SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001 Commission File Number 0-16093
CONMED CORPORATION
(Exact name of the registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 Broad Street, Utica, New York 13501
(Address of principal executive offices) (Zip Code)
(315) 797-8375
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
The number of shares outstanding of registrant's common stock, as of
August 1, 2001 is 16,731,492 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number Page
Item 1. Financial Statements
- Consolidated Condensed Statements
of Income 1
- Consolidated Condensed Balance Sheets 2
- Consolidated Condensed Statements
of Cash Flows 3
- Notes to Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June June
---- ----
2000 2001 2000 2001
-------- -------- -------- --------
Net sales .................... $ 97,878 $104,171 $200,689 $210,080
-------- -------- -------- --------
Cost of sales ................ 47,327 49,965 95,988 99,639
Selling and administrative ... 33,247 33,922 64,009 68,751
Research and development ..... 3,572 3,476 6,978 7,172
-------- -------- -------- --------
84,146 87,363 166,975 175,562
-------- -------- -------- --------
Income from operations ....... 13,732 16,808 33,714 34,518
Interest expense, net ........ 8,238 7,848 16,643 16,179
-------- -------- -------- --------
Income before income taxes ... 5,494 8,960 17,071 18,339
Provision for income taxes ... 1,978 3,226 6,146 6,602
-------- -------- -------- --------
Net income ................... $ 3,516 $ 5,734 $ 10,925 $ 11,737
======== ======== ======== ========
Per share data:
Net Income
Basic .................... $ .23 $ .37 $ .71 $ .76
Diluted .................. .23 .37 .70 .75
Weighted average common shares
Basic .................... 15,311 15,407 15,298 15,389
Diluted .................. 15,551 15,599 15,535 15,568
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December June
2000 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 3,470 $ 924
Accounts receivable, net ...................... 78,626 84,657
Inventories ................................... 104,612 103,194
Deferred income taxes ......................... 1,761 1,761
Prepaid expenses and other current assets ..... 3,562 3,848
--------- ---------
Total current assets ........................ 192,031 194,384
--------- ---------
Property, plant and equipment, net .............. 62,450 66,758
Goodwill, net ................................... 225,801 222,595
Other intangible assets, net .................... 195,008 193,742
Other assets .................................... 4,281 4,886
--------- ---------
Total assets ................................ $ 679,571 $ 682,365
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............. $ 36,068 $ 37,665
Accounts payable .............................. 20,350 19,049
Accrued compensation .......................... 9,913 9,163
Income taxes payable .......................... 1,979 2,823
Accrued interest .............................. 5,130 5,192
Other current liabilities ..................... 4,836 4,468
--------- ---------
Total current liabilities ................... 78,276 78,360
--------- ---------
Long-term debt .................................. 342,680 330,033
Deferred income taxes ........................... 12,154 16,118
Other long-term liabilities ..................... 15,858 17,335
--------- ---------
Total liabilities ........................... 448,968 441,846
--------- ---------
Shareholders' equity:
Preferred stock, par value $.01 per share;
authorized 500,000 shares; none outstanding . -- --
Common stock, par value $.01 per share;
100,000,000 shares authorized; 15,352,186 and
15,433,980 shares issued and outstanding in
2000 and 2001, respectively ............... 153 154
Paid-in capital ............................... 128,062 128,568
Retained earnings ............................. 103,834 115,571
Accumulated other comprehensive loss .......... (1,027) (3,355)
Less 25,000 shares of common stock in treasury,
at cost ..................................... (419) (419)
--------- ---------
Total shareholders' equity .................. 230,603 240,519
--------- ---------
Total liabilities and shareholders' equity .. $ 679,571 $ 682,365
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 2000 and 2001
(in thousands)
(unaudited)
2000 2001
-------- --------
Cash flows from operating activities:
Net income ....................................... $ 10,925 $ 11,737
-------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................... 4,612 4,345
Amortization ............................... 9,803 10,740
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable .............. (2,361) (5,992)
Inventories ...................... (8,786) (991)
Prepaid expenses and
other current assets ........... (1,308) (311)
Accounts payable ................. 6,893 (1,344)
Income taxes payable ............. 2,753 844
Accrued compensation ............. (840) (736)
Accrued interest ................. 1,952 62
Other assets/liabilities, net .... (2,177) (785)
-------- --------
10,541 5,832
-------- --------
Net cash provided by operating activities .. 21,466 17,569
-------- --------
Cash flows from investing activities:
Purchases of property, plant, and equipment ...... (7,602) (8,655)
-------- --------
