market for our products such as trocars, clip appliers, scissorsis growing. We intend to increase
our overall market share by leveraging our entire portfolio of products to
increase sales and surgical staplers and a
full lineprofits. An example of ECG electrodes for heart monitoring and other patient care
products. We also offerthis is our entry in 2002 into the
business of integrated operating room systems and intensive care
unit service managers. Our products are used in a variety of clinical settings,
such asequipment. We can now offer
"one-stop shopping" to our customers by designing and installing integrated
operating rooms surgery centers, physicians' offices and critical care
areasthen providing the capital and disposable products for use
in them.
Where we believe it makes sense, we plan to continue to pursue
acquisitions which enable us to fill gaps in or strengthen our product lines. In
addition, we may enter into agreements which enable us to quickly and
inexpensively expand our product lines and leverage our distribution channels
without an acquisition. An example of hospitals.this is the agreement which we entered in
December 2003 with OSI Systems, Inc., and its subsidiary, Dolphin Medical, Inc.,
under which we are now the exclusive North American distributor for a full line
of pulse oximetry products. These products will become part of our Patient Care
product line.
- 29 -
Certain of our products, particularly our line of surgical suction
instruments and tubing and our line of ECG electrodes, are more commodity in
nature, with limited opportunity for product differentiation. These products
compete in very mature, price sensitive markets. As a result, while sales
volumes are increasing, we have experienced and expect we will continue to
experience pricing and margin pressures in these product lines. We believe we
can continue to profitably compete in these product lines by maintaining and
improving upon our low cost manufacturing structure. In addition, we expect to
continue to use the cash generated from sales of these relatively low margin,
low investment products to invest in, improve and expand our higher margin
product lines.
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 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 equipment shipment and we
recognize revenue upon the disposable product shipment. The cost of
the equipment is amortized over the terms of the commitment
agreements.
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.
-28-
customer
returns and credits, rebates, discounts and current market
conditions.
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.shipment
based upon analysis of historical data.
o Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs of $8.1 million,
$8.6 million,
$7.5 million and $7.5$8.3 million for the years ended 2000,December 31, 2001,
2002 and 2002,2003, respectively, are included in selling and
administrative expense.
- 30 -
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$1.7
million at December 31, 20022003 is adequate to provide for any probable
losses from accounts receivable.
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting from the
potential inability to sell our products at prices in excess of current carrying
costs. The markets in which we operate are highly competitive, with new products
and surgical procedures introduced on an on-going basis. Such marketplace
changes may cause our products to become obsolete. We make estimates regarding
the future recoverability of the costs of our products and record a provision
for excess and obsolete inventories based on historical experience, expiration
of sterilization dates and expected future trends. If actual product life
cycles, product demand or acceptance of new product introductions are less
favorable than projected by management, additional inventory write-downs may be
required.
Business Acquisitions
We completed several acquisitions in 20022003, including the Bionx acquisition
with a purchase prices totaling
approximately $17.4price of $47.0 million, and have a history of growth through
acquisitions. The assets and liabilities 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 $262.4$290.6 million and other
intangible assets of $180.3$194.0 million atas of December 31, 2002.2003.
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 at
least 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.
(See- 31 -
In connection with the Bionx acquisition, significant estimates were made
in the $7.9 million valuation of the purchased in-process research and
development assets. The purchased in-process research and development value
relates to next generation arthroscopy products, which have been or 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 arthroscopic 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.
See Note 2 and Note 5 to the consolidated financial statements).
-29-
statements for further
discussion.
Pension PlansPlan
We sponsor three defined benefit pension plans for the Company and its
subsidiaries.covering substantially all
our employees. These pension plans were merged effective January 1, 2004. Major
assumptions used in the accounting for thesethe 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'plan's measurement date. A
change in any of these assumptions would have an effect on net periodic pension
benefit costs reported in the consolidated financial statements.
Lower market interest rates and plan asset returns have resultedcaused us to lower the discount rate used
in declinesdetermining pension expense from 6.75% in 2003 to 6.25% in 2004. This change
in assumption will result in higher pension expense in 2004.
We have used an expected rate of return on pension plan assets of 8.0% for
purposes of determining the net periodic pension benefit cost. In determining
the expected return on pension plan assets, we consider the relative weighting
of plan assets, the historical performance of total plan assets and individual
asset performanceclasses and funded status. The discount rate
was lowered from 7.0% to 6.75% reflecting current economic conditions. Pensionand other indicators of future performance. In
addition, we consult with financial and investment management professionals in
developing appropriate targeted rates of return. As a result of funding the
maximum deductible pension contributions in 2003, pension plan assets have
increased
- 32 -
substantially, which will result in higher expected returns and decreased
pension expense in 20032004.
Based on these and other factors, 2004 pension expense is expected to be negatively impacted by these changes.estimated at
approximately $5.0 million. Actual expense may vary significantly from this
estimate.
See Note 10 to the consolidated financial statements for further
discussion.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is $11.0approximately $15.5 million at December 31,
2002.2003. 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.
We have established a valuation allowance to reflect the uncertainty of
realizing the benefits of certain net operating loss carryforwards recognized in
connection with the Bionx acquisition. 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.
See Note 7 to the consolidated financial statements for further
discussion.
Results of Operations
2002 Compared to 2001
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the periods
indicated:
Year Ended December 31,
-----------------------
2001 2002 ----- -----2003
---- ---- ----
Net sales ....................................................................... 100.0% 100.0% 100.0%
Cost of sales ............................................................... 47.7 47.7 ----- -----47.8
------ ------ ------
Gross margin ........................................................... 52.3 52.3 52.2
Selling and administrative expense ..................... 32.8 31.330.8 31.7
Research and development expense ......................... 3.5 3.6 ----- -----3.4
Write-off of purchased IPRD ........ -- -- 1.7
Other expense (income) ............. -- 0.4 (0.6)
------ ------ ------
Income from operations ....................................... 16.0 17.417.5 16.0
Loss on early extinguishment of debt -- 0.3 1.6
Interest expense net .................................................... 7.2 5.4
----- -----5.5 3.7
------ ------ ------
Income before income taxes and extraordinary loss .................................... 8.8 12.011.7 10.7
Provision for income taxes ..................................... 3.1 4.3
----- -----
-30-4.2 4.2
------ ------ ------
Net income ...................... 5.7% 7.5% 6.5%
====== ====== ======
- 33 -
Income before extraordinary2003 Compared to 2002
Sales for 2003 were $497.1 million, an increase of $44.0 million (9.7%)
compared to sales of $453.1 million in 2002. The acquisition of Bionx Implants,
Inc. in March 2003 (the "Bionx acquisition") accounted for $12.6 million of the
increase, the acquisition of CORE Dynamics, Inc. in December 2002 (the "CORE
acquisition") accounted for $7.2 million of the increase and favorable foreign
currency exchange rates accounted for $10.8 million of the increase. The Bionx
and CORE acquisitions are described more fully in Note 2 to the consolidated
financial statements.
o Arthroscopy sales increased $15.5 million (9.6%) in 2003 to $177.4
million from $161.9 million in 2002, largely as a result of the
Bionx acquisition.
o Powered surgical instrument sales increased $7.7 million (6.7%) in
2003 to $122.0 million from $114.3 million in 2002, largely on
increased sales of our new PowerPro(R) battery-powered instrument
product line.
o Patient care sales increased $0.3 million (0.4%) in 2003 to $70.0
million from $69.7 million in 2002 as sales of our ECG and surgical
suction product lines continue to face significant competition and
pricing pressures.
o Electrosurgery sales increased $7.6 million (10.9%) in 2003 to $77.3
million from $69.7 million in 2002, as a result of strong sales of
our new System 5000(R) electrosurgical generator.
o Endoscopy sales increased $9.0 million (24.5%)in 2003 to $45.8
million from $36.8 million in 2002, largely as a result of the CORE
acquisition.
o Integrated operating room systems sales for 2003 were $4.6 million
as a result of a full year of the two acquisitions comprising this
product line as compared to $0.7 million for the last two months of
2002.
Cost of sales increased to $237.4 million in 2003 compared to $215.9
million in 2002, primarily as a result of the increased sales volumes described
above. Gross margin percentage decreased slightly to 52.2% in 2003 as compared
to 52.3% in 2002. As discussed in Note 2 to our consolidated financial
statements, during 2003, we incurred $1.3 million in acquisition-related charges
which are included in cost of sales. Additionally, as noted above, our ECG and
surgical suction product lines continue to face significant competition and
pricing pressures resulting in a lower gross margin in these product lines.
Selling and administrative expense increased to $157.5 million in 2003 as
compared to $139.7 million in 2002. As a percentage of sales, selling and
administrative expense totaled 31.7% in 2003 compared to 30.8% in 2002. The
increase in selling and administrative expense as a percentage of sales is due
largely to the transition to a larger, independent sales agent based sales force
for our arthroscopy and powered surgical instrument product lines. During 2003,
we restructured our arthroscopy and powered surgical instrument 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. As part of
the sales force restructuring, we converted 90 direct employee sales
representatives
- 34 -
into nine independent sales agent groups. As a result of this restructuring, we
now have 18 exclusive sales agent groups managing 230 arthroscopy and powered
surgical instrument sales representatives. The transition in the sales force and
its greater number of sales staff is expected to result in higher future sales
growth in our arthroscopy and powered surgical instrument product lines.
Research and development expense totaled $17.3 million in 2003 compared to
$16.1 million in 2002. This increase is largely due to the Bionx acquisition and
represents continued research and development efforts focused primarily on
product development in the arthroscopy and powered surgical instrument product
lines. As a percentage of sales, research and development was 3.4%, consistent
with 3.6% in 2002.
We wrote off purchased in-process research and development assets of $7.9
million in connection with the Bionx acquisition in the first quarter of 2003.
This item is explained in further detail in Note 2 to the consolidated financial
statements.
Other income in 2003 consists of a $9.0 million gain on settlement of a
contractual dispute offset by pension settlement losses of $2.8 million and
acquisition-related charges of $3.2 million. Other expense incurred during 2002
consists of a $2.0 million loss ................... 5.7% 7.7%
===== =====on the settlement of a patent dispute. These
items are explained in further detail in Note 12 to the consolidated financial
statements.
Losses on early extinguishment of debt of $8.1 million in 2003 and $1.5
million in 2002 are related to the refinancing of our debt agreements. These
items are explained in further detail in Note 6 to the consolidated financial
statements.
Interest expense in 2003 was $18.9 million compared to $24.5 million in
2002. The decrease in interest expense is primarily a result of lower weighted
average borrowings outstanding in 2003 as compared to 2002 as well as lower
weighted average interest rates on our borrowings, (inclusive of the implicit
finance charge on our accounts receivable sale facility), which decreased to
5.96% in 2003 as compared to 7.55%, in 2002, as the 9.0% Senior Subordinated
Notes the ("Notes") were retired in favor of lower cost bank debt as discussed
in Note 6 to the consolidated financial statements.
Provision for income taxes has been recorded at an effective rate of 39.5%
in 2003 and 36.0% in 2002. The increase in effective rate is due to the
nondeductibility of the in-process research and development charge. A
reconciliation of the United States statutory income tax rate to our effective
tax rate is included in Note 7 to the consolidated financial statements.
2002 Compared to 2001
Sales for 2002 were $453.1 million, an increase of 5.7%$24.4 million (5.7%)
compared to sales of $428.7 million in 2001. Excluding ourThe acquisition of certain product lines
from Imagyn Medical
Technologies, Inc. in July 2001 (the "second Imagyn"Imagyn acquisition") accounted for $10.4
million of the increase and adjusting for
constantfavorable foreign currency exchange rates sales would have grown by
approximately 2.3%.
o Sales in our orthopedic businesses grew 2.3% to $276.2accounted
for $2.0 million in
2002 from $269.9 million in 2001. Adjusted for constant foreign
currency exchange rates, orthopedic sales growth in 2002 would have
been approximately 1.6% compared with 2001, as the value of the Euro
strengthenedincrease. The Imagyn acquisition is described more fully
in comparison withNote 2 to the dollar.consolidated financial statements.
o Arthroscopy sales which represented approximately 58.6% of total
2002 orthopedic revenues, grew 4.0%increased $6.3 million (4.0%) in 2002 to $161.9
million from $155.6 million in 2001, on strength instrong sales of disposable
products and video equipment.
- 35 -
o Powered surgical instrument sales which represented approximately
41.4% of total 2002 orthopedic revenues, remained flat at $114.3 million in
2002 and 2001. We believe the weakness in sales in the powered
surgical instrument product line wasis a result of our aging
battery-powered product offering which was replaced in March 2002
with our new PowerPro(R)battery-powered instrument product line. We
believe that onceas PowerPro(R)becomes is established in the marketplace, as
was evidenced in 2003, it will enable us to resume overall growth in
powered surgical instrument sales.
Additionally, during 2002 we entered into a
distribution agreement with DePuy Orthopaedics, ("DePuy"), a Johnson
& Johnson Company, which will enable the DePuy sales force to also
sell PowerPro(R)which should aid sales growth in this product line.
o Patient care sales forincreased $0.6 million (0.9%) in 2002 wereto $69.7
million a .9% increase from $69.1 million in 2001 as modest increases in sales of our ECG
and other patient care product lines more than offset declines in sales of our
surgical suction product lines which continue to face significant
competition and pricing pressures.
o Electrosurgery sales forincreased $2.8 million (4.2%) in 2002 wereto $69.7
million an increase of
4.2% from $66.9 million in 2001, driven by increases in
disposable product sales.
o Endoscopy sales forincreased $14.0 million (61.4%) in 2002 wereto $36.8
million an increase of 61.4% from $22.8 million in 2001. Excluding the impactThe increase is largely a result
of the second
Imagyn acquisition in July 2001, as described in Note 2 to our
consolidated financial statements, the increase in endoscopy sales
was approximately 7.0%.acquisition.
o Integrated operating room systems sales for 2002 were $.7$0.7 million
as a result of two acquisitions discussed in Note 2 to our conso-
lidated financial statements.the fourth quarter of 2002.
Cost of sales increased to $215.9 million in 2002 compared to $204.4
million in 2001, primarily as a result of the increased sales volumes described
above. Gross margin percentage remained consistent at 52.3% in 2002 as compared
with 2001. As discussed in NotesNote 2 and 12 to our 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 andin acquisition-related charges which are
included in cost of sales. Excluding
the impact of these non-
-31-
recurring expenses, cost of sales for 2001 was $202.8 million. Gross margin
percentage for 2001, excluding the Imagyn-related charges, was 52.7%, slightly
better than the 52.3%, experienced in 2002. The decrease in gross margin
percentage inDuring 2002, is a result of sales ofwe sold sample PowerPro(R) product, to the
DePuy sales force,
pursuant to a distribution agreement, as discussed above,
which were at gross margins lower than the margins
realized for units sold to end-user customers, as well ascustomers. In addition, during 2002 we
experienced certain unfavorable production variances
experienced in 2002.variances.
Selling and administrative expense increaseddecreased to $141.7$139.7 million in 2002 as
compared to $140.6 million in 2001. As a percentage of sales, selling and
administrative expense totaled 31.3% in 2002 compared to 32.8% in 2001. During 2002, selling and administrative
expense decreased by approximately $8.8 million, before income taxes, as a
result of the adoption of SFAS 142.142 and the discontinuation of amortization of
goodwill and certain intangibles. As discussed in Note 12 to the consolidated financial statements, we settled a patent infringement case which resulted in a fourth quarter 2002 charge topercentage of sales, selling and
administrative expense totaled 30.8% in 2002 compared to 32.8% in 2001. The
decrease in selling and administrative expense as a percentage of $2.0 million, before income taxes.
Excluding the impactssales is due
to reduced amortization expense as a result of the adoption of SFAS 142 and the patent litigation
charge, selling and administrative expense in 2002 would have been approximately
$148.5 million or 32.8% as a percentage of sales, the same as in 2001.142.