Net cash used by investing activities ...... (7,602) (8,655)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit facility ....... 2,000 7,000
Proceeds from issuance of common stock ........... 442 507
Payments on long-term debt ....................... (16,459) (18,050)
-------- --------
Net cash used by financing activities ...... (14,017) (10,543)
-------- --------
Effect of exchange rate changes
on cash and cash equivalents ................... (241) (917)
-------- --------
Net decrease in cash and cash equivalents .......... (394) (2,546)
Cash and cash equivalents at beginning of period ... 3,747 3,470
-------- --------
Cash and cash equivalents at end of period ......... $ 3,353 $ 924
======== ========
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Organization and operations
- ------------------------------------
The consolidated condensed financial statements include the accounts of CONMED
Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). All
intercompany accounts and transactions have been eliminated. CONMED Corporation
is a medical technology company specializing in instruments and implants for
arthroscopic sports medicine, and powered surgical instruments, for orthopaedic,
ENT, neuro-surgery and other surgical specialties. We are also a leading
developer, manufacturer and supplier of advanced medical devices, including RF
electrosurgery systems used in all types of surgery, ECG electrodes for heart
monitoring, and minimally invasive surgical devices. Our products are used in a
variety of clinical settings, such as operating rooms, surgery centers,
physicians' offices and critical care areas of hospitals. Our business is
organized, managed and internally reported as a single segment, since our
product offerings have similar economic, operating and other related
characteristics.
Note 2 - Interim financial information
- --------------------------------------
The statements for the three and six months ended June 2000 and 2001 are
unaudited; in our opinion such unaudited statements include all adjustments
(which comprise only normal recurring accruals) necessary for a fair
presentation of the results for such periods. The consolidated condensed
financial statements for the year ending December 2001 are subject to adjustment
at the end of the year when they will be audited by independent accountants. The
results of operations for the three and six months ended June 2001 are not
necessarily indicative of the results of operations to be expected for any other
quarter nor for the year ending December 2001. The consolidated condensed
financial statements and notes thereto should be read in conjunction with the
financial statements and notes for the year ended December 2000 included in our
Annual Report to the Securities and Exchange Commission on Form 10-K. Certain
prior year amounts have been reclassified to conform with the presentation used
in 2001.
Note 3 - Other comprehensive income (loss)
- ------------------------------------------
Comprehensive income (loss) consists of the following:
Three months ended Six months ended
June June
---- ----
2000 2001 2000 2001
-------- -------- -------- --------
Net income ................ $ 3,516 $ 5,734 $ 10,925 $ 11,737
Other comprehensive income:
Foreign currency
translation adjustment (99) 171 (262) (892)
Cash flow hedging
(net of income taxes) . -- 114 -- (1,436)
-------- ------- --------- --------
Comprehensive income .... $ 3,417 $ 6,019 $ 10,663 $ 9,409
======== ======= ========= ========
4
Accumulated other comprehensive income (loss) consists of the following:
Accumulated
Cumulative Cash Other
Translation Flow Comprehensive
Adjustments Hedges Income (loss)
----------- ------ -------------
Balance, December 2000 ..................... $(1,027) $ -- $(1,027)
------- ------- -------
Foreign currency translation adjustments (892) -- (892)
Cash flow hedging (net of income taxes) -- (1,436) (1,436)
------- ------- -------
Balance, June 2001 ......................... $(1,919) $(1,436) $(3,355)
======= ======= =======
Note 4 - Inventories
- --------------------
The components of inventory are as follows (in thousands):
December June
2000 2001
---- ----
Raw materials .............................. $ 38,278 $ 39,330
Work-in-process ............................ 12,612 10,465
Finished goods ............................. 53,722 53,399
-------- --------
Total .......................... $104,612 $103,194
======== ========
Note 5 - New accounting pronouncements
- --------------------------------------
In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and
No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective
for us July 1, 2001 and January 1, 2002, respectively. SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Under SFAS 142, amortization of goodwill,
including goodwill recorded in past business combinations, will discontinue upon
adoption of this standard. In addition, goodwill recorded as a result of
business combinations completed during the six-month period ending December 31,
2001 will not be amortized. All goodwill and intangible assets will be tested
for impairment in accordance with the provisions of the Statement. We are
currently reviewing the provisions of SFAS 141 and SFAS 142 and assessing the
impact of adoption.
5
Note 6 - Earnings per share
- ---------------------------
Basic earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential shares outstanding (ie., options and warrants) during the
period. The following is a reconciliation of the weighted average shares used in
the calculation of basic and diluted EPS (in thousands):
Three months ended Six months ended
June June
---- ----
2000 2001 2000 2001
------ ------ ------ ------
Shares used in the calculation
of Basic EPS(weighted average
shares outstanding) .............. 15,311 15,407 15,298 15,389
------ ------ ------ ------
Effect of dilutive potential
securities ....................... 240 192 237 179
------ ------ ------ ------
Shares used in the calculation
of Diluted EPS ................... 15,551 15,599 15,535 15,568
------ ------ ------ ------
The shares used in the calculation of diluted EPS exclude warrants and options
to purchase shares where the exercise price was greater than the average market
price of common shares for the period. Such shares aggregated 1,515,000 and
2,129,000 for the three months ended June 2000 and 2001, respectively, and
1,485,000 and 2,297,000 for the six months ended June 2000 and 2001,
respectively.
Note 7 - Business acquisitions
- ------------------------------
On November 20, 2000 we acquired certain assets of the disposable minimally
invasive surgical business of Imagyn Medical Technologies, Inc. (the "Imagyn
acquisition") for a purchase price of $6,000,000. The acquisition was funded
through borrowings under our revolving credit facility. Annual sales of the
acquired product lines were approximately $6.5 million. The results of
operations of the acquired business are included in our consolidated results
from the date of acquisition.
On July 6, 2001 we acquired the remaining assets of the minimally invasive
surgical business of Imagyn Medical Technologies Inc. that we did not acquire in
November 2000 (the "second Imagyn acquisition"). Under the terms of the
acquisition agreement, we issued Imagyn 1.3 million shares of CONMED common
stock, valuing the transaction at $33.9 million based on the closing share price
on July 6, 2001. The issued stock is subject to a 90-day lock-up restriction and
certain other sales restrictions. Annual sales of the acquired product lines
were approximately $18.0 million. The results of operations of the acquired
business will be included in our consolidated results beginning in the third
quarter.
Note 8 - Nonrecurring severance charge
- --------------------------------------
During the quarter ended June 2000, we announced we would replace our
arthroscopy direct sales force with non-stocking, exclusive sales agent groups
in certain geographic regions of the United States. As a result, we incurred a
severance charge of $1,509,000, before income taxes, or $.06 per diluted share,
in the second quarter of 2000. This nonrecurring charge is included in selling
and administrative expense.
6
Note 9 - Guarantor financial statements
- ---------------------------------------
Our credit facility and subordinated notes (the "Notes") are guaranteed (the
"Subsidiary Guarantees") by our subsidiaries (the "Subsidiary Guarantors"). The
Subsidiary Guarantees provide that each Subsidiary Guarantor will fully and
unconditionally guarantee our obligations under the credit facility and the
Notes on a joint and several basis. Each Subsidiary Guarantor is wholly-owned by
CONMED Corporation. The following supplemental financial information sets forth
on a condensed consolidating basis, consolidating balance sheet, statement of
income and statement of cash flows for the Parent Company Only, Subsidiary
Guarantors and for the Company as of December 2000 and June 2001 and for the
three and six months ended June 2000 and 2001.