Research and development expense totaled $16.1 million in 2002 compared to
$14.8 million in 2001. This increase represents continued research and
development efforts primarily focused on product development in the
electrosurgery, arthroscopy and orthopedicpowered surgical instrument product lines. As a
percentage of sales, research and development was 3.6%, consistent with 3.5% in
2001.
Other expense incurred during 2002 consists of a $2.0 million loss on the
settlement of a patent dispute. This charge is explained in further detail in
Note 12 to the consolidated financial statements.
- 36 -
Losses on early extinguishment of debt of $1.5 million in 2002 are related
to the refinancing of our debt agreements. These items are explained in further
detail in Note 6 to the consolidated financial statements.
Interest expense in 2002 was $24.5 million compared to $30.8 million in
2001. The decrease in interest expense is primarily a result of lower totalweighted
average borrowings outstanding duringin 2002 as compared to the same period a year ago, as
borrowings have declined to $257.4 million at December 31, 2002 as compared to
$335.9 million at December 31, 2001. The weighted average interest rates on our
borrowings increased slightly to 6.93% at December 31, 2002 as compared to 6.31%
at December 31, 2001 as borrowings under our senior credit facility were reduced
while borrowings under our Senior Subordinated Notes remained at $130 million.
During 2002, we terminated our former senior credit agreement and entered
into a new senior credit agreement. Accordingly, we recorded an extraordinary
charge on the early extinguishment of debt, of approximately $.9 million, net of
income taxes, to write-off the remaining unamortized deferred financing costs
associated with the approximately three years remaining on the old senior credit
agreement.
2001 Compared to 2000
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the periods
indicated:
Year Ended December 31,
-----------------------
2000 2001
----- -----
Net sales ............................................. 100.0% 100.0%
Cost of sales ......................................... 47.5 47.7
----- -----
Gross margin ....................................... 52.5 52.3
Selling and administrative expense .................... 32.4 32.8
Research and development expense ...................... 3.8 3.5
----- -----
-32-
Income from operations ............................. 16.3 16.0
Interest expense, net ................................. 8.7 7.2
----- -----
Income before income taxes ......................... 7.6 8.8
Provision for income taxes ............................ 2.7 3.1
----- -----
Net income ......................................... 4.9% 5.7%
===== =====
Sales for 2001 were $428.7 million, an increase of 8.3% compared to sales
of $395.9 million in 2000. Excluding our acquisition of certain product lines
from Imagyn in November 2000 (the "Imagyn acquisition") and July 2001, and
adjusting for constant foreign currency exchange rates, sales would have grown
by approximately 5.2%.
o Sales in our orthopedic businesses grew 4.3% to $269.9 million in 2001
from $258.8 million in 2000. Adjusted for constant foreign currency
exchange rates, orthopedic sales growth in 2001 would have been
approximately 5.5% compared with 2000, as the value of the Canadian
dollar and certain European currencies weakened in comparison with the
dollar.
o Arthroscopy sales, which represented approximately 57.7% of total 2001
orthopedic revenues, grew 7.3% in 2001 to $155.6 million from $145.0
million in 2000, on strength in sales of disposable products and video
equipment.
o Powered surgical instrument sales, which represented approximately
42.3% of total 2001 orthopedic revenues, grew 1.0% to $114.3 million
in 2001 from $113.7 million in 2000. We believe the weakness in sales
in the powered surgical instrument product line was a result of our
aging battery-powered product offering which has been replaced by our
new PowerPro(R) battery-powered instrument product line, as we
describe above.
o Patient care sales for 2001 were $69.1 million, a 1.3% increase from
$68.2 million in 2000, as modest increases in sales of our ECG and
other patient care product lines more than offset declines in sales of
surgical suction product lines which occurred as a result of
significant competition and pricing pressures.
o Electrosurgery sales for 2001 were $66.9 million, an increase of 7.0%
from $62.5 million in 2000, driven by increases in electrosurgical
pencil and other disposable product sales.
o Endoscopy sales for 2001 were $22.8 million, an increase of 256% from
$6.4 million in 2000. Excluding the impact of the Imagyn acquisitions
in November 2000 and July 2001, as described in Note 2 to our
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 in 2000, primarily as a result of the increased sales volumes described
above. As discussed in Notes 2 and 12 to our 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-
-33-
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% in 2000.
Including the Imagyn-related charges, gross margin percentage for 2001 was
52.3%.
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 orthopedic direct sales force, as described
in Note 12 to our consolidated financial statements, selling and administrative
expenses as a percentage of sales were 32.0% in 2000. This restructuring
involved replacing our orthopedic 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. Our research and development efforts are focused primarily
on new product development in the orthopedic product lines.
Interest expense in 2001 was $30.8 million compared to $34.3 million in
2000. The decrease in interest expense is primarily a result of lower
weighted average interest rates on our borrowings, outstanding(inclusive of the implicit
finance charge on our accounts receivable sale facility), which have declineddecreased to
6.31% at December 31, 20017.55% in 2002 as compared to 8.84%8.08% in 2001.
Provision for income taxes has been recorded at December 31, 2000.an effective rate of 36%
for 2002 and 2001. A reconciliation of the United States statutory income tax
rate to our effective tax rate is included in Note 7 to the consolidated
financial statements.
Liquidity and Capital Resources
Cash generated from our operations, including sales of accounts receivable
and borrowings under our revolving credit facility, have traditionally providedprovide the working capital
for our operations, debt service under our senior credit facilityagreement and the
funding of our capital expenditures. In addition, we have useduse term borrowings,
including:
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.
On May 29, 2002, we completed a public offeringCash provided by operations
Our net working capital position was $146.3 million at December 31, 2003.
Net cash provided by operations increased to $58.0 million in the year ended
December 31, 2003 compared to $44.9 million in 2002.
Net cash provided by operations in 2003 was positively impacted by the
following: depreciation, amortization and deferred income taxes; the non-cash
write-off of 3.0 million shares of
our common stock. Net proceeds to the Companyremaining unamortized deferred financing costs related to the
saleextinguishment of our 9% senior subordinated notes; the non-cash write-off of
purchased in-process research and development assets; and increased sales of
accounts receivable and an increase in income taxes payable.
Net cash provided by operations in 2003 was negatively impacted by the
following: $11.1 million in pension contributions in excess of the shares
approximated $66.1$8.4 million
and were usedin net periodic pension benefit cost recognized in the consolidated statement of
income made to reduce indebtedness underthe underfunding of our former
senior credit agreement. We expectpension plans; the increase in
working capital as a result of the Bionx acquisition (discussed in Note 2 to the
consolidated financial statements); increases in accounts receivable and
inventory as a result of growth in our business; and decreases in accounts
payable and accrued interest, primarily related to the timing of the payment of
these liabilities.
Investing cash flows
Net cash used by investing activities in 2003 included $55.1 million in
payments related to business acquisitions, net of cash acquired, most of which
is
- 37 -
related to the Bionx acquisition and the remainder related to several smaller
acquisitions as discussed in Note 2 to the consolidated financial statements.
Capital expenditures in 2003 were $9.3 million compared to $13.4 million
in 2002. The decrease in capital expenditures compared to a year ago is a result
of the completion of several large capital projects. Capital expenditures
representing the ongoing capital investment requirements of our business are
expected to continue at the rate of approximately $9.0 to use$12.0 million
annually.
Financing cash flow from our
operations andflows
Financing activities in 2003 consist primarily of $160.0 million in
borrowings under our revolving credit facility to finance our
operations, our debt service under our new senior credit facility and term
borrowings and the funding of our capital expenditures.
-34-
During 2002, we entered into a new $200 million senior credit agreement (the "newand the retirement, primarily in
June 2003, of $130.0 million in 9.0% senior credit agreement")subordinated notes (discussed in
Note 6 to the consolidated financial statements). The newIn addition to the retirement
of the $130.0 million in Notes, the Company repaid an additional $22.8 million
in borrowings originating largely as a result of the Bionx acquisition
(discussed in Note 2 to the consolidated financial statements). Annual savings
in interest costs based on December 31, 2003 borrowing and interest rate levels
as a result of the retirement of the Notes is estimated at approximately $6.0
million.
Our senior credit agreement consists of a $100 million revolving credit
facility and a $100$260 million term loan. The
proceeds of the term loan portion of the new senior credit agreementThere were used
to eliminate the term loans andno borrowings outstanding on
the revolving credit facility under the previously existing senior credit agreement (the "former senior credit
agreement").as of December 31, 2003. The new senior credit agreement calls for both components to extend
for approximately five years, with the revolving credit facility terminating on
August 28, 2007 and the term loan expiring on December 15, 2007. The term loan
portion of the facility can be extended an additional two years, provided our
currentlybalance outstanding $130 million in 9% Senior Subordinated Notes are
refinanced or repaid by December 15, 2007. The scheduled principal payments
on the term loan portionfacility at December 31, 2003 was $243.0 million. The term loan
facility extends for approximately 6 years, with scheduled principal payments of
the new senior credit agreement are $1.0$2.6 million annually withthrough December 2007 increasing to $71.0 million in 2008
and the remaining balance outstanding due and payable onin December 15,
2007.2009. We may also be required,
under certain circumstances, to make additional principal payments based on
excess cash flow as defined in the newamended senior credit agreement. We are notNo such
payments were required to make an excess cash flow payment based onfor the application of these tests to 2002.year-ended December 31, 2003. Interest rates on
the term loan and
revolving credit facility components of the new senior credit agreement are LIBOR plus 275 basis points and LIBOR plus 250 basis points, respectively, or an
alternative base interest rate. The weighted average interest rates2.25% (3.41% at December 31, 20022003). Interest
rates on the term loan and revolving credit facility were 4.18% and 5.75%,
respectively. In addition, we are obligated to pay a fee of .5% per annum on the
unused portion of the revolving credit facility ($95.0 millionare LIBOR plus 2.50% (3.66% at December
31, 2002)2003).
The new senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and related
rights which are pledgedhave been sold in connection with our accounts receivable sales
agreement. The new 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 new 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.
The Senior Subordinated Notes (the "Notes") are in aggregate principal
amount of $130.0 million, have a maturity date of March 15, 2008 and bear
interest at 9.0% per annum which is payable semi-annually. 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. On March 12, 2003, we served notice
to the trustee for the Notes that we would redeem $15.0 million par value of the
Notes, on May 1, 2003, at the redemption price of 104.5%, for a total redemption
price of $15.7 million, plus accrued and unpaid interest. We intend to redeem
the Notes through borrowings under our revolving credit facility. The premium
paid on the Notes will be recorded as a charge to operating income in the second
quarter of 2003.
We used term loans to purchase the property in Largo, Florida utilized by
our Linvatec subsidiary. The term loans consistdebt assumed in 2001 in connection with the
purchase consists of a Class A note bearing interest at 7.50% per annum with semiannual
payments of principal and interest through SeptemberJune 2009 (the "Class A note"); and a Class C
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 and(the "Class C note"). Additionally, there is a
seller-financed note bearingwhich bears interest at 6.50% per annum with monthly
payments of principal and interest -35-
through July 2013.2013 (the "Seller note"). The
principal balances assumed on
- 38 -
the Class A note, Class C note and Seller note aggregated $12.3 million $6.2
million and $4.2 million, respectively, at the date of acquisition. The
principal balances outstanding on the Class A note, Class C note and
seller-financed note aggregate $10.7$9.6 million, $6.9$7.5 million and $4.0$3.8 million,
respectively, at December 31, 2002.
Our net working capital position was $135.7 million at December 31, 2002
as compared to $44.7 million at December 31, 2001. Included in net working
capital at December 31, 2001 was $56.0 million owed on2003. These loans are secured by our revolving credit
facility which was due to expire on December 31, 2002. As discussed above,
during 2002, we entered into a new $200 million senior credit agreement. The
proceeds of the new senior credit agreement were used to eliminate the existing
term loans and borrowings on the revolving credit facility under the former
senior credit agreement. Accordingly, balances outstanding on the former
revolving credit facility have been reclassified from current to long-term
obligations.Largo,
Florida property.
Off-Balance Sheet Arrangements
We have a five-yearan 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 consolidated
wholly-owned, bankruptcy-remote,
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 (the "asset interest") to a commercial paper conduit. The accounts
receivable sales agreement was amended and restated on substantially the same
terms and conditions on October 23, 2003 but replaced the commercial paper
conduit with a bank. The commercial paper conduit or the bank's (the
"conduit purchaser""purchaser"). The conduit purchaser's share of collections on accounts receivable are calculated as
defined in the accounts receivable sales agreement.agreement, as amended. Effectively,
collections on the pool of receivables flow first to the conduit
purchaser and then to
CRC. ToCRC, but to the extent that the conduit purchaser's share of collections were less than
the amount of the conduit purchaser's asset interest, there is no recourse to CONMED or
CRC for such shortfall. For receivables that have been sold, CONMED Corporation
and its subsidiaries retain collection and administrative responsibilities as
agent for the conduit purchaser. As of December 31, 20012002 and 2002,2003, the undivided
percentage ownership interest in receivables sold by CRC to the conduit purchaser
aggregated $40.0$37.0 million and $37.0$44.0 million, respectively, which has been
accounted for as a sale and reflected in the balance sheet as a reduction in
accounts receivable. Expenses associated with the sale of accounts receivable,
including the purchaser's financing costs to purchase the accounts receivable,
were $1.2 million and $0.8 million, in 2002 and 2003, respectively and are
included in interest expense.
There are certain statistical ratios, primarily related to sales dilution
and losses on accounts receivable, which must be calculated and maintained on
the pool of receivables in order to continue selling to the conduit purchaser. The pool
of receivables is in full compliance with these ratios. 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 conduit purchaser rather than being used to fund new
receivable purchases. If this wereTo the extent that such collections would not be available
to occur,CONMED in the form of new receivables purchases, we would need to access an
alternate source of working capital, such as our $100 million revolving credit
facility. Our accounts receivable sales agreement, as amended, also requires us
to enter intoobtain a liquidity agreement with certain banks under whichcommitment (the "purchaser commitment"), on an annual basis, from
the banks agree to commitpurchaser to fund the conduit's purchase of our accounts receivable in the event that the conduit is unable to fund such purchases
through the sale of commercial paper. These liquidity agreements are typically
for a period of 364 days which requires us to renew our liquidity agreement on
an annual basis.receivable. The purchaser
commitment expires October 21, 2004. In the event we wereare unable to renew our
liquidity agreement,purchaser commitment, we would need to access an alternate source of working
capital, such as our $100 million revolving credit facility.
Net cash provided by operations, which we also refer to as "operating cash
flow," was $44.9 million in 2002 compared to $77.1 million in 2001. Excluding
the effects of the sale of accounts receivable, operating cash flow increased to
$47.9 million in 2002 compared to $37.1 million in 2001.
-36-- 39 -
In reconciling net income to operating cash flow, operating cash flow in
2002 was positively impacted by depreciation, amortization and increases in
accounts payable, income taxes payable and deferred income taxes and negatively
impacted primarily by increases in accounts receivable and inventory and
decreases in accrued compensation and accrued interest. The increases in
accounts receivable and inventory are primarily related to an increase in sales.
The increases in accounts payable, income taxes payable and deferred income
taxes and decreases in accrued compensation and interest are primarily related
to the timing of the payment of these liabilities.
Capital expenditures in 2002 were $13.4 million. These capital expenditures
represent the ongoing capital investment requirements of our business and are
expected to continue at approximately this same rate annually. Net cash used by
investing activities in 2002 also included $17.4 million related to the purchase
of several businesses as discussed in Note 2 to the consolidated financial
statements.