7
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- --------- --------
ASSETS
Current assets:
Cash and cash equivalents........................ $ - $ 3,470 $ - $ 3,470
Accounts receivable, net......................... 35,218 43,408 - 78,626
Inventories...................................... 20,174 84,438 - 104,612
Deferred income taxes............................ 1,761 - - 1,761
Prepaid expenses and other
current assets............................... 598 2,964 - 3,562
-------- -------- --------- --------
Total current assets....................... 57,751 134,280 - 192,031
-------- -------- --------- --------
Property, plant and equipment, net................... 38,275 24,175 - 62,450
Goodwill, net........................................ 61,651 164,150 - 225,801
Other intangible assets, net......................... 7,498 187,510 - 195,008
Other assets......................................... 473,408 5,217 (474,344) 4,281
-------- -------- --------- --------
Total assets..................................... $638,583 $515,332 $(474,344) $679,571
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 36,068 $ - $ - $ 36,068
Accounts payable................................. 4,398 15,952 - 20,350
Accrued compensation............................. 2,147 7,766 - 9,913
Income taxes payable............................. 1,338 641 - 1,979
Accrued interest................................. 5,130 - - 5,130
Other current liabilities........................ 1,890 2,946 - 4,836
-------- -------- --------- --------
Total current liabilities.................... 50,971 27,305 - 78,276
-------- -------- --------- --------
Long-term debt....................................... 342,680 - - 342,680
Deferred income taxes................................ 12,154 - - 12,154
Other long-term liabilities.......................... 2,175 349,295 (335,612) 15,858
-------- -------- --------- --------
Total liabilities................................ 407,980 376,600 (335,612) 448,968
-------- -------- --------- --------
Shareholders' equity:
Preferred stock.................................. - - - -
Common stock..................................... 153 1 (1) 153
Paid-in capital.................................. 128,062 - - 128,062
Retained earnings................................ 103,834 139,758 (139,758) 103,834
Accumulated other comprehensive
loss......................................... (1,027) (1,027) 1,027 (1,027)
Less common stock in
treasury, at cost............................... (419) - - (419)
-------- -------- --------- --------
Total shareholders' equity................... 230,603 138,732 (138,732) 230,603
-------- -------- --------- --------
Total liabilities and
shareholders' equity....................... $638,583 $515,332 $(474,344) $679,571
======== ======== ========= ========
8
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
June 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- --------- --------
ASSETS
Current assets:
Cash and cash equivalents........................ $ - $ 924 $ - $ 924
Accounts receivable, net......................... 35,019 49,638 - 84,657
Inventories...................................... 19,377 83,817 - 103,194
Deferred income taxes............................ 1,761 - - 1,761
Prepaid expenses and other
current assets............................... 724 3,124 - 3,848
-------- -------- --------- --------
Total current assets....................... 56,881 137,503 - 194,384
-------- -------- --------- --------
Property, plant and equipment, net................... 43,993 22,765 - 66,758
Goodwill, net........................................ 60,669 161,926 - 222,595
Other intangible assets, net......................... 7,627 186,115 - 193,742
Other assets......................................... 475,442 40,814 (511,370) 4,886
-------- -------- --------- --------
Total assets..................................... $644,612 $549,123 $(511,370) $682,365
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 37,665 $ - $ - $ 37,665
Accounts payable................................. 3,492 15,557 - 19,049
Accrued compensation............................. 1,791 7,372 - 9,163
Income taxes payable............................. 2,520 303 - 2,823
Accrued interest................................. 5,192 - - 5,192
Other current liabilities........................ 2,605 1,863 - 4,468
-------- -------- --------- --------
Total current liabilities.................... 53,265 25,095 - 78,360
-------- -------- --------- --------
Long-term debt....................................... 330,033 - - 330,033
Deferred income taxes................................ 16,118 - - 16,118
Other long-term liabilities.......................... 4,677 376,868 (364,210) 17,335
-------- -------- --------- --------
Total liabilities................................ 404,093 401,963 (364,210) 441,846
-------- -------- --------- --------
Shareholders' equity:
Preferred stock.................................. - - - -
Common stock..................................... 154 1 (1) 154
Paid-in capital.................................. 128,568 - - 128,568
Retained earnings................................ 115,571 149,078 (149,078) 115,571
Accumulated other comprehensive
loss......................................... (3,355) (1,919) 1,919 (3,355)
Less common stock in
treasury, at cost............................... (419) - - (419)
-------- -------- --------- --------
Total shareholders' equity................... 240,519 147,160 (147,160) 240,519
-------- -------- --------- --------
Total liabilities and
shareholders' equity....................... $644,612 $549,123 $(511,370) $682,365
======== ======== ========= ========
9
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended June 2000
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- -------- --------
Net sales............................................ $ 18,927 $ 78,951 $ - $ 97,878
-------- -------- -------- --------
Cost of sales........................................ 10,919 36,408 - 47,327
Selling and administrative expense................... 5,412 27,835 - 33,247
Research and development expense..................... 470 3,102 - 3,572
-------- -------- -------- --------
16,801 67,345 - 84,146
-------- -------- -------- --------
Income from operations............................... 2,126 11,606 - 13,732
Interest expense, net................................ - 8,238 - 8,238
-------- -------- -------- --------
Income before income taxes........................... 2,126 3,368 - 5,494
Provision for income taxes........................... 765 1,213 - 1,978
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries..................... 1,361 2,155 - 3,516
Equity in earnings of unconsolidated
subsidiaries....................................... 2,155 - (2,155) -
-------- -------- -------- --------
Net income........................................... $ 3,516 $ 2,155 $ (2,155) $ 3,516
======== ======== ======== ========
10
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended June 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- ------------ --------
Net sales............................................ $ 20,503 $ 83,668 $ - $104,171
-------- -------- -------- --------
Cost of sales........................................ 11,816 38,149 - 49,965
Selling and administrative expense................... 6,067 27,855 - 33,922
Research and development expense..................... 350 3,126 - 3,476
-------- -------- -------- --------
18,233 69,130 - 87,363
-------- -------- -------- --------
Income from operations............................... 2,270 14,538 - 16,808
Interest expense, net................................ - 7,848 - 7,848
-------- -------- -------- --------
Income before income taxes........................... 2,270 6,690 - 8,960
Provision for income taxes........................... 817 2,409 - 3,226
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries..................... 1,453 4,281 - 5,734
Equity in earnings of unconsolidated
subsidiaries....................................... 4,281 - (4,281) -
-------- -------- -------- --------
Net income........................................... $ 5,734 $ 4,281 $ (4,281) $ 5,734
======== ======== ======== ========
11
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Six Months Ended June 2000
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- -------- --------
Net sales............................................ $ 39,547 $161,142 $ - $200,689
-------- -------- -------- --------
Cost of sales........................................ 21,972 74,016 - 95,988
Selling and administrative expense................... 10,657 53,352 - 64,009
Research and development expense..................... 957 6,021 - 6,978
-------- -------- -------- --------
33,586 133,389 - 166,975
-------- -------- -------- --------
Income from operations............................... 5,961 27,753 - 33,714
Interest expense, net................................ - 16,643 - 16,643
-------- -------- -------- --------
Income before income taxes........................... 5,961 11,110 - 17,071
Provision for income taxes........................... 2,146 4,000 - 6,146
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries..................... 3,815 7,110 - 10,925
Equity in earnings of unconsolidated
subsidiaries....................................... 7,110 - (7,110) -
-------- -------- -------- --------
Net income........................................... $ 10,925 $ 7,110 $ (7,110) $ 10,925
======== ======== ======== ========
12
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Six Months Ended June 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- -------- -------- --------
Net sales............................................ $ 40,973 $169,107 $ - $210,080
-------- -------- -------- --------
Cost of sales........................................ 24,299 75,340 - 99,639
Selling and administrative expense................... 12,165 56,586 - 68,751
Research and development expense..................... 732 6,440 - 7,172
-------- -------- -------- --------
37,196 138,366 - 175,562
-------- -------- -------- --------
Income from operations............................... 3,777 30,741 - 34,518
Interest expense, net................................ - 16,179 - 16,179
Income before income taxes........................... 3,777 14,562 - 18,339
Provision for income taxes........................... 1,360 5,242 - 6,602
-------- -------- -------- --------
Income before equity in earnings
of unconsolidated subsidiaries..................... 2,417 9,320 - 11,737
Equity in earnings of unconsolidated
subsidiaries....................................... 9,320 - (9,320) -
-------- -------- -------- --------
Net income........................................... $ 11,737 $ 9,320 $ (9,320) $ 11,737
======== ======== ======== ========
13
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 2000
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
------- ------- ------- --------
Net cash flows from operating
activities.......................................... $ 8,881 $12,585 $ - $ 21,466
------- ------- ------- --------
Cash flows from investing activities:
Distributions from subsidiaries.................... 10,138 - (10,138) -
Purchases of property, plant and
equipment.................................... (5,600) (2,002) - (7,602)
------- ------- ------- --------
Net cash provided (used)
by investing activities.................. 4,538 (2,002) (10,138) (7,602)
------- ------- ------- --------
Cash flows from financing:
Distributions to parent.......................... - (10,138) 10,138 -
Borrowings under revolving
credit facility.............................. 2,000 - - 2,000