Financing activities in 2002 consist primarily of the completion of a
public offering of 3.0 million shares of our common stock and the completion of
a new $200 million senior credit facility as discussed above. The $66.1 million
in proceeds from the stock offering were used to repay term loans under our
former senior credit agreement. Net repayments on our debt as a result of the
stock offering and cash generated from operations totaled $78.5 million in 2002.
Concurrent with the stock offering, we repurchased for $2.0 million from
Bristol-Myers Squibb Company a warrant exercisable for 1.5 million shares of our
common stock. Proceeds from the exercise of stock options totaled $5.0 million
in 2002.
On January 13, 2003, we entered into an agreement to acquire Bionx
Implants, Inc. (the "Bionx acquisition") in a cash transaction valuing Bionx at
$4.35 per share. We completed the acquisition on March 10, 2003, paying $46.9
million in cash which we financed through borrowings under our revolving credit
facility.
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 has paid us
$9.5 million in cash, which will be recorded as a gain to operating income in
the first quarter of 2003 net of legal costs.
On March 11, 2003, we agreed to settle a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd. In return for a
one-time $1.5 million payment, CONMED has been granted a nonexclusive license to
the disputed patents used to manufacture the gels used in certain of our ECG
product lines. Accordingly, we recorded a charge to income in the fourth quarter
of 2002 for the $1.5 million plus legal costs of approximately $.5 million.
Management believes that cash generated from operations, our current cash
resources and funds available under our new 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 December 31, 2002.
The following table summarizes our contractual obligations related to operating leasesfor the next
five years and long-term debtthereafter (amounts in thousands). There were no capital lease
obligations as of December 31, 2002:
-37-
(Amounts in thousands)
2003 2004 2005 2006 2007 Thereafter
------ ------ ------ ------2003.
Payments Due by Period
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
-------- ------------------ -------- -------- --------
Long-term debt ........... $2,631 $2,554 $2,741 $2,943 $102,914 $143,604..... $264,591 $ 4,143 $ 8,862 $ 78,171 $173,415
Purchase Obligations 19,700 1,200 5,500 13,000 --
Operating lease
obligations ............ 1,698 1,499 1,235 1,213 1,233 3,138
------ ------ ------ ------.... 11,832 2,127 3,571 3,407 2,727
-------- ------------------ -------- -------- --------
Total contractual
cash obligations ....... $4,329 $4,053 $3,976 $4,156 $104,147 $146,742
====== ====== ====== ======Obligations .... $296,123 $ 7,470 $ 17,933 $ 94,578 $176,142
======== ================== ======== ======== ========
Stock-based Compensation
We have reserved shares of common stock issuance to employees and
directors under fourthree shareholder-approved stock option 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.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets to be held and
used and for long-lived assets to be disposed of. This Statement supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 retains the fundamental provisions of
Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used, and (b) measurement of long-lived assets
to be disposed of by sale. Effectively January 1, 2002, we adopted this
pronouncement, which had no impact on the financial condition or results of
operations for the year ended December 31, 2002.
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 will adopt
this pronouncement during 2003. As a result we expect to 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 did not
-38-
have an impact on our financial condition or results of operations for the year
ended December 31, 2002.
In October 2002 the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 02-17("EITF 02-17"), "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination" which addresses certain customer -related
intangible assets acquired in a business combination in accordance with SFAS
No.141, "Business Combinations". SFAS 141 requires that an identifiable
intangible asset acquired in a business combination be recorded apart from
goodwill. EITF 02-17 requires a customer related intangible asset acquired in a
business combination to be recorded apart from goodwill and amortized over its
estimated useful life. This EITF is to be applied to all business combinations
consummated after October 25, 2002. We are reviewing the effect of EITF 02-17 on
the accounting for our acquisitions during the fourth quarter of 2002. The
existing customer relationship intangible asset recorded by the Company will
continue to be accounted for as a separate indentifiable intangible asset
subject to amortization.
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. We are reviewing FIN 45 to determine its
impact, if any, on future reporting periods, and do not currently anticipate any
material accounting impact on our financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123, "Accounting for
Stock-Based Compensation" to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
will continue to account for stock-based compensation using the intrinsic value
method and will continue to provide pro forma disclosures of the net income and
earnings per share effect of stock options using the "fair value method" in our
annual and interim financial statements.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued. The interpretation provides guidance on consolidating variable
interest entities and 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
are reviewing FIN No. 46 to determine its impact, if any, on future reporting
periods, and do not currently anticipate any material accounting or disclosure
requirement under the provisions of the interpretation.
-39-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal market risks involve foreign currency exchange rates,
interest rates and credit risk.
Foreign currency risk
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 31, 2002,2003,
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 2002,2003, changes
in foreign currency exchange rates increased our sales by approximately $10.8
million and income before income taxes by approximately $2.0$7.8 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.
Interest rate risk
Our exposure to market risk for changes in interest rates relates to our
borrowings. Interest rate swaps, a form of derivative, are used to manage
interest rate risk. As of December 31, 20022003, we had entered into an interest
rate swap with a $50.0 million notional amount expiring in June 20032004 which
convertedeffectively converts $50.0 million of the approximate $105.0$243.0 million of floating
rate borrowings under our senior credit facilityagreement into fixed rate borrowings
with a base interest rate of 7.01%3.63%. We amended this swap effective February 11, 2003 to lower the base
rate on the $50.0 million in floating rate borrowings to 3.63% and extend the
expiration date to June 2004. IfAssuming we make our 2004 scheduled term
loan payments, if market interest rates for similar borrowings average 1% more
in 20032004 than they did in 2002,2003, our interest expense, after considering the
effects of our interest rate swap, would increase, and income before income
taxes would decrease by $1.0$2.3 million. Comparatively, if market interest rates
averaged 1% less in 20032004 than they did during 2002,2003, our interest expense, after
considering the effects of our interest rate swap, would
- 40 -
decrease, and income before income taxes would increase by $1.0$2.3 million. These
amounts are determined by considering the impact of hypothetical interest rates
on our borrowing cost and interest rate swap agreement and doesdo not consider any
actions by management to mitigate our exposure to such a change.
Credit Risk
A substantial portion of our accounts receivable are due from hospitals
and other healthcare providers. We generally do not receive collateral for these
receivables. Although the concentration of these receivables with customers in a
similar industry poses a risk of non-collection, we believe this risk is
mitigated somewhat by the large number and geographic dispersion of these
customers and by frequent monitoring of the creditworthiness of the customers to
whom credit is granted in the normal course of business.
Exposure to credit risk is controlled through credit approvals, credit
limits and monitoring procedures, and we believe that reserves for losses are
adequate. There is no significant net exposure due to any individual customer or
other major concentration of credit risk.
-40-
Item 8. Financial Statements and Supplementary Data
Our 20022003 Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP dated March 28, 2003,February 27, 2004, are included elsewhere
herein.
Item 9. Changes inIn 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.
-41-Item 9A. Controls and Procedures
The Company has carried out an evaluation under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon the Company's evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2003, the disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the
reports the Company's files and submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported as and when required.
There has been no change in the Company's internal control over financial
reporting during the Company's fiscal year ended December 31, 2003 that has
materially affected, or is reasonable likely to materially effect, the Company's
internal control over financial reporting.
- 41 -
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Executive Officers, the Audit
Committee and Audit Committee financial experts is incorporated herein by
reference to the sections captioned "Proposal One: Election of Directors" and
"Directors, Executive Officers, Senior Officers and Senior Officers"Nominees for the Board of
Directors" in CONMED Corporation's definitive Proxy Statement to be mailed on or
about April 15, 20035, 2004 for the annual meeting of shareholders to be held on May 20,
2003.18,
2004.
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 15, 20035, 2004
for the annual meeting of shareholders to be held on May 20, 2003.18, 2004.
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
15, 20035, 2004 for the annual meeting of shareholders to be held on May 20, 2003.18, 2004.
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 15, 20035, 2004 for the annual meeting of shareholders to be held on May
20, 2003.18, 2004.
Item 14. ControlsPrincipal Accounting Fees and Procedures
WithinServices
Information with respect to fees billed, the 90-day period priorAudit Committee's
pre-approval policies and procedures with regard to such fees and the nature of
services provided by our independent auditor, PricewaterhouseCoopers LLP, is
incorporated herein by reference to the filingsection captioned "Audit Fees" in CONMED
Corporation's definitive Proxy Statement to be mailed on or about April 5, 2004
for the annual meeting 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 subsequentshareholders to the date of their evaluation.
-42-be held on May 18, 2004.
- 42 -
PART IV
Item 15. 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 AccountantsAuditors F-1
Consolidated Balance Sheets at December 31, 20012002 and 20022003 F-2
Consolidated Statements of Income for the Years Ended F-3
December 31, 2000, 2001, 2002 and 2002 F-32003
Consolidated Statements of Shareholders' Equity for the Years F-4
Ended December 31, 2000, 2001, 2002 and 2002 F-42003
Consolidated Statements of Cash Flows for the Years Ended F-6
December 31, 2000, 2001, 2002 and 2002 F-62003
Notes to Consolidated Financial Statements F-8
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule VIII) F-35II) F-32
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
4745 below are filed as part of this Form 10-K.
(b) Reports on Form 8-K
None
-43-- 43 -
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 28, 20031, 2004
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 28, 20031, 2004
/s/ JOSEPH J. CORASANTI President, Chief Operating
- ------------------------------------------------------------- Officer and Director March 28, 20031, 2004
Joseph J. Corasanti
/s/ ROBERT D. SHALLISH JR. Vice President-Finance
- ------------------------------------------------------------- And Chief Financial Officer March 28, 2003
Robert D. Shallish, Jr. (Principal Financial Officer) March 1, 2004
/s/ LUKE A. POMILIO Vice President - Corporate
- ------------------------------------------------------------- Controller (Principal March 28, 2003
Luke A. Pomilio Accounting Officer) March 1, 2004
/s/ BRUCE F. DANIELS
- ------------------------------------------------------------- Director March 1, 2004
Bruce F. Daniels
/s/ Jo ANN GOLDEN
- -------------------------------- Director March 28, 20031, 2004
Jo Ann Golden
/s/ STEPHEN M. MANDIA
- ------------------------------------------------------------- Director March 1, 2004
Stephen M. Mandia Director March 28, 2003
/s/ WILLIAM D. MATTHEWS
- ------------------------------------------------------------- Director March 1, 2004
William D. Matthews Director March 28, 2003
/s/ ROBERT E. REMMELL
- ------------------------------------------------------------- Director March 1, 2004
Robert E. Remmell Director March 28, 2003
/s/ STUART J. SCHWARTZ
- ------------------------------------------------------------- Director March 1, 2004
Stuart J. Schwartz
Director March 28, 2003
-44-
CERTIFICATION
I, Eugene R. Corasanti, certify that:
1. I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
March 28, 2003
/s/ Eugene R. Corasanti
----------------------------------------
Eugene R. Corasanti
Chairman of the Board and
Chief Executive Officer
-45-
CERTIFICATION
I, Robert D. Shallish, certify that:
1. I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
March 28, 2003
/s/ Robert D. Shallish Jr.
----------------------------------------
Robert D. Shallish, Jr.
Vice President - Finance and
Chief Financial Officer
-46-44 -
Exhibit Index
Exhibit No. Description of Instrument
- ----------- -------------------------No.
2.1 - 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 reportQuarterly
Report on Form 10-Q filed on August 13, 2001.
2.2 - 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 reportQuarterly Report on Form 10-Q filed on August 13, 2001.
2.3 - The Agreement and Plan of Merger dated January 13, 2003 by and
among CONMED Corporation, Arrow Merger Corporation and Bionx
Implants, Inc. - incorporated herein by reference to Exhibit 2.5
of our Annual Report on Form 10-K for the year ended December 31,
2002.
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 reportQuarterly
Report on Form 10-Q filed on November 14, 2001.
2.42.5 - The ReceivablesAmendment No. 1 dated October 23, 2003 to the Purchase and Sale
Agreement dated November 1, 2001 among CONMED Corporation, et al
and CONMED Receivables Corporation Blue Keel
Funding, LLC- incorporated herein by
reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q
filed on November 13, 2003.
2.6 - Amended and Restated Receivables Purchase Agreement, dated October
23, 2003, among CONMED Receivables Corporation, CONMED
Corporation, and Fleet National Bank - incorporated herein by
reference to Exhibit 10.210.1 of our reportQuarterly Report on Form 10-Q
filed on November 14, 2001.
2.5 - The Agreement and Plan of Merger dated January 13, 2003
by and among CONMED Corporation, Arrow Merger
Corporation and Bionx Implants, Inc.2003.
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).1991.
3.2 - 1999 Amendment to Certificate of Incorporation and Restated
Certificate of Incorporation of CONMED Corporation - incorporated
herein by reference to Exhibit 3.2 in 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.
- 45 -
Exhibit Description of Instrument
No.
4.3 - Amended and Restated Credit Agreement, dated August 28, 2002June 30, 2003, among
CONMED Corporation, JPMorgan Chase Bank and the several banks and
other financial institutions or entities from time to time parties
thereto - incorporated herein by reference to Exhibit 10.1 of our
reportQuarterly Report on Form 10-Q filed on October 31,
2002.August 14, 2003.
4.4 - First Amendment to Amended and Restated Credit Agreement, dated
December 23, 2003, among CONMED Corporation, JPMorgan Chase Bank
and the several other financial institutions or entities from time
to time parties thereto.
4.5 - Guarantee and Collateral Agreement, dated August 28, 2002, made by
CONMED Corporation and certain of its subsidiaries -47-
Exhibit No. Description of Instrument
- ----------- -------------------------
in favor of
JPMorgan Chase Bank - incorporated herein by reference to Exhibit
10.2 of our reportQuarterly Report on Form 10-Q filed on October 31,
2002.
4.54.6 - Indenture,First Amendment to Guarantee and Collateral Agreement, dated as of March 5, 1998,June
30, 2003, made by and among CONMED Corporation and certain of its
subsidiaries in favor of JPMorgan Chase Bank and the Subsidiary Guarantors named
thereinseveral banks
and First Union National Bank, as
Trustee--incorporatedother financial institutions or entities from time to time
parties thereto - incorporated herein by reference to the exhibit inExhibit 10.2
of our Registration StatementQuarterly Report on Form S-810-Q filed on March 26,
1998 (File No. 333-48693).August 14, 2003.
10.1 - Employment Agreement between the Company and Eugene R. Corasanti,
dated December 16, 1996-- incorporated herein by reference to
the exhibitExhibit 10.1 in our Annual Report on Form 10-K for the year ended
December 31, 1996.
10.2 - Amendment to December 16, 1996 Employment Agreement between the
Company and Eugene R. Corasanti, dated March 7, 2002.2002 -
incorporated herein by reference to Exhibit 10.10 in our Annual
Report on Form 10-K for the year ended December 31, 2001.
10.3 - Employment Agreement between the Company and Joseph J. Corasanti,
dated May 2, 2000 - incorporated herein by reference to the exhibitExhibit
10.9 in our Annual Report on Form 10-K for the year ended December
31, 2000.
10.4 (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).
10.5 - 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.
10.6 - 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.
-48-
Exhibit No. Description of Instrument
- ----------- -------------------------
10.710.5 - Amended and Restated Employee Stock Option Plan (including form of
Stock Option Agreement) --incorporated herein by reference to
the exhibitExhibit 10.6 in our Annual Report on Form 10-K for the year ended
December 31, 1996.
10.8- 46 -
Exhibit Description of Instrument
No.
10.6 - Stock Option Plan for Non-Employee Directors of CONMED
Corporation-- incorporated by reference to Exhibit 10.5 in our
Annual Report on Form 10-K for the year ended December 31, 1996.
10.910.7 - Amendment to Stock Option Plan for Non-employee Directors of
CONMED Corporation - incorporated by reference to the Definitive
Proxy Statement for the 2002 annual meeting as filed on April 17,
2002.