Proceeds from issuance of
common stock................................. 442 - - 442
Payments on long-term debt....................... (16,459) - - (16,459)
Net cash provided (used) by
------- ------- ------- --------
financing activities...................... (14,017) (10,138) 10,138 (14,017)
------- ------- ------- --------
Effect of exchange rate changes on cash
and cash equivalents............................... - (241) - (241)
------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents.................................... (598) 204 - (394)
Cash and cash equivalents at
beginning of period................................. 598 3,149 - 3,747
------- ------- ------- --------
Cash and cash equivalents at
end of period....................................... $ 0 $ 3,353 $ - $ 3,353
======= ======= ======= ========
14
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 2001
(in thousands)
(unaudited)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
------- ------- ------- --------
Net cash flows from operating
activities.......................................... $ 7,037 $10,532 $ - $ 17,569
------- ------- ------- --------
Cash flows from investing activities:
Distributions from subsidiaries.................... 10,689 - (10,689) -
Purchases of property, plant and
equipment.................................... (7,183) (1,472) - (8,655)
Net cash provided (used)
------- ------- ------- --------
by investing activities................. 3,506 (1,472) (10,689) (8,655)
------- ------- ------- --------
Cash flows from financing:
Distributions to parent.......................... - (10,689) 10,689 -
Borrowings under revolving
credit facility.............................. 7,000 - - 7,000
Proceeds from issuance of
common stock................................. 507 - - 507
Payments on long-term debt....................... (18,050) - - (18,050)
------- ------- ------- --------
Net cash provided (used)by
financing activities...................... (10,543) (10,689) 10,689 (10,543)
------- ------- ------- --------
Effect of exchange rate changes on cash
and cash equivalents............................... - (917) - (917)
------- ------- ------- --------
Net decrease in cash and
cash equivalents.................................... - (2,546) - (2,546)
Cash and cash equivalents at
beginning of period................................. - 3,470 - 3,470
------- ------- ------- --------
Cash and cash equivalents at
end of period....................................... $ - $ 924 $ - $ 924
====== ======== ======= ========
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and information that is based on the beliefs of management, as well as
assumptions made by and information currently available to management.
When used in this Form 10-Q, 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 discussed in our Annual
Report on Form 10-K for the year ended December 2000, 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: general economic and business conditions; changes in customer
preferences; competition; changes in technology; the introduction of new
products; the integration of any acquisition; changes in business strategy; the
possibility that United States or foreign regulatory and/or administrative
agencies might initiate enforcement actions against us or our distributors; our
indebtedness; quality of our management and business abilities and the judgment
of our personnel; the availability, terms and deployment of capital; the risk of
litigation, especially patent litigation as well as the cost associated with
patent and other litigation and changes in regulatory requirements.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Form 10-Q or to
reflect the occurrence of unanticipated events.
Three months ended June 2001 compared to three months ended June 2000
Sales for the quarter ended June 2001 were $104.2 million, an increase of 6.4%
compared to sales of $97.9 million in the same quarter a year ago.
Sales in our orthopaedic businesses grew 5.9% to $66.4 million from $62.7
million in the comparable quarter last year. Arthroscopy sales, which represent
approximately 57.2% of total orthopaedic revenues, grew 5.3% to $38.0 million
from $36.1 million in the same period a year ago. Powered surgical instrument
sales, which represent approximately 42.8% of orthopaedic revenues, grew 6.8% to
$28.4 million from $26.6 million in the same quarter last year. Adjusted for
constant foreign currency exchange rates, orthopaedic sales growth in the second
quarter of 2001 would have been approximately 7.7% compared with the second
quarter of 2000.
Patient care sales for the three months ended June 2001 were $17.6 million, a
4.8% increase from $16.8 million in the same period a year ago, as sales of our
surgical suction product lines have stabilized compared to the same period a
year ago.
Electrosurgery sales for the three months ended June 2001 were $17.1 million, an
increase of 1.8% from $16.8 million in the second quarter of last year,
reflecting increased disposable product sales.
Sales of minimally invasive surgery (MIS) products increased 87.5% to $3.0
million in the three months ended June 2001 from $1.6 million in the same period
a year ago. Substantially all of the increase in MIS sales is a result of our
November 2000 Imagyn acquisition (Note 7 to the condensed consolidated financial
statements).
Cost of sales increased to $49,965,000 in the current quarter as compared to
$47,327,000 in the same quarter a year ago as a result of the increased sales
volumes described above. Gross margin percentage improved to 52.0% in the second
16
quarter of 2001 compared to 51.6% in the second quarter of 2000, primarily as a
result of increased sales volumes in our orthopaedic product lines which carry
higher gross margins than certain of our other product lines.