10.1010.8 - 1999 Long-term Incentive Plan - incorporated by reference to the
Definitive Proxy Statement for the 1999 annual meeting as filed on
April 16, 1999.
10.1110.9 - Amendment to 1999 Long-term Incentive Plan - incorporated by
reference to the Definitive Proxy Statement for the 2002 annual
meeting as filed on April 17, 2002.
10.1210.10 - 2002 Employee Stock Purchase Plan - incorporated by reference to
the Definitive Proxy Statement for the 2002 annual meeting as
filed on April 17, 2002.
1214 - Statement re: ComputationCode of RatiosEthics - The CONMED code of Earnings to Fixed
Charges.ethics may be accessed via the
Company's website at http://www.conmed.com/investor-ethics.htm
21 - Subsidiaries of the Registrant.
23 - Consent, dated March 28, 2003,12, 2004, of PricewaterhouseCoopers LLP,
independent accountants for CONMED Corporation.
-49-31.1 - Certification of Eugene R. Corasanti pursuant to Rule 13a-14(a),
of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of Robert D. Shallish, Jr. pursuant to Rule
13a-14(a), of the Exchange Act, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 - Certifications of Eugene R. Corasanti and Robert D. Shallish, Jr.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
On October 29, 2003, the Company filed a Report on Form 8-K furnishing as
Exhibit 99.1 under Item 12, an October 24, 2003 press release announcing third
quarter and nine month period ending September 30, 2003 results.
On February 3, 2004, the Company filed a Report on Form 8-K furnishing as
Exhibit 99.1 under Item 12, a January 29, 2004 press release announcing fourth
quarter and year ended December 31, 2003 results.
- 47 -
REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS
To the Board of Directors and
Shareholders of CONMED Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15 (a)(1) on Page 43 present fairly, in all material
respects, the financial position of CONMED Corporation and its subsidiaries at
December 31, 20022003 and 2001,2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002,2003, 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 15 (a)(2) on Page 43 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.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".
PricewaterhouseCoopers LLP
Syracuse, New York
March 28, 2003February 27, 2004
F-1
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 20012002 and 20022003
(In thousands except share amounts)
2001 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 1,402 $ 5,626
Accounts receivable, less allowance for doubtful
accounts of $1,553 in 2001 and $922 in 2002 ........ 51,188 58,093
Inventories ............................................ 107,390 120,443
Deferred income taxes .................................. 1,105 6,304
Prepaid expenses and other current assets .............. 3,464 3,200
-------- --------
Total current assets ........................... 164,549 193,666
-------- --------
Property, plant and equipment, net ....................... 91,026 95,608
Goodwill, net ............................................ 251,140 262,394
Other intangible assets, net ............................. 184,383 180,271
Other assets ............................................. 10,510 10,201
-------- --------
Total assets ................................... $701,608 $742,140
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...................... $ 73,429 $ 2,631
Accounts payable ....................................... 19,877 22,074
Accrued compensation ................................... 11,863 10,463
Income taxes payable ................................... 2,507 5,885
Accrued interest ....................................... 4,954 3,794
Other current liabilities .............................. 7,207 13,127
-------- --------
Total current liabilities ...................... 119,837 57,974
-------- --------
Long-term debt ........................................... 262,500 254,756
Deferred income taxes .................................... 18,655 28,446
Other long-term liabilities .............................. 16,982 14,025
-------- --------
Total liabilities .............................. 417,974 355,201
-------- --------
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; 25,261,590 and 28,808,105, issued and
outstanding in 2001 and 2002, respectively ......... 253 288
Paid-in capital ........................................ 160,757 231,832
Retained earnings ...................................... 128,240 162,391
Accumulated other comprehensive loss ................... (5,197) (7,153)
Less 37,500 shares of common stock in treasury, at cost (419) (419)
-------- --------
Total shareholders' equity ..................... 283,634 386,939
-------- --------
Total liabilities and shareholders' equity ..... $701,608 $742,140
======== ========
2002 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 5,626 $ 5,986
Accounts receivable, less allowance for doubtful
accounts of $922 in 2002 and $1,672 in 2003 ....... 58,093 60,449
Inventories ........................................... 120,443 120,945
Deferred income taxes ................................. 6,304 10,188
Prepaid expenses and other current assets ............. 3,200 3,538
---------- ----------
Total current assets .......................... 193,666 201,106
---------- ----------
Property, plant and equipment, net ........................ 95,608 97,383
Goodwill, net ............................................. 262,394 290,562
Other intangible assets, net .............................. 180,271 193,969
Other assets .............................................. 10,201 22,038
---------- ----------
Total assets .................................. $ 742,140 $ 805,058
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................... $ 2,631 $ 4,143
Accounts payable ...................................... 22,074 18,320
Accrued compensation .................................. 10,463 10,685
Income taxes payable .................................. 5,885 10,877
Accrued interest ...................................... 3,794 279
Other current liabilities ............................. 13,127 10,551
---------- ----------
Total current liabilities ..................... 57,974 54,855
---------- ----------
Long-term debt ............................................ 254,756 260,448
Deferred income taxes ..................................... 28,446 46,143
Other long-term liabilities ............................... 14,025 10,122
---------- ----------
Total liabilities ............................. 355,201 371,568
---------- ----------
Commitments and contingencies
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; 28,808,105 and 29,140,644, issued
in 2002 and 2003, respectively .................... 288 291
Paid-in capital ....................................... 231,832 237,076
Retained earnings ..................................... 162,391 194,473
Accumulated other comprehensive income (loss) ......... (7,153) 2,069
Less 37,500 shares of common stock in treasury, at cost (419) (419)
---------- ----------
Total shareholders' equity .................... 386,939 433,490
---------- ----------
Total liabilities and shareholders' equity .... $ 742,140 $ 805,058
========== ==========
See notes to consolidated financial statements.
F-2
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 2001, 2002 and 20022003
(In thousands except per share amounts)
2000 2001 2002
-------- -------- --------
Net sales .................................. $395,873 $428,722 $453,062
-------- -------- --------
Cost of sales .............................. 188,223 204,374 215,891
Selling and administrative expense ......... 128,316 140,560 141,735
Research and development expense ........... 14,870 14,830 16,087
-------- -------- --------
331,409 359,764 373,713
-------- -------- --------
Income from operations ..................... 64,464 68,958 79,349
Interest expense ........................... 34,286 30,824 24,513
-------- -------- --------
Income before income taxes and
extraordinary loss ...................... 30,178 38,134 54,836
Provision for income taxes ................. 10,864 13,728 19,741
-------- -------- --------
Income before extraordinary loss ........... 19,314 24,406 35,095
Extraordinary loss, net of income taxes .... -- -- 944
-------- -------- --------
Net income ................................. $ 19,314 $ 24,406 $ 34,151
======== ======== ========
Per share data:
Income before extraordinary loss
Basic .............................. $ .84 $ 1.02 $ 1.28
Diluted ............................ .83 1.00 1.26
Extraordinary loss
Basic .............................. -- -- .03
Diluted ............................ -- -- .03
Net income
Basic .............................. $ .84 $ 1.02 $ 1.25
Diluted ............................ .83
2001 2002 2003
---- ---- ----
Net sales .......................... $ 428,722 $ 453,062 $ 497,130
Cost of sales ...................... 204,374 215,891 237,433
---------- ---------- ----------
Gross profit ....................... 224,348 237,171 259,697
---------- ---------- ----------
Selling and administrative expense . 140,560 139,735 157,453
Research and development expense ... 14,830 16,087 17,306
Write-off of purchased in-process
research and development assets -- -- 7,900
Other expense (income) ............. -- 2,000 (2,917)
---------- ---------- ----------
155,390 157,822 179,742
---------- ---------- ----------
Income from operations ............. 68,958 79,349 79,955
Loss on early extinguishment of debt -- 1,475 8,078
Interest expense ................... 30,824 24,513 18,868
---------- ---------- ----------
Income before income taxes ......... 38,134 53,361 53,009
Provision for income taxes ......... 13,728 19,210 20,927
---------- ---------- ----------
Net income ......................... $ 24,406 $ 34,151 $ 32,082
========== ========== ==========
Earnings per share:
Basic ...................... $ 1.02 $ 1.25 $ 1.11
Diluted .................... 1.00 1.23 1.10
See notes to consolidated financial statements.
F-3
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 2001, 2002 and 20022003
(In thousands)
Accumulated
Other
Common Stock Other
--------------- Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ -------------- -------- -------- -------- ------------- -------- -------------
Balance at December 31, 1999 ......... 22,957 $230 $127,317 $84,520 (387) $(419) $211,261
------ ------ -------- -------- ------------- -------- -------------
Exercise of2000 .... 23,029 $ 230 $127,985 $103,834 (1,027) $ (419) $ 230,603
Common 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 31, 2000 ......... 23,029 230 127,985 103,834 (1,027) (419) 230,603
Exercise of stock options ........issued
under employee plans .... 259 3 1,827 1,830
Tax benefit arising from
exercise ofcommon stock options ......................issued under
employee plans .......... 604 604
StockCommon 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 31, 2001 ............. 25,262 253 160,757 128,240 (5,197) (419) 283,634
Common stock issued
under employee plans .... 546 5 5,012 5,017
Tax benefit arising from
common stock issued under
employee plans .......... 1,970 1,970
Common stock issuance ....... 3,000 30 66,093 66,123
Repurchase of common
stock warrant ........... (2,000) (2,000)
Comprehensive income:
Foreign currency
translation adjustments ... 1,010
Cash flow hedging
(net of income tax
benefit of $596) ....... 1,058
(continued)
See notes to consolidated financial statements.
F-4
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 2001, 2002 and 20022003
(In thousands)
Accumulated
Other
Common Stock Other
--------------- Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ -------------- -------- -------- -------- ------------- -------- -------------
Exercise of stock options........... 546 5 5,012 5,017
Tax benefit arising
from exercise of
stock options................... 1,970 1,970
Stock issuance...................... 3,000 30 66,093 66,123
Repurchase of stock warrant......... (2,000) (2,000)
Comprehensive income:
Foreign currency
translation adjustments........... 1,010
Cash flow hedging
(net of income tax
benefit of $596)............... 1,058
Minimum pension liability
(net of income tax
benefit of $2,264)............. ..... (4,024)
Net income.........................income ................. 34,151
Total comprehensive income..........income .. 32,195
------ -------------- -------- -------- -------- ------------- -------- -------------
Balance at December 31, 2002............2002 .... 28,808 $ 288 $231,832 $162,391 $(7,153)$ (7,153) $ (419) $386,939
====== ======$ 386,939
======== ======== ======== ======== ============= ======== =============
Common stock issued
under employee plans .... 248 2 3,198 3,200
Tax benefit arising from
common stock issued
under employee plans .... 390 390
Common stock issued in
connection with business
acquisitions ............ 85 1 1,656 1,657
Comprehensive income:
Foreign currency
translation adjustments ... 3,082
Cash flow hedging
(net of income tax
expense of $593) ....... 1,054
Minimum pension liability
(net of income tax
expense of $2,861) ..... 5,086
Net income ................. 32,082
Total comprehensive income .. 41,304
-------- -------- -------- -------- ------------- -------- -------------
Balance at December 31, 2003 .... 29,141 $ 291 $237,076 $194,473 $ 2,069 $ (419) $ 433,490
======== ======== ======== ======== ============= ======== =============
See notes to consolidated financial statements.
F-5
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 2001, 2002 and 20022003
(In thousands)
2000 2001 2002 -------- -------- ---------2003
---- ---- ----
Cash flows from operating activities:
Net income ................................... $ 19,314 $ 24,406 $ 34,151 -------- -------- ---------$ 32,082
---------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................. 9,434 9,055 9,203 10,539
Amortization ............................. 20,053 21,093 13,167 14,315
Deferred income taxes .................... 7,974 8,562 10,664 Extraordinary loss,13,715
Income tax benefit of stock
option exercises ................... 604 1,970 390
Contributions to pension plans
in excess of net pension cost ........ (2,297) (1,999) (11,082)
Write-off of income taxes ..purchased in-process
research and development assets ...... -- -- 9447,900
Write-off of deferred financing costs .... -- 1,475 2,181
Increase (decrease) in cash flows from
changes in assets and liabilities, net
of effects from acquisitions:
Sale of accounts receivable .......... -- 40,000 (3,000) 7,000
Accounts receivable .................. (2,166) (12,508) (2,151) (6,405)
Inventories .......................... (18,035) (4,235) (15,213) (3,411)
Accounts payable ..................... 3,824 (516) 1,157 (5,105)
Income taxes payable ................. 2,295 (281) 4,748
Income tax benefit of stock
option exercises ................... 219 604 1,9704,217 2,188
Accrued compensation ................. 255 1,950 (1,584) (338)
Accrued interest ..................... 542 (290) (1,160) (3,515)
Other assets/liabilities, net ........ (7,759) (10,691) (7,973)
-------- -------- ---------
16,636(8,394) (5,974) (2,444)
---------- ---------- ----------
52,743 10,772 -------- -------- ---------25,928
---------- ---------- ----------
Net cash provided by operations ...... 35,950 77,149 44,923 -------- -------- ---------58,010
---------- ---------- ----------
Cash flows from investing activities:
Payments related to business acquisitions
net of cash acquired ........................ (6,042)..................... -- (17,375) (55,079)
Purchases of property, plant and
equipment, net ........................... (14,050) (14,443) (13,384) -------- -------- ---------(9,309)
Other investing activities ................... -- -- (4,085)
---------- ---------- ----------
Net cash used by investing activities (20,092) (14,443) (30,759) -------- -------- ---------(68,473)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock ... -- 66,123 -- 66,123
Net proceeds from exercise ofcommon stock options .. 449issued
under employee plans ..................... 1,830 5,017 3,200
Repurchase of warrant on common stock ........ -- (2,000) --
(2,000)Redemption of 9.0% Senior Subordinated Notes . -- -- (130,000)
Payments on debt ............................. (32,921) (76,423) (183,680) (22,796)
Proceeds of debt ............................. 17,000 11,000 105,138 160,000
Payments related to issuance of debt ......... -- -- (1,513) -------- -------- ---------(1,950)
---------- ---------- ----------
Net cash usedprovided (used) by financing
activities ..................... (15,472) (63,593) (10,915) -------- -------- ---------8,454
---------- ---------- ----------
(continued)
See notes to consolidated financial statements.
F-6
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2002 and 2003
(In thousands)
2000
2001 2002 -------- -------- ---------2003
---- ---- ----
Effect of exchange rate changes
on cash and cash equivalents ................... (663) (1,181) 975 -------- -------- ---------2,369
---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents ...................... (277) (2,068) 4,224 360
Cash and cash equivalents at beginning
of year ...................................... 3,747 3,470 1,402 -------- -------- ---------5,626
---------- ---------- ----------
Cash and cash equivalents at end of year ......... $ 3,470 $ 1,402 $ 5,626 ======== ======== =========$ 5,986
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................. $ 33,788 $ 31,135 $ 24,453 $ 21,698
Income taxes ......................... 4,141 2,098 5,478 5,507
Supplemental disclosures of non-cash investing and financing activities:
As more fully described in Note 2, we acquired a businessbusinesses in 2001 through the
exchange of approximately 2.0 million shares of our common stock valued at $29.9$30.4
million.
As more fully described in Note 2,6, we acquired certain property in 2001 through
the assumption of approximately $22.7 million of debt and accrued interest.
As more fully described in Note 2, during 2003 we have agreed to issueissued approximately 100,00085,000
shares of our common stock valued at approximately $1.8$1.7 million as part of the
consideration for the purchasepurchases of several businesses.businesses in 2002.
See notes to consolidated financial statements.
F-7
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands per except per share amounts)
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, 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.equipment. Our products are used in a variety of clinical
settings, such as operating rooms, surgery centers, physicians' offices and
critical care areashospitals.