Selling and administrative expenses increased to $33,922,000 in the second
quarter of 2001 as compared to $33,247,000 in the second quarter of 2000. As a
percentage of sales, selling and administrative expenses totaled 32.6% in the
second quarter of 2001 compared to 34.0% in the second quarter of 2000. In the
second quarter of 2000, we announced a plan to replace our arthroscopy direct
sales force with non-stocking exclusive sales agent groups in certain geographic
regions of the United States (Note 8 to the condensed consolidated financial
statements). As a result, we incurred a nonrecurring severance charge of
$1,509,000, before income taxes, which is included in selling administrative
expense. Excluding this nonrecurring charge, selling and administrative expenses
in the second quarter of 2000 totals approximately 32.4% which is consistent
with the second quarter of 2001.
Research and development expense decreased slightly to $3,476,000 in the second
quarter of 2001 as compared to $3,572,000 in the second quarter of 2000. As a
percentage of sales, research and development expense decreased to 3.3% in the
current quarter compared to 3.6% in the same quarter a year ago.
Interest expense in the second quarter of 2001 was $7,848,000 compared to
$8,238,000 in the second quarter of 2000. The decrease in interest expense is a
result of lower total borrowings during the current quarter as compared to the
same period a year ago, as total current and long-term debt outstanding
decreased to approximately $367,698,000 at June 2001 compared to $380,210,000 at
June 2000. Additionally, the weighted average interest rates on our term loans
and revolving credit facility have declined (6.23% and 6.01%, respectively at
June 2001 as compared to 8.26% and 8.27%, respectively at June 2001) resulting
in decreased interest expense. (See Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
Six months ended June 2001 compared to six months ended June 2000
Sales for the six months ended June 2001 were $210.1 million, an increase of
4.7% compared to sales of $200.7 million in the same quarter a year ago.
Sales in our orthopaedic businesses grew 4.3% to $137.2 million from $131.5
million in the comparable period last year. Arthroscopy sales, which represent
approximately 57.0% of total orthopaedic revenues, grew 3.6% to $78.2 million
from $75.5 million in the same period a year ago. Powered surgical instrument
sales, which represent approximately 43.0% of orthopaedic revenues, grew 5.4% to
$59.0 million from $56.0 million in the same period last year. Adjusted for
constant foreign currency exchange rates, orthopaedic sales growth in the first
half of 2001 would have been approximately 6.2% compared with the first half of
2000.
Patient care sales for the six months ended June 2001 were $35.2 million, a 0.8%
decline from $35.5 million in the same period a year ago, reflecting expected
declines in sales of our surgical suction product lines as a result of increased
competition and pricing pressures.
Electrosurgery sales for the six months ended June 2001 were $32.1 million, an
increase of 4.6% from $30.7 million in the first half of last year, reflecting
improved generator and disposable product sales.
Sales of MIS products increased 89.7% to $5.5 million in the six months ended
June 2001 from $2.9 million in the same period a year ago. Approximately 82.8%
of the total increase in MIS sales is a result of our November 2000 Imagyn
acquisition (Note 7 to the condensed consolidated financial statements), while
6.9% is a result of internal growth.
17
Cost of sales increased to $99,639,000 in the first half as compared to
$95,988,000 in the same period a year ago as a result of the increased sales
volumes described above. Gross margin percentage improved to 52.6% in the first
half of 2001 compared to 52.2% in the first half of 2000, primarily as a result
of increased sales volumes in our orthopaedic product lines which carry higher
gross margins than certain of our other product lines.
Selling and administrative expenses increased to $68,751,000 in the first half
of 2001 as compared to $64,009,000 in the first half of 2000. As a percentage of
sales, selling and administrative expenses totaled 32.7% in the first half of
2001 compared to 31.8% in the first half of 2000. In the second quarter of 2000,
we announced a plan to replace our arthroscopy direct sales force with
non-stocking exclusive sales agent groups in certain geographic regions of the
United States (Note 8 to the condensed consolidated financial statements). This
plan resulted in greater sales force coverage in the affected geographic
regions. The increase in selling and administrative expense is a result of
higher commission and other costs in the first half of 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 increased to $7,172,000 in the first half of
2001 as compared to $6,978,000 in the first half of 2000. As a percentage of
sales, research and development expense decreased to 3.4% in the current period
compared to 3.5% in the same period a year ago.