Principles of hospitals.consolidation
The consolidated financial statements include the accounts of CONMED
Corporation and its controlled subsidiaries. All intercompany accounts and
transactions have been eliminated.
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, bankruptcy-remote, 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 (the "asset interest") to a
commercial paper conduit. On October 23, 2003 the accounts receivable sales
agreement was amended and restated on substantially the same terms and
conditions with the exception of replacing the commercial paper conduit with a
bank. The commercial paper conduit or the bank's (the "conduit purchaser""purchaser"). The conduit purchaser's share of
collections on accounts receivable are calculated as defined in the accounts
receivable sales agreement.agreement, as amended.
F-8
Effectively, collections on the pool of receivables flow first to the conduit purchaser
and then to CRC, but to the extent that the conduit
purchaser's share of collections
were less than the amount of the conduit purchaser's asset interest, there is no
recourse to CONMED or CRC for such shortfall. For receivables that have been
sold, CONMED Corporation and its subsidiaries retain collection and
administrative responsibilities as agent for the conduit purchaser. As of December 31,
20012002 and 2002,2003, the undivided percentage ownership interest in receivables sold
by CRC to the F-8
conduit purchaser aggregated $40.0$37.0 million and $37.0$44.0 million,
respectively, which has been accounted for as a sale and reflected in the
balance sheet as a reduction in accounts receivable. Expenses associated with
the sale of accounts receivable, including the conduit purchaser's financing cost of issuing
commercial paper,costs to
purchase the accounts receivable, were $.2$1.2 million and $1.2$0.8 million, in 20012002
and 2002,
respectively.2003, respectively, and are included in interest expense.
There are certain statistical ratios, primarily related to sales dilution
and losses on accounts receivable, which must be calculated and maintained on
the pool of receivables in order to continue selling to the conduit purchaser. The pool
of receivables is in full compliance with these ratios. 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 conduit purchaser rather than being used to fund new
receivable purchases. To the extent that such collections would not be available
to CONMED in the form of new receivables purchases, we would need to access an
alternate source of working capital, such as our $100 million revolving credit
facility. Our accounts receivable sales agreement, as amended, also requires us
to enter intoobtain a liquidity agreement with certain
banks under whichcommitment (the "purchaser commitment"), on an annual basis, from
the banks agree to commitpurchaser to fund the conduit's purchase of our accounts receivable in the event that the conduit is unable to fund such
purchases through the sale of commercial paper. These liquidity agreements are
typically for a period of 364 days which requires us to renew our liquidity
agreement on an annual basis.receivable. The purchaser
commitment expires October 21, 2004. In the event we wereare unable to renew our
liquidity
agreement,purchaser commitment, we would need to access an alternate source of working
capital, such as our $100 million revolving credit facility.
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 to identifiable intangible
assets of acquired businesses. Goodwill and other intangible assets havehad been
amortized over periods ranging from 5 to 40 years through December 31, 2001.
Because of our history of growth through acquisitions, goodwill and other
intangible assets comprise a substantial portion (59.6%(60.2% at December 31, 2002)2003) of
our total assets.
F-9
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. As a result of the
adoption of this standard, amortization of goodwill and certain intangibles has
been discontinued.
F-9
During 2002 and 2003, we performed impairment tests of goodwill and
indefinite-lived intangible assets. We tested for impairment usingassets and evaluated the two-step process
prescribeduseful lives of acquired
intangibles assets subject to amortization. These tests and evaluations were
performed in accordance with SFAS 142. The first step is identification for potential
impairment. The second step, which has been determined not to be necessary,
measures the amount of any impairment. No impairment losses or adjustments to
useful lives have been recognized as a result of these tests. Impairment of Long-Lived Assets
SFAS No. 144, "Accounting forIt is our policy
to perform our annual impairment tests in the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144") was adopted by us on January 1, 2002. Ourfourth quarter.
Other long-lived assets
accountedWe review for in accordance with SFAS 144 primarily consistimpairment of long-lived assets (consisting of intangible
assets subject to amortization and property, plant and equipment. In accordance
with SFAS 144, we review for impairment of long-lived assetsequipment) whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized by reducing the recorded value to fair value.
Derivative financial instrumentsEquity investments
We use an interest rate swap to manage the interest risk associated with
our variable rate debt under our credit facility. 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 changeshave several investments in the valuescommon stock of other companies in our
industry which are less than 20% of the derivatives arevoting stock of these companies and in
which we do not have the ability to exercise significant influence. We have
accounted for depending on whetherthese investments under the derivative
qualifies for hedge accounting. Upon adoptioncost method.
Hedging activity
Our hedging activity consists of SFAS 133, we recorded a
net-of-tax cumulative-effect-type loss adjustment of approximately $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$50 million of
the $243 million in LIBOR-based floating rate debt under our senior credit
facilityagreement into fixed rate debt with a base interest rate of 7.01%3.63%. Gross holding
losses during 2001 and 2002 related to theThe interest
rate swap aggregated $4.4
millionexpires in June 2004 and $.8 million, respectively, before income taxes. Approximately $1.3
million and $2.5 million, before income taxes, of gross holding losses were
reclassified andis included in net incomeother current liabilities at a
fair value of $0.6 million in 2001 and 2002, respectively.our consolidated balance sheet at December 31,
2003.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable,
accounts payable, and interest rate swapslong-term debt approximates their carrying amount.
The estimated fair values and carrying amounts of long-term debt are as follows
(in thousands):
2001 2002
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Long-term debt (including
current maturities) .... $ 335,929 $ 338,529 $ 257,387 $ 262,587
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). Transaction gains and losses are included in net
income.
F-10
Income Taxestaxes
We provide for income taxes in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability method
specified by SFAS 109, deferred tax assets and liabilities are based on the
difference between the financial statement and tax basis of assets and
liabilities as measured by the tax rates that are anticipated to be in effect
when these differences reverse. The deferred tax provision generally represents
the net change in the assets and liabilities for deferred tax. A valuation
allowance is established when it is necessary to reduce deferred tax assets to
amounts for which realization is more likely than not.
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 equipment shipment and we
recognize revenue upon the disposable product shipment. The cost of
the equipment is amortized over the terms of the commitment
agreements.
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.customer
returns, credits, rebates, discounts and current market conditions.
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.shipment
based upon analysis of historical data.
o Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs of $8.1 million,
$8.6 million,
$7.5 million and $7.5$8.3 million for the years ended 2000, 2001, 2002 and
2002,2003, respectively, are included in selling and administrative
expense.
F-11
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$1.7
million at December 31, 20022003 is adequate to provide for any probable
losses from accounts receivable.
F-11
Earnings per share
Basic earnings per share ("basic EPS") is computed based on the weighted
average number of common shares outstanding for the period. Diluted EPSearnings per
share ("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):
2000EPS:
2001 2002 ------ ------ ------2003
---- ---- ----
Shares used in the calculation of basic EPS
(weighted average shares outstanding) ........ 22,967... 24,045 27,337 28,930
Effect of dilutive potential securities .......... 304..... 356 490 326
------ ------ ------
Shares used in the calculation of diluted EPS .... 23,271 24,401 27,827 29,256
====== ====== ======
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 3,396, 2,8422.8 million,
0.7 million and 6831.3 million at December 31, 2000, 2001, 2002 and 2002,2003, respectively.
Stock-based Compensation
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 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" ("APB 25"), 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 2000, 2001, 2002 and 20022003 was $8.55,
$7.39,
$9.32 and $9.32,$5.81, 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 F-12
assumptions for options granted in 2000, 2001, 2002 and 2002,2003,
respectively: Risk-free interest rates of 5.06%4.38%, 4.38%2.70% and 2.70%3.13%; volatility
factors of the expected market price of the Company's common stock of 68.01%48.04%,
48.04%41.10% and 41.10%32.08%; 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:
2000F-12
2001 2002 ------- ------- -------
Income before extraordinary loss2003
---- ---- ----
Net income - as reported $19,314 $24,406 $35,095
------- ------- -------............. $ 24,406 $ 34,151 $ 32,082
---------- ---------- ----------
Pro forma stock-based employee
compensation expense, net of related
income tax effect ........................... (3,147).................. (2,845) (2,156) ------- ------- -------
Income before extraordinary loss(2,383)
---------- ---------- ----------
Net income - pro forma .. $16,167 $21,561 $32,939
======= ======= =======............... $ 21,561 $ 31,995 $ 29,699
========== ========== ==========
EPS before extraordinary loss - as reported:
Basic ..................................... $ 0.84............................ $ 1.02 $ 1.281.25 $ 1.11
Diluted ................................... $ 0.83.......................... $ 1.00 $ 1.261.23 $ 1.10
EPS before extraordinary loss - pro forma:
Basic ..................................... $ .70............................ $ .90 $ 1.201.17 $ 1.03
Diluted ................................... $ .69.......................... $ .88 $ 1.181.15 $ 1.02
Accumulated other comprehensive income (loss)
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 .............. -- 3,082 -- 3,082
Cash flow hedging (net of
income taxes) ............ -- -- 1,054 1,054
Minimum pension liability
(net of income taxes) .... 5,086 -- -- 5,086
--------- ----------- ------- -------------
Balance, December 31, 2003 ..... $ -- $ 1,923 $ 146 $ 2,069
========= =========== ======= =============
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation used in 2002.2003.
Note 2 -- Business Acquisitions
On November 20, 2000 weAssets and liabilities of acquired certain assetsbusinesses have been accounted for
under the purchase method of accounting and recorded at their fair values at the
date of acquisition. The excess of the disposable
minimally invasive surgical businesspurchase price over the estimated fair
values of the net assets acquired has been recorded as goodwill. The results of
operations of acquired businesses have been included in the consolidated
statements of income as of the date of acquisition.
In 2001 we completed the acquisition of certain assets of Imagyn Medical
Technologies, Inc.Inc (the "Imagyn acquisition") related to our Endoscopy product
line
F-13
for a purchase price of $6.0 million. The acquired
products, with annual revenues of approximately $5.0$29.9 million complement our
existing minimally invasive surgical products business.in CONMED common stock. Goodwill associated with the Imagyn
acquisition aggregatedtotaled approximately $4.8 million.
On June 11,$26.7 million and is deductible for income tax
purposes. We incurred $1.6 million in acquisition-related charges during 2001 we reached a definitive agreement to
acquire the
remaining assetstransition manufacturing of the minimally invasive surgical business of Imagyn Medical
Technologies, Inc. that we did not acquire in November 2000 (the "second Imagyn
acquisition"). The new products, with annual revenues of approximately $20.0
million, complementproduct to our existing minimally invasive surgical products business.
Under the terms of the acquisition agreement, we issued Imagyn approximate1y 2.0
million 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. As discussed in Note 12, during the third and fourth quarters of
2001 we incurred certain nonrecurring costs aggregating approximately
F-13
$1.5 million in connection with the second Imagyn acquisition whichfacilities. These charges
are included in cost of sales.
On August 3, 2001,In 2002 we purchased the real estate partnerships which own the
Largo, Florida property leased by our Linvatec subsidiary for an aggregate
purchase pricecompleted acquisitions 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 6).
On March 20 and July 23, 2002, respectively, we acquiredseveral businesses related to our
Patient Care and Endoscopy product lines, for approximately $2.0
million in cash. Goodwill associated with these acquisitions aggregated
approximately $1.9 million with annual revenuesincluding the December 31, 2002
acquisition of approximately $1.2 million.
Under the terms of the agreements, we also agreed to pay additional
consideration dependent upon future product sales.
On October 29 and November 25, 2002, respectively, we acquiredCORE Dynamics, Inc. (the "CORE acquisition"), as well as two
businesses engaged in the design, manufacture and installation of integrated
operating room systems and related equipmentequipment. Consideration for a total of approximately $6.0acquisitions completed
in 2002 aggregated $17.4 million in cash and $1.7 million in CONMED common stock
plus the assumption of liabilities. Goodwill
associated with these acquisitions aggregated approximately $6.4$3.4 million with
annual revenues of approximately $5.0 million.in liabilities. Under the
terms of onecertain of the acquisition agreements, we also agreed to pay additional
consideration dependent upon future operating income.
Onsales or profitability and the satisfactory
execution of a plan to transition and consolidate manufacturing of an acquired
business to our facilities. Any future consideration paid will be recorded in
goodwill. Goodwill recorded in 2002 totaled approximated $16.2 million and is
deductible for income tax purposes.
In 2003 we completed several smaller acquisitions related to our Patient
Care and Electrosurgery product lines totaling $6.1 million and recorded
additional contingent consideration related to 2002 acquisitions of $2.0
million. Goodwill recorded in 2003 related to these acquisitions totaled $5.9
million and is deductible for income tax purposes. These acquisitions did not
have a material effect on our results of operations for the year ended December
31, 2003.
In March 2003 we also completed the acquisition of Bionx Implants, Inc.
(the "Bionx acquisition") related to our arthroscopy product line, for $47.0
million in cash plus the assumption of approximately $12.1 million in
liabilities. Included in cost of sales in 2003 are $1.3 million in
acquisition-related charges, consisting principally of the following: $0.5
million in charges as a result of the step-up to fair value recorded related to
the sale of inventory acquired as a result of the Bionx acquisition and the CORE
acquisition; $0.5 million in inventory charges as a result of the
discontinuation of certain of our arthroscopy product lines in favor of those
acquired as a result of the Bionx acquisition; and $0.3 million in other
transition-related charges. An additional $3.2 million in acquisition-related
costs not related to cost of sales which were incurred during 2003 are included
in other expense as discussed in Note 12.
Bionx develops and manufactures self-reinforced resorbable polymer
implants including screws, pins and meniscal implants for use in a variety of
arthroscopic applications, including sports medicine and fracture fixation. The
Bionx product lines complement CONMED's existing arthroscopy product line.
Unaudited pro forma statements of income for the years ended December 31,
2002 we acquired certainand 2003, assuming the Bionx acquisition occurred as of January 1, 2002 are
presented below.
2002 2003
---- ----
Net sales .......... $471,530 $500,812
Net income ......... $ 31,746 $ 31,492
Basic EPS .......... $ 1.16 $ 1.09
Diluted EPS ........ 1.14 1.08
F-14
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of CORE Dynamics, Inc.,acquisition based on a
developerthird-party valuation. Goodwill and manufactureridentifiable intangible assets associated
with the Bionx acquisition are not deductible for income tax purposes.
Cash .............................. $ 517
Other current assets .............. 7,284
Property, plant and equipment ..... 2,459
In-process research and development 7,900
Identifiable intangible assets .... 15,700
Goodwill .......................... 25,222
--------
Total assets acquired ............. 59,082
--------
Current liabilities ............... (7,647)
Deferred income taxes ............. (3,898)
Other long-term liabilities ....... (521)
--------
Total liabilities assumed ......... (12,066)
--------
Net assets acquired ............... $ 47,016
========
Based on the third-party valuation, $7.9 million of minimally invasive surgical
products (the "CORE acquisition"). The acquired products, with annual revenuesthe purchase price
represents the estimated fair value of approximately $7.5 million, complement our existing Endoscopy product lines.
Under the termsprojects that, as of the acquisition agreement, we agreeddate
had not reached technological feasibility and had no alternative future use.
Accordingly, this amount of purchased in-process research and development assets
was written-off in accordance with FASB Interpretation No. 4, "Applicability of
FASB Statement No. 2 to pay $9.0 million in
cash. GoodwillBusiness Combinations Accounted for by the Purchase
Method". No benefit for income taxes has been recorded on the write-off of
purchased in-process research and development assets as these costs are not
deductible for income tax purposes.
The purchased in-process research and development value relates to next
generation arthroscopy products, which have been or 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 arthroscopic 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 CORE acquisition aggregated approximately
$7.8 million.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 acquisitionscapital 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 in 2002versus 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
F-15
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 require adjustment based
upon information which isvary
significantly from the estimated results.
Of the $15.7 million of acquired intangible assets, $0.8 million were
assigned to registered trademarks and are not currently available, principally relatedsubject to the
valuationamortization. The
remaining $14.9 million of intangiblesacquired intangible assets have a weighted average
useful life of 20 years. The intangible assets that make up that amount include
$9.0 million of customer relationships (38 year weighted average useful life),
$5.4 million of core technology (12 year weighted average useful life) and inventory.$0.5
million of distributor relationships (7 year weighted average useful life).
Note 3 -- Inventories
The componentsInventories consist of inventorythe following at December 31, 2001 and:
2002 are as follows:
2001 2002
-------- --------2003
---- ----
Raw materials .......................... $ 38,101materials............................ $ 44,701 $ 35,352
Work in process ........................ 11,921process.......................... 12,869 14,583
Finished goods ......................... 57,368goods........................... 62,873 -------- --------
$107,390 $120,443
======== ========71,010
--------- ---------
$ 120,443 $ 120,945
========= =========
Note 4 -- Property, Plant and Equipment
Details of property,Property, plant and equipment are as follows:
2001consist of the following at December 31,:
2002 -------- --------2003
---- ----
Land ..................................................................................... $ 4,0044,196 $ 4,1964,200
Building and improvements ............................ 67,951............... 70,100 F-14
75,224
Machinery and equipment .............................. 68,284................. 74,838 83,105
Construction in progress ............................. 1,955................ 5,038 -------- --------
142,1943,768
--------- ---------
154,172 166,297
Less: Accumulated depreciation ............. (51,168) (58,564) -------- --------
$ 91,026(68,914)
--------- ---------
$ 95,608 ======== ========$ 97,383
========= =========
We lease various manufacturing and office facilities and equipment under
operating leases. Rental expense on these operating leases was approximately
$3,376, $2,756, $2,064 and $2,064$1,959 for the years ended December 31, 2000, 2001, 2002 and 2002,2003,
respectively. The aggregate future minimum lease commitments for operating
leases at December 31, 20022003 are as follows:
Years ending December 31,:
2003 ......................................... $1,698
2004 ......................................... 1,499
2054 ......................................... 1,235
2008 ......................................... 1,213
2007 ......................................... 1,233
Thereafter ................................... 3,1382004...................................... $ 2,127
2005...................................... 1,815
2006...................................... 1,756
F-16
2007...................................... 1,727
2008...................................... 1,680
Thereafter................................ 2,727
Note 5 - Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
2002 2003
---- ----
Balance as of January 1, 2002 ...................................... $251,140...................... $ 251,140 $ 262,394
Goodwill acquired during 2002 ................................................................... 16,194 31,210
Adjustments to goodwill resulting from business
acquisitions finalized in 2002 ......................................................... (4,940) --------(3,285)
Foreign currency translation .................. -- 243
---------- ----------
Balance as of December 31, 2002 .................................... $262,394
========.................... $ 262,394 $ 290,562
========== ==========
Other intangible assets consist of the following:
December 31, 20012002 December 31, 2002
------------------------ ------------------------2003
----------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amortized intangible assets: Amount Amortization Amount Amortization
----------------- ------------ ----------------- ------------
Amortized intangible assets:
Customer relationships ........................... $ 96,712 $(10,180) $ 96,712 $(12,725)(12,725) $ 105,712 $ (15,447)
Patents and other intangible assets... 22,148 (10,441)assets 23,674 (13,534) 33,258 (16,498)
Unamortized intangible assets:
Trademarks and tradenames ............ 95,715 (9,571) 95,715 (9,571)
--------......... 86,144 -- 86,944 --
--------- ------------ ----------------- ------------
$214,575 $(30,192) $216,101 $(35,830)
========$ 206,530 $ (26,259) $ 225,914 $ (31,945)
========= ============ ================= ============
F-15
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 2123 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 79 years.
Our customer relationship asset wasassets were acquired in connection with the 1997
acquisition of Linvatec Corporation. ThisCorporation and the 2003 Bionx acquisition. These
intangible asset representsassets represent the value associated with business expected to be
generated from existing customers as of the acquisition date. In connection with the Linvatec acquisition theThe value of this assetthese
assets was determined by measuring the present value of the projected future
earnings attributable to this asset.these assets. Additionally, while the useful life of
thisthese customer relationship assetassets is not limited by contract or any other
economic, regulatory or other known factors, the useful life of 38 years was
determined at the acquisition date by historical customer attrition. In
accordance with SFAS 142 and as clarified by EITF (Emerging Issues Task Force)
Issue 02-17,
F-17
"Recognition of Customer Relationship Intangible Assets Acquired in a Business
Combination" which was issued on January 6, 2003, this, customer relationship
which isrelationships evidenced by customer purchase orders isare
contractual in nature and therefore continuescontinue to be recognized separate from
goodwill and are amortized over thetheir 38 year life.
The trademarks and tradenames intangible asset was recognized in
conjunction with the 1997 acquisition of Linvatec Corporation.Corporation and the 2003 Bionx
acquisition. We continue to market products under the acquired trademarks and
tradenames of "Linvatec", "Hall", "Shutt", "Envision" and "Envision""Bionx". From the date of the Linvatec acquisition, we
have continuedWe
continue to release new product and product extensions under the above
trademarks and tradenames and continue to maintain and promote these trademarks
and tradenames in the market through legal registration and such methods as
advertising, medical education and trade shows. It is our belief that the
trademarks and tradenames intangible asset will generate cash flow for an
indefinite period of time. Accordingly, upon adoption ofTherefore, in accordance with SFAS 142, effective
January 1, 2002, amortization of theour
trademarks and tradenames intangible asset was discontinued.is not amortized.
The amortization expense related to intangible assets for the year ending
December 31, 20022003 and the estimated amortization expense for each of the five
succeeding years is as follows:
2002 $5,634
2003 5,371$ 5,686
2004 5,0055,721
2005 4,0994,816
2006 3,6054,248
2007 3,6054,236
2008 4,236
The following is a reconciliation assuming goodwill and other intangible
assets had been accounted for in accordance with SFAS 142 in the year ended
December 31, 2000, 2001 and 2002:
F-16
2000 2001, 2002 ------- ------- -------
Income before extraordinary
lossand 2003:
2001 2002 2003
---- ---- ----
Net income - as reported .......................... $19,314 $24,406 $35,095
------- ------- -------........ $ 24,406 $ 34,151 $ 32,082
---------- ---------- ----------
Adjustments (net of income taxes)
Add back: Goodwill amortization ............ 4,043 4,120 -- --
Add back: Trademarks and trade
names amortization ............. 1,532 1,532 -- ------- ------- -------
Adjusted--
---------- ---------- ----------
Net income before
extraordinary loss .......................... $24,889 $30,058 $35,095
======= ======= =======- adjusted ........... $ 30,058 $ 34,151 $ 32,082
========== ========== ==========
Basic EPS
Income before extraordinary
lossNet income - as reported .......................... $ .84........ $ 1.02 $ 1.28
------- ------- -------1.25 $ 1.11
---------- ---------- ----------
Adjustments (net of income taxes)
Add back: Goodwill amortization ............ .17 .17-- --
Add back: Trademarks and trade
names amortization ............. .07 .06 -- ------- ------- -------
Adjusted--
---------- ---------- ----------
Net income before
extraordinary loss .......................... $ 1.08- adjusted ........... $ 1.25 $ 1.28
======= ======= =======1.25 $ 1.11
========== ========== ==========
F-18
Diluted EPS
Income before extraordinary
lossNet income - as reported .......................... $ .83........ $ 1.00 $ 1.26
------- ------- -------1.23 $ 1.10
---------- ---------- ----------
Adjustments (net of income taxes)
Add back: Goodwill amortization ............ .17 .17-- --
Add back: Trademarks and trade
names amortization ............. .07 .06 -- ------- ------- -------
Adjusted--
---------- ---------- ----------
Net income before
extraordinary loss .......................... $ 1.07- adjusted ........... $ 1.23 $ 1.26
======= ======= =======1.23 $ 1.10
========== ========== ==========
Note 6 -- Long Term Debt
Long term debt consists of the following at December 31, :
2002 2003
---- ----
Revolving line of credit ..................... $ 5,000 $ --
Term loan borrowings on senior credit facility 100,000 243,000
9.0% senior subordinated notes ............... 130,000 --
Mortgage notes ............................... 22,387 21,591
-------- --------
Total long term debt ......................... 257,387 264,591
Less: current portion ........................ 2,631 4,143
-------- --------
$254,756 $260,448
======== ========
We entered into a new $200 million senior credit agreement (the "new
senior"senior credit
agreement") during the year-endingyear-ended December 31, 2002. The new
senior credit agreement consists of a $100 million revolving credit facility and
a $100 million term loan. As of December 31, 2002, we had $100 million
outstanding on the term loan and $5 million outstanding on the revolving credit
facility.
The proceeds of the term loan portion of the new senior credit agreement
were used to eliminate the term loans and borrowings on the revolving credit
facility under the previously existing senior credit agreement (the "former
senior credit agreement"). Deferred financing feescosts of
$1.5 million related to the approximately three years remaining on the former
senior credit agreement were written off as an extraordinary charge of $.9 million, net of $.6 millionin 2002 but
have been reclassified to ordinary income on our consolidated statement of
income tax
benefit, or $.04 per diluted share,as a result of our 2003 adoption of Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections".
At December 31, 2002, the senior credit agreement consisted of a $100
million revolving credit facility and a $100 million term loan. During the year
ended December 31, 2003 we amended the 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 redemption of $130.0 million in outstanding 9% senior
subordinated notes (the "Notes"), primarily in June 2003, as well as related
accrued interest, and 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 $5.9 million in 4.5% call premium and
$2.2 million in unamortized deferred financing costs as a loss on early
extinguishment of debt.
F-19
The new
senior credit agreement calls for both components to extendbalance outstanding on the expanded term loan facility at December 31,
2003 was $243.0 million. The expanded term loan facility extends for
approximately five6 years, with
F-17
the revolving credit facility terminating on August 28, 2007 and the term loan
expiring on December 15, 2007. The term loan portion of the facility can be
extended an additional two years, provided our currently outstanding $130
million in 9% Senior Subordinated Notes are refinanced or repaid by December 15,
2007.
The scheduled principal payments on the term loan portion of the new senior
credit agreement are $1.0$2.6 million
annually withthrough December 2007 increasing to $71.0 million in 2008 and the
remaining balance outstanding due and payable onin December 15, 2007.2009. We may also be required, under
certain circumstances, to make additional principal payments based on excess
cash flow as defined in the newamended senior credit agreement. No such payments
were required for the years ended December 31, 2002 and 2003. There were no
borrowings outstanding on the revolving credit facility under the amended senior
credit agreement as of December 31, 2003. Interest rates on the new term
loan and revolving credit facility components of the new senior credit
agreement are LIBOR plus 275 basis points and LIBOR plus 250 basis points,
respectively, or an alternative base interest rate. The weighted average
interest rates2.25% (3.41% at December 31, 20022003). Interest rates on the term loan and revolving credit
facility were 4.18% and 5.75%, respectively. In addition, we are obligated to
pay a fee of .5% per annum on the unused portion of
the revolving credit facility ($95.0 millionare LIBOR plus 2.50% (3.66% at December 31, 2002)2003).
The newamended senior credit agreement is collateralized by substantially all
of our personal property and assets, except for our accounts receivable and
related rights which are pledgedhave been sold in connection with our accounts receivable
sales agreement. The newamended 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 newamended 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 debt assumed in 2001 in connection with the
Largo acquisition (Note 2),purchase 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
aggregateaggregated $12.2 million $6.2 million and $4.2 million, respectively, at the
date of acquisition. The principal balances outstanding related to the Largo
acquisition, aggregated $10.7 million, $6.9 million and $4.0 million, at
December 31, 2002 on the Class A note,
Class C note and Seller note respectively. The Largo acquisition related debt is collateralized by, among
other things, recordedaggregate $9.6 million, $7.5 million and
unrecorded mortgage liens on the Largo property.
We have $130$3.8 million, of 9% Senior Subordinated Notes (the "Notes")
outstandingrespectively, at December 31, 2002. The Notes mature on March 15, 2008, unless
previously redeemed2003. These loans are collateralized
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. On March 12, 2003, we served notice to the trustee for the
Notes that we would redeem $15.0 million par value of the Notes, on May 1, 2003,
at the redemption price of 104.5%, for a total redemption price of $15.7
million, plus accrued and unpaid interest. We intend to redeem the Notes through
borrowings
F-18
under our revolving credit facility. The premium paid on the Notes will be
recorded as a charge to operating income in the second quarter of 2003.Largo, Florida property.
As discussed in Note 1, we use an interest rate swap to hedge a formportion of
derivative
financial instrument, to manageour long-term debt. The interest rate risk. Weswap, which we have designated as a
cash-flow hedge, an interest rate swap which effectively converts $50 million of LIBOR-based floating rate
debt under our senior credit agreement into fixed rate debt with a base interest
rate of 7.01%3.63%. The interest rate swap expires in June
2003 and is included in liabilities on the balance sheet with a fair value
approximating $1.4 million at December 31, 2002. We amended this swap effective
February 11, 2003 to lower the base rate on the $50.0 million in floating rate
borrowings to 3.63% and extend the expiration date to June 2004.
The scheduled maturities of long-term debt outstanding at December 31,
20022003 are as follows:
Year ended December 31,:
2003 ..............................................................F-20
2004................................................. $ 2,631
2004 .............................................................. 2,554
2005 .............................................................. 2,741
2006 .............................................................. 2,943
2007 .............................................................. 102,914
Thereafter ........................................................ 143,6044,143
2005................................................. 4,330
2006................................................. 4,532
2007................................................. 4,753
2008................................................. 73,418
Thereafter........................................... 173,415
Note 7 -- Income Taxes
The provision for income taxes for the years ended December 31, 2000, 2001, 2002
and 20022003 consists of the following:
2000 2001 2002 ------- ------- -------2003
---- ---- ----
Current tax expense:
Federal ............................. $ 1,634.................. $ 3,565 $ 7,7827,251 $ 5,486
State ............................... 300.................... 400 540 665
Foreign ............................. 956.................. 1,201 755 ------- ------- -------
2,8901,061
-------- -------- --------
5,166 9,0778,546 7,212
Deferred income tax expense ............. 7,974.. 8,562 10,664 ------- ------- -------13,715
-------- -------- --------
Provision for income taxes .......... $10,864 $13,728 $19,741
======= ======= =======$ 13,728 $ 19,210 $ 20,927
======== ======== ========
A reconciliation between income taxes computed at the statutory federal
rate and the provision for income taxes follows:
2000for the years ended December 31, 2001,
2002 ------- ------- -------and 2003 follows:
2001 2002 2003
---- ---- ----
Tax provision at statutory rate based
on income before income taxes and
extraordinary loss ........................ $10,562 $13,347 $19,193
Foreign sales corporation/......... $ 13,347 $ 18,676 $ 18,553
Extraterritorial income exclusion ......... (725) (894) (949) (1,252)
State income taxes ................................... 180........................ 270 351 F-19
476
Nondeductible intangible amortization ......... 321..... 320 90 90
Nondeductible write-off of purchased
in-process research and developments assets -- -- 2,765
Other nondeductible permanent differences ..... 200. 220 215 268
Other, net .................................... 326................................ 465 841
------- ------- -------
$10,864 $13,728 $19,741
======= ======= =======827 27
-------- -------- --------
$ 13,728 $ 19,210 $ 20,927
======== ======== ========
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities at December 31, 20012002 and 20022003 are as
follows:
2001F-21
2002 -------- --------2003
---- ----
Assets:
Receivables ......................................Inventory ................................... $ 2252,106 $ 94
Inventory ........................................ 870 2,106
Deferred compensation ............................ 943 1,142
Employee benefits ................................ 428 491
Additional minimum pension liability ............. 597 2,861
Interest rate swap ............................... 1,106 510
Other ............................................ 164 8598,948
Net operating losses of acquired subsidiary ...... 3,410subsidiaries 2,986 11,025
Deferred compensation ....................... 1,142 1,361
Accounts receivable ......................... 94 262
Employee benefits ........................... 491 --
Additional minimum pension liability ........ 2,861 --
Interest rate swap .......................... 510 --
Other ....................................... 859 2,390
Valuation allowance for deferred tax assets ...... (3,410)......................... -- (8,462)
-------- --------
4,333 11,049 15,524
-------- --------
Liabilities:
Goodwill and intangible assets ................... 17,757.............. 28,633 43,695
Depreciation ..................................... 4,126................................ 4,558 5,721
Employee benefits ........................... -- 1,980
Interest rate swap .......................... -- 83
-------- --------
21,883 33,191 51,479
-------- --------
Net liability .......................................... $(17,550)....................................... $(22,142) $(35,955)
======== ========
Management hadThe net operating loss carryforwards of acquired subsidiaries expire at
various dates through 2023. We have established a valuation allowance in prior years to reflect
the uncertainty of realizing the benefitbenefits of certain net operating loss
carryforwards related to an acquisition. Duringrecognized in connection with the year-ended December 31,
2002, management determined that a valuation allowance was no longer required,
resulting in a reduction in goodwill related to theBionx acquisition.
Note 8 -- Shareholders' Equity
The shareholders have authorized 500 thousand500,000 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 31, 20012002
and 2002,2003, 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.
F-20
In connection with the 1997 acquisition of Linvatec Corporation, we issued
to Bristol-Myers Squibb Company a warrant exercisable in whole or in part for up
to 1.5 million shares of our common stock at a price of $22.82 per share. On May
6, 2002, we purchased the warrant for $2.0 million in cash and subsequently
cancelled it. The purchase resulted in a $2.0 million reduction to paid-in
capital.
On May 29, 2002, we completed a public offering of 3.0 million shares of
our common stock. Net proceeds to the Company related to the sale of the shares
F-22
approximated $66.1 million and were used to reduce indebtedness under our credit
facility.
We have reserved 2.75.7 million shares of common stock for issuance to
employees and directors under fourthree stock option plans (the "Plans") of which
approximately 1.3 million263,000 shares remain available for grant at December 31, 2002.2003.
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:
Weighted-
Number Average
of Exercise
Options Price
------- ---------
Outstanding at December 31, 1999 ........................ 2,656 $13.96
Granted ......................................... 684 14.05
Forfeited ....................................... (209) 17.20
Exercised ....................................... (72) 6.23
------- ---------
Outstanding at December 31, 2000 ........................ 3,059 $ 13.91
Granted ......................................................... 709 15.59
Forfeited ..................................................... (75) 18.86
Exercised ..................................................... (259) 7.07
------- ---------
Outstanding at December 31, 2001 ........................ 3,434 14.69
Granted ......................................................... 742 23.42
Forfeited ..................................................... (40) 15.27
Exercised ..................................................... (546) 8.88
------- ---------
Outstanding at December 31, 2002 ........................ 3,590 17.27
Granted ................ 669 17.44
Forfeited .............. (84) 19.49
Exercised .............. (181) 11.84
------- ---------
Outstanding at December 31, 2003 3,994 $ 17.2717.55
======= =========
Exercisable:
December 31, 2000 ............................... 1,6742001 ...... 1,954 $ 12.31
December 31, 2001 ............................... 1,954 13.59
December 31, 2002 ..................................... 1,875 15.55
December 31, 2003 ...... 2,590 17.19
Stock
Weighted Options Weighted
Stock Options Weighted Average Exercisable Average
Range of Outstanding at Average Remaining Exercise at December 31, Exercise
Exercise Prices December 31, 200231,2003 Life (Years) Price 20022003 Price
- ---------------- --------------------------------- ----------------- -------- --------------- --------
Less than $10.00 307 6.0222 5.8 $ 8.30 2608.97 190 $ 8.148.94
$10.00 to $15.00 869 7.0 13.85 428 13.56833 6.0 13.89 648 13.84
$15.00 to $17.50 908 5.7 16.38 689 16.36978 5.3 16.23 761 16.33
$17.50 to $20.00 515 7.1 19.02 278 19.22
F-21
1,034 7.7 18.64 378 19.16
$20.00 to $22.50 643 7.8 21.39 220 20.96579 6.5 21.35 340 20.92
$22.50 to $26.00 348 9.4 25.90 -- --8.1 25.89 273 25.89
During 2002 we adopted a shareholder-approved Employee Stock Purchase Plan
(the "Employee Plan"), under which we have reserved 1.0 million shares of common
stock for issuance to our employees. The Employee Plan provides to employees the
opportunity to invest from 1% to 10% of their annual salary to purchase shares
of
F-23
CONMED common stock through the exercise of stock options granted by the Company
at a purchase price equal to the lesser of (1)85% of the fair market value of
the common stock at the beginning of a semi-annual period and (2) 85% of the
fair market value of the common stock at the end of such semi-annual period.
During 2003, we issued approximately 28 thousand67,000 shares of common stock under
the Employee Plan related to 2002.Plan. No stock-based compensation expense has been recognized in
the accompanying consolidated financial statements as a result of common stock
issuances under the Employee Plan.
Note 9 -- Business Segments and Geographic Areas
CONMED'sCONMED conducts its business is organized, managedthrough four principal operating units,
CONMED Patient Care, CONMED Endoscopy, CONMED Electrosurgery and internally reportedLinvatec
Corporation. In accordance with Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), our chief operating decision-maker has been identified as the President
and Chief Operating Officer, who reviews operating results to make decisions
about allocating resources and assessing performance for the entire company. All
four material operating units qualify for aggregation under SFAS 131 due to
their identical customer base and similarities in economic characteristics,
nature of products and services, procurement, manufacturing and distribution
processes. Based upon the aggregation criteria for segment reporting, we have
aggregated our operating units into 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 by product line:
2000 2001 2002 -------- -------- --------2003
---- ---- ----
Arthroscopy ................................... $145,044....................... $155,650 $161,876 $177,468
Powered surgical instruments .................. 113,738Surgical Instruments ...... 114,375 114,302 122,031
Electrosurgery .................... 66,875 69,674 77,337
Patient care .................................. 68,261Care ...................... 69,067 69,753 Electrosurgery ................................ 62,459 66,875 69,67469,937
Endoscopy ..................................... 6,371......................... 22,755 36,801 45,764
Integrated operating room systems ............. --Operating Room Systems . -- 656 4,593
-------- -------- --------
Total ......................................... $395,873............................. $428,722 $453,062 $497,130
======== ======== ========
The following is net sales information for geographic areas:
2000 2001 2002 -------- -------- --------2003
---- ---- ----
United States ................................. $288,514............ $306,306 $320,312 $333,473
Canada ................... 16,662 15,980 24,620
United Kingdom ........... 15,382 18,625 19,883
Japan ......................................... 18,885.................... 18,234 18,820 Canada ........................................ 14,624 16,662 15,980
United Kingdom ................................ 11,904 15,382 18,62518,265
All other countries ........................... 61,946...... 72,138 79,325 100,889
-------- -------- --------
Total ......................................... $395,873.................... $428,722 $453,062 $497,130
======== ======== ========
Sales are attributed to countries based on the location of the customer.
There were no significant investments in long-lived assets located outside the
United States at December 31, 20012002 and 2002.2003.
F-24
Note 10 -- Employee Benefit Plans
We maintainsponsor an employee savings plan ("401(k)") and severalthree defined benefit
pension plans (the "pension plans") covering substantially all our employees.
The three defined benefit pension plans were merged and overall benefit levels
reduced effective January 1, 2004.
Total employer contributions to the employee savings401(k) plan were $2.4 million, $1.7, million and $2.0
million and $2.2 million in 2000,
2001 and 2002, respectively.
F-22
We make annual contributions to the defined benefit pension plans equal to
the maximum deduction allowed for federal income tax purposes.
Net pension cost for 2000, 2001 and 2002 included the following
components:
2000years ended December 31, 2001, 2002 ------- ------- -------
Service cost-- benefits earned duringand 2003,
respectively.
We use a December 31, measurement date for our pension plans. Unrecognized
gains and losses are amortized on a straight-line basis over the average
remaining service period .................................. $ 2,658 $ 3,622 $ 3,988
Interest cost onof active participants. The following table provides a
reconciliation of the projected benefit obligation, . 1,608 1,785 2,002
Expected return on plan assets ................ (1,121) (1,211) (1,595)
Net amortization and deferral ................. 21 166 350
------- ------- -------
Net pension cost .............................. $ 3,166 $ 4,362 $ 4,745
======= ======= =======
The following table sets forth the plans' funded
status and amounts
recognized inof the consolidated balance sheetspension plans at December 31, 2001 and 2002:
2001:
2002 -------- --------2003
---- ----
Accumulated Benefit Obligation .................. $ 27,645 $ 32,044
======== ========
Change in benefit obligation
Projected benefit obligation at beginning of year .... $ 22,949 $ 29,748 $ 33,639
Service cost ......................................... 3,622.................................... 3,988 4,167
Interest cost ........................................ 1,785................................... 2,002 2,419
Actuarial loss (gain) ................................ 4,597.................................. 1,178 6,794
Benefits paid ........................................ (3,205)................................... (3,277) (8,141)
-------- --------
Projected benefit obligation at end of year ............... $ 29,74833,639 $ 33,63938,878
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year ....... $ 13,077.. $ 16,963 $ 18,169
Actual returngain (loss) on plan assets ......................... 432............... (2,261) 4,075
Employer contribution ................................ 6,659........................... 6,744 19,529
Benefits paid ........................................ (3,205)................................... (3,277) (8,141)
-------- --------
Fair value of plan assets at end of year ..................... $ 16,96318,169 $ 18,16933,632
-------- --------
Change in funded status
Funded status ........................................................................... $ 12,78515,470 $ 15,4705,246
Unrecognized net actuarial loss ...................... (9,062)................. (13,760) (14,634)
Unrecognized transition liability .................... (56)............... (52) (48)
Unrecognized prior service cost ...................... (140)................. (129) (118)
Additional minimum pension liability ................. 1,659............ 7,947 --
-------- --------
Accrued (prepaid) pension cost ................................. $ 5,186.................. $ 9,476 $ (9,554)
======== ========
For 2000,Amounts recognized in the consolidated balance sheets consist of the
following at December 31,:
2002 2003
---- ----
Accrued pension liability .............................. $ 9,476 $ --
Prepaid pension asset .................................. -- (9,554)
Accumulated other comprehensive income (loss) .......... (7,947) --
-------- --------
Net amount recognized .................................. $ 1,529 $ (9,554)
======== ========
F-25
The following actuarial assumptions were used to determine our accumulated
and projected benefit obligations as of December 31,:
2002 2003
---- ----
Discount rate .......................................... 6.75% 6.25%
Expected return on plan assets ......................... 8.00% 8.00%
Rate of compensation increase .......................... 3.00% 3.00%
Net periodic pension cost for the years ended December 31, consist of the
following:
2001 2002 2003
---- ---- ----
Service cost - benefits earned during
the period .............................. $ 3,622 $ 3,988 $ 4,167
Interest cost on projected benefit obligation 1,785 2,002 2,419
Expected return on plan assets .............. (1,211) (1,595) (1,728)
Net amortization and deferral ............... 166 350 750
Settlement loss ............................. -- -- 2,839
-------- -------- --------
Net periodic pension cost ................... $ 4,362 $ 4,745 $ 8,447
======== ======== ========
During the years ended December 31, 2001 and 2002, we recognized
comprehensive losses of $1.1 million and $4.0 million, respectively, net of
income taxes, as a result of the changes in the additional minimum pension
liability required to be recognized. During the year ended December 31, 2003, we
recognized comprehensive income of $5.1 million, net of income taxes, as a
result of the change in the additional minimum pension liability required to be
recognized.
The following actuarial calculation purposes,assumptions were used to determine our net
periodic pension benefit cost for the weighted
average discountyears ended December 31,:
2001 2002 2003
---- ---- ----
Discount rate was 7.5%, 7.0% and.................................... 7.50% 7.00% 6.75%, respectively,
Expected return on plan assets ................... 8.00% 8.00% 8.00%
Rate of compensation increase .................... 4.50% 3.00% 3.00%
In determining the expected long
termreturn on pension plan assets, we consider the
relative weighting of plan assets, the historical performance of total plan
assets and individual asset classes and economic and other indicators of future
performance. In addition, we consult with financial and investment management
professionals in developing appropriate targeted rates of return.
Asset management objectives include maintaining an adequate level of
diversification to reduce interest rate and market risk and providing adequate
liquidity to meet immediate and future benefit payment requirements.
F-26
The allocation of return was 8.0%pension plan assets by category is as follows at
December 31,:
Percentage of Pension Target
Plan Assets Allocation
2002 2003 2004
---- ---- ----
Equity securities ....................... 56% 41% 60%
Debt securities ......................... 28 49 36
Other ................................... 16 10 4
---- ---- ----
Total ................................... 100% 100% 100%
==== ==== ====
As of December 31, 2003, the Plan held 28,000 shares of our common stock,
which had a fair value of $0.7 million. We believe that our long-term asset
allocation on average will approximate the targeted allocation. We regularly
review our actual asset allocation and periodically rebalance the rate of increase in future compensation
levels was 4.5%, 4.5% and 3.0%, respectively.pension plan's
investments to our targeted allocation when deemed appropriate.
Our 2004 pension plan funding is not expected to exceed $5.7 million.
Note 11 -- Legal Matters
From time to time, we have been named asare a defendant in certain lawsuits alleging product
liability, patent infringement, or other claims incurred in the ordinary course
of business. We accrue for contingent losses when the loss is
probable and reasonably estimable. Contingent gainsThese claims are recognized when
realized. Certain of these claims aregenerally covered by various insurance policies,
subject to certain deductible amounts and maximum policy limits. F-23When there is
no insurance coverage, as would typically be the case primarily in lawsuits
alleging patent infringement, 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 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 million per incident and
$25 million 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 party's 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.
F-27
Ultimate liabilityIn November 2003, we commenced litigation against Johnson & Johnson and
several of its subsidiaries, including Ethicon, Inc. for violation of federal
and state antitrust laws. The lawsuit claims that Johnson & Johnson engaged in
illegal and anticompetitive conduct with respect to these contingencies, if any, is not
consideredsales of product used in
endoscopic surgery, resulting in higher prices to consumers and the exclusion of
competition. We have sought relief which includes an injunction restraining
Johnson & Johnson from continuing its anticompetitive practice as well as
receiving the maximum amount of damages allowed by law. While we believe that
our claims are well-grounded in fact and law, there can be material to the consolidated financial statements of the
Company.no assurance that we
will be successful in our claim.
Note 12 -- Non-recurring Items
DuringOther expense (income)
Other expense (income) for the quarteryear ended June 2000, we announced we would replace our
arthroscopy direct sales force with non-stocking, exclusive sales agent groups
in certain geographic regionsDecember 31, consists of the
United States. Asfollowing:
2002 2003
---- ----
Gain on settlement of a result, we incurredcontractual dispute ............. $ -- $ (9,000)
Pension settlement loss ................................. -- 2,839
Acquisition-related costs ............................... -- 3,244
Loss on settlement of a severance charge of $1.5 million, before income taxes, 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 $.9 million and $.7 million, respectively,
before income taxes, in each of the third and fourth quarters of 2001. These
non-recurring charges are included in cost of sales.
During the quarter ended September 30, 2002, we entered into a new $200
million senior credit agreement. Deferred financing fees related to the
approximately three years remaining on the former senior credit agreement have
been written off as an extraordinary charge of $.9 million, net of income taxes,
or $.04 per diluted share, on the early extinguishment of debt.
Onpatent dispute .................. 2,000 --
-------- --------
Other expense (income) .............................. $ 2,000 $ (2,917)
-------- --------
In March 11, 2003, we agreed to settle a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd. In, in return for a
one-time $1.5 million payment, CONMED has been granted a nonexclusive license to
the disputed patents used to manufacture the gels used in certain of our ECG
product lines. Accordingly, wepayment. We recorded a charge to income in the fourth
quarter of 2002 for theto recognize a loss of $1.5 million plus legal costs of
approximately $.5$0.5 million.
During 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 as a gain on settlement of a
contractual dispute, net of $0.5 million in legal costs.
During 2003, we announced a plan to restructure our arthroscopy and
powered surgical instrument 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 2. As part of the sales force
restructuring, we converted 90 direct employee sales representatives into nine
independent sales agent groups. As a result of this restructuring, we now have
18 exclusive independent sales agent groups managing 230 arthroscopy and powered
surgical instrument sales representatives. As a result of the termination of the
90 direct employee sales representatives, we recorded a charge to other expense
of $2.8 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 2003, we incurred acquisition-related charges of approximately $4.5
million, of which $1.3 million has been recorded in cost of sales as discussed
in Note 2 and $3.2 million in acquisition and transition-related costs have been
recorded in other expense. The $3.2 million in costs recorded to other expense
are acquisition and transition-related, consisting of $1.3 million in retention
bonuses, travel, severance and other costs related to acquisitions completed in
the fourth quarter of 2002, and $1.9 million of such costs related to the Bionx
acquisition completed in the first quarter of 2003.
F-28
Note 13 -- Guarantees
We provide service and warranty policieswarranties on certain of our products at the time of sale. The
standard warranty on our capital and reusable equipment is for a period of one
year. 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 year ended December 31, 2002, are as follows:
2002 2003
---- ----
Balance as of January 1, 2002 ............................................. $ 2,909 $ 3,213
-------- --------
Provision for warranties .................................................. 4,287 4,209
Claims made ............................................................................ (3,983) -------(3,934)
Warranties acquired .................... -- 100
-------- --------
Balance as of December 31, 2002 ......................................... $ 3,213 =======$ 3,588
======== ========
Note 14--14 - New Accounting Pronouncements
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 any material accounting
impact on our financial condition or results of operations.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued and subsequently revised in December 2003. The guidelines of the
interpretation are applicable for us in our first quarter 2004 financial
statements. 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. Adoption of this
pronouncement is not expected to have any material impact on our financial
condition or results of operations during 2004.
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
F-29
we have reclassified the extraordinary loss recognized in the third quarter of
2002 related to the refinancing of debt to ordinary income.
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 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 became
applicable for us in our third quarter 2003. Adoption of this pronouncement has
not had any material impact on our financial condition or results of operations
during 2003.
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
became applicable for us in our third quarter 2003. Adoption of this
pronouncement has not had any material impact on our financial condition or
results of operations during 2003.
In December 2003, SFAS No. 132R "Employers' Disclosures about Pensions and
Other Postretirement Benefits" was issued. SFAS No. 132R amends the disclosure
requirements of SFAS No. 132 to require additional disclosures about assets,
obligations, cash flow and net periodic benefit cost. The statement is effective
in 2003 and the related disclosures have been included in Note 10 to the
consolidated financial statements.
Note 15-- Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 20012002 and 20022003 are as follows:
F-24
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
Net income adjusted for SFAS 142 .. 7,416 7,147 6,428 9,067
EPS:
Basic ......................... .26 .25 .20 .30
Basic adjusted for SFAS 142 ... .32 .31 .26 .36
Diluted ....................... .26 .25 .20 .30
Diluted adjusted for SFAS 142 . .32 .31 .25 .35
Three Months Ended
------------------------------------------
March June September December
-------- ------------- ---- --------- --------
2002
Net sales ......................... $113,205 $111,269...................... $ 113,205 $ 111,269 $ 113,332 $115,256$ 115,256
Gross profit ......................................... 59,101 59,558 58,903 59,609
Income before extraordinary loss .. 9,076 8,950 9,167 7,902
Net Income........................income ..................... 9,076 8,950 8,223 7,902
EPS
- before extraordinary loss:
Basic ............................................... $ .36 $ .34 .32$ .29 $ .28
Diluted ....................... .35 .33 .32 .27
EPS-Net income
Basic ......................... .36 .34 .29 .28
Diluted ........................................... .35 .33 .28 .27
As discussed in Notes 2 and 12, duringF-30
Three Months Ended
------------------
March June September December
----- ---- --------- --------
2003
Net sales ...................... $ 118,034 $ 124,540 $ 120,747 $ 133,809
Gross profit ................... 61,656 65,131 63,231 69,679
Net income ..................... 6,668 2,763 9,706 12,945
EPS:
Basic ...................... $ .23 $ .10 $ .34 $ .45
Diluted .................... .23 .09 .33 .44
Unusual Items Included In Selected Quarterly Financial Data:
2002
September
In the third and fourth quartersquarter of 2001,2002, we incurred certain transition charges relatedrecorded a charge of $1.5 million to recognize
a loss on the second Imagyn
acquisition. Such costs totaled $.9 million and $.7 million, respectively,
before income taxes, in eachearly extinguishment of the third and fourth quarters of 2001. These
nonrecurring charges are included in cost of sales. As discussed indebt--see Note 12,
during6.
December
In the fourth quarter of 2002, we incurredrecorded a charge of $2.0 million charge, before
income taxes, to selling and administrative expense, related to
the settlement of a patent infringement case.dispute--see Note 15 - Subsequent Events
On January 13,12.
2003
we entered into an agreement to acquire the common
stock of Bionx Implants, Inc. (the "Bionx acquisition") in a cash transaction
valuing Bionx at $4.35 per share. We completed the acquisition on March
10,
2003, paying $46.9 million in cash which we financed through borrowings under
our revolving credit facility (Note 6). Bionx develops and manufactures
self-reinforced resorbable polymer implants including screws, pins and meniscal
implants for use in a variety of orthopedic applications, including sports
medicine and fracture fixation. In 2002, Bionx recorded revenues of
approximately $18.0 million. The acquired product lines are expected to
complement CONMED's existing orthopedic product lines. The purchase price
allocation of the Bionx acquisition is still being finalized.
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 has paid us
$9.5 million in cash, which will be recorded as a gain to ordinary income in the first quarter of 2003, netwe recorded a charge of legal costs.
F-25
$7.9 million related to
the write-off of purchased in-process research and development. The first
quarter effective tax rate was increased from 36.0% to 55.1% to reflect the
nondeductibility of the $7.9 million charge.
In the first quarter of 2003, we recorded a gain of $9.0 million on the
settlement of a contractual dispute and acquisition-related charges of $1.3
million to other expense (income)--see Note 16 - Guarantor Financial Statements
Our credit facility12.
June
In the second quarter of 2003, we recorded pension settlement losses of $2.1
million and subordinated notes (the "Notes") are guaranteed
(the "Subsidiary Guarantees") by eachacquisition-related charges 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$1.2 million to other expense
(income)--see Note 12.
In the credit facility andsecond quarter of 2003 we recorded losses on 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, statementearly extinguishment of
income and statementdebt of cash flows$7.9 million--see Note 6.
September
In the third quarter of 2003, we recorded pension settlement losses of $0.7
million to other expense (income)--see Note 12.
December
In the fourth quarter of 2003, we reduced the effective tax rate for the Parent Company
Only, Subsidiary Guarantors and Non-Guarantor Subsidiary and for the Company as
of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001
and 2002.
F-26
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 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 ................ 2,808 181,575 -- -- 184,383
Other assets ................................ 483,167 2,376 -- (475,033) 10,510
-------- ---------- ---------- ------------ --------
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 ................. 6,467 285,330 41,947 (316,762) 16,982
-------- ---------- ---------- ------------ --------
Total liabilities ....................... 359,590 333,042 42,104 (316,762) 417,974
-------- ---------- ---------- ------------ --------
Shareholders' equity:
Preferred stock ......................... -- -- -- -- --
Common stock ............................ 253 -- -- -- 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 .......... 283,634 156,164 2,107 (158,271) 283,634
-------- ---------- ---------- ------------ --------
Total liabilities and shareholders' equity $643,224 $ 489,206 $ 44,211 $ (475,033) $701,608
======== ========== ========== ============ ========
F-27
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2002
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
-------- ---------- ---------- ------------ --------
ASSETS
Current assets:
Cash and cash equivalents ............... $ 3,824 $ 1,516 $ 286 $ -- $ 5,626
Accounts receivable, net ................ 746 13,397 43,950 -- 58,093
Inventories ............................. 25,829 94,614 -- -- 120,443
Deferred income taxes ................... 6,210 -- 94 -- 6,304
Prepaid expenses and other current assets 823 2,377 -- -- 3,200
-------- ---------- ---------- ------------ --------
Total current assets .............. 37,432 111,904 44,330 -- 193,666
-------- ---------- ---------- ------------ --------
Property, plant and equipment, net .......... 47,327 48,281 -- -- 95,608
Goodwill, net ............................... 96,393 166,001 -- -- 262,394
Other intangible assets, net ................ 3,565 176,706 -- -- 180,271
Other assets ................................ 498,111 2,406 -- (490,316) 10,201
-------- ---------- ---------- ------------ --------
Total assets ............................ $682,828 $ 505,298 $ 44,330 $ (490,316) $742,140
======== ========== ========== ============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ....... $ 1,284 $ 1,347 $ -- $ -- $ 2,631
Accounts payable ........................ 4,907 17,167 -- -- 22,074
Accrued compensation .................... 4,052 6,411 -- -- 10,463
Income taxes payable .................... 5,885 -- -- -- 5,885
Accrued interest ........................ 3,733 36 25 -- 3,794
Other current liabilities ............... 5,781 7,346 -- -- 13,127
-------- ---------- ---------- ------------ --------
Total current liabilities ........... 25,642 32,307 25 -- 57,974
-------- ---------- ---------- ------------ --------
Long-term debt .............................. 234,468 20,288 -- 254,756
Deferred income taxes ....................... 28,446 -- -- 28,446
Other long-term liabilities ................. 7,333 269,259 41,956 (304,523) 14,025
-------- ---------- ---------- ------------ --------
Total liabilities ....................... 295,889 321,854 41,981 (304,523) 355,201
-------- ---------- ---------- ------------ --------
Shareholders' equity:
Preferred stock ......................... -- -- -- -- --
Common stock ............................ 289 -- -- -- 289
Paid-in capital ......................... 231,831 -- 2,000 (2,000) 231,831
Retained earnings ....................... 162,391 184,603 349 (184,952) 162,391
Accumulated other comprehensive loss .... (7,153) (1,159) -- 1,159 (7,153)
Less common stock in treasury, at cost .. (419) -- -- -- (419)
-------- ---------- ---------- ------------ --------
Total shareholders' equity .......... 386,939 183,444 2,349 (185,793) 386,939
-------- ---------- ---------- ------------ --------
Total liabilities and shareholders' equity $682,828 $ 505,298 $ 44,330 $ (490,316) $742,140
======== ========== ========== ============ ========
F-28
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 31, 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-29
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 31, 2001
(in thousands)
Parent Non-
Company Subsidiary 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-30
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 31, 2002
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
------- ---------- ---------- ------------ --------
Net sales ............................. $105,527 $ 347,535 $ -- $ -- $453,062
-------- ---------- ---------- ------------ --------
Cost of sales ......................... 57,207 158,684 -- -- 215,891
Selling and administrative expense .... 33,156 110,097 (1,518) -- 141,735
Research and development expense ...... 1,752 14,335 -- -- 16,087
-------- ---------- ---------- ------------ --------
92,115 283,116 (1,518) -- 373,713
-------- ---------- ---------- ------------ --------
Income from operations ................ 13,412 64,419 1,518 -- 79,349
Interest expense, net ................. -- 23,373 1,140 -- 24,513
-------- ---------- ---------- ------------ --------
Income before income taxes
and extraordinary loss .............. 13,412 41,046 378 -- 54,836
Provision for income taxes ............ 4,829 14,776 136 -- 19,741
-------- ---------- ---------- ------------ --------
Income before equity in earnings of
unconsolidated subsidiaries and
extraordinary loss .................. 8,583 26,270 242 -- 35,095
Equity in earnings of
unconsolidated subsidiaries ....... 26,512 -- -- (26,512) --
-------- ---------- ---------- ------------ --------
Income before extraordinary loss ...... 35,095 26,270 242 (26,512) 35,095
Extraordinary loss, net of income taxes 944 -- -- -- 944
-------- ---------- ---------- ------------ --------
Net income ............................ $ 34,151 $ 26,270 $ 242 $ (26,512) $ 34,151
======== ========== ========== ============ ========
year
from 41.4% to 39.5% thereby decreasing income tax expense by $1.0 million.
F-31
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 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-32
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 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-33
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2002
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
--------- ---------- ---------- ------------ ---------
Net cash flows from operating
activities ............................... $ 19,417 $ 25,240 $ 266 $ -- $ 44,923
--------- ---------- ---------- ------------ ---------
Cash flows from investing activities:
Distributions from subsidiaries .......... 17,214 -- -- (17,214) --
Payments related to business acquisitions (17,375) -- -- -- (17,375)
Purchases of property, plant and
equipment ............................ (4,517) (8,867) -- -- (13,384)
--------- ---------- ---------- ------------ ---------
Net cash provided (used)
by investing activities .......... (4,678) (8,867) -- (17,214) (30,759)
--------- ---------- ---------- ------------ ---------
Cash flows from financing:
Distributions to parent .................. -- (17,013) -- 17,013 --
Payments on note payable to parent company -- -- (201) 201 --
Net proceeds from issuance of
common stock ........................... 66,123 -- -- -- 66,123
Net proceeds from exercise of
stock options .......................... 5,017 -- -- -- 5,017
Repurchase of warrant on common stock .... (2,000) -- -- -- (2,000)
Payments on debt ......................... (183,680) -- -- -- (183,680)
Proceeds of debt ......................... 105,138 -- -- -- 105,138
Payments related to issuance
of debt ................................ (1,513) -- -- -- (1,513)
--------- ---------- ---------- ------------ ---------
Net cash provided (used) by
financing activities ............ (10,915) (17,013) (201) 17,214 (10,915)
--------- ---------- ---------- ------------ ---------
Effect of exchange rate changes on cash
and cash equivalents ..................... -- 975 -- -- 975
--------- ---------- ---------- ------------ ---------
Net increase in cash and
cash equivalents ......................... 3,824 335 65 -- 4,224
Cash and cash equivalents at
beginning of period ...................... -- 1,181 221 -- 1,402
--------- ---------- ---------- ------------ ---------
Cash and cash equivalents at
end of period ............................ $ 3,824 $ 1,516 $ 286 $ -- $ 5,626
========= ========== ========== ============ =========
F-34
SCHEDULE VIII--ValuationII--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
- --------------------------------------------------------- ------------ ---------- ---------- ---------- --------------
2002
2003
- ----
Allowance for bad debts ..$ 922 $ 741 $ 640 $ (631) $ 1,672
Inventory reserves .... 6,596 1,834 985 (1,983) 7,432
Deferred tax asset
Valuation allowance . -- -- 8,462 -- 8,462
2002
- ----
Allowance for bad debts $ 1,553 $ (144) $ -- $ (487) $ 922
Inventory reserves ....... $.... 8,692 $ 776 $-- (2,872) $ 6,596
Deferred tax asset
valuation allowance .... $. 3,410 $-- (3,410) $ -- $ --
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
F-35F-32