Interest expense in the first half of 2001 was $16,179,000 compared to
$16,643,000 in the first half of 2000. The decrease in interest expense is a
result of lower total borrowings during the current quarter as compared to the
same period a year ago, as total current and long-term debt outstanding
decreased to approximately $367,698,000 at June 2001 as compared to $380,210,000
at June 2000. Additionally, the weighted average interest rates on our term
loans and revolving credit facility have declined (6.23% and 6.01%,
respectively, at June 2001 as compared to 8.26% and 8.27%, respectively, at June
2001) resulting in decreased interest expense. (See Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations).
Liquidity and Capital Resources
Our net working capital position increased to $116,024,000 at June 2001 compared
to $113,755,000 at December 2000. Net cash provided by operations was
$17,569,000 for the first six months of 2001 compared to $21,466,000 for the
same period a year ago. Operating cash flow in the first half of 2001 was
positively impacted by depreciation, amortization and an increase in income
taxes payable. Operating cash flow in the first half of 2001 was negatively
impacted primarily by an increase in accounts receivable.
Net cash used by investing activities for the six months ended June 2001 and
2000 consisted of $8,655,000 and $7,602,000, respectively, in capital
expenditures.
Financing activities during the six months ended June 2001 consisted primarily
of scheduled payments of $18,050,000 on our term loans and $7,000,000 in
borrowings on our revolving credit facility. Financing activities during the six
months ended June 2000 consisted primarily of scheduled payments of $16,459,000
on our term loans and $2,000,000 in borrowings on our revolving credit facility.
Our term loans under our credit facility at June 2001 aggregate $182,893,000.
Our term loans are repayable quarterly over remaining terms of approximately
four years. Our credit facility also includes a $100,000,000 revolving credit
facility which expires and is expected to be renegotiated prior to December
2002, of which $46,000,000 was available at June 2001. The borrowings under the
credit facility carry interest rates based on a spread over LIBOR or an
18
alternative base interest rate. The covenants of the credit facility provide for
increase and decrease to this interest rate spread based on our operating
results. The weighted average interest rates at June 2001 under the term loans
and the revolving credit facility were 6.23% and 6.01%, respectively.
Additionally, we are obligated to pay a fee of .375% per annum on the unused
portion of the revolving credit facility.
We use an interest rate swap, a form of derivative financial instrument, to
manage interest rate risk. We have designated as a cash-flow hedge, an interest
rate swap which effectively converts $50,000,000 of LIBOR-based floating rate
debt under our credit facility into fixed rate debt with a base interest rate of
7.01%. The interest rate swap expires in June 2003 and is included in
liabilities on the balance sheet with a fair value approximating $2,243,000.
There were no material changes in our market risk during the quarter ended June
2001. For a detailed discussion of market risk, see our Annual Report on Form
10-K for the year ended December 2000, Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk.
The credit facility is collateralized by all of our personal property. The
credit facility contains covenants and restrictions which, among other things,
require maintenance of certain working capital levels and financial ratios,
prohibit dividend payments and restrict the incurrence of certain indebtedness
and other activities, including acquisitions and dispositions. We are also
required to make mandatory prepayments from net cash proceeds from any issue of
equity and asset sales. Mandatory prepayments are to be applied first to the
prepayment of the term loans and then to reduce borrowings under the revolving
credit facility.
The Notes are in aggregate principal amount of $130,000,000 and have a maturity
date of March 15, 2008. The Notes bear interest at 9.0% per annum which is
payable semi-annually. The indenture governing the Notes has certain restrictive
covenants and provides for, among other things, mandatory and optional
redemptions by us.
The credit facility and Notes are guaranteed by each of our subsidiaries. The
Subsidiary Guarantees provide that each Subsidiary Guarantor will fully and
unconditionally guarantee our obligations on a joint and several basis. Each
Subsidiary Guarantor is wholly-owned by CONMED Corporation. Under the credit
facility and Note indenture, our subsidiaries are subject to the same covenants
and restrictions that apply to us (except that the Subsidiary Guarantors are
permitted to make dividend payments and distributions, including cash dividend
payments, to us or another Subsidiary Guarantor).
As discussed in Note 7, we completed a second Imagyn acquisition in the third
quarter of 2001. We expect to record a nonrecurring charge to expense totaling
approximately $1.2 million in the second half of 2001 for incremental transition
costs associated with the acquisition.
As of August 3, 2001, we effectively purchased the Largo, Florida property which
our Linvatec subsidiary had been leasing from a third party for an aggregate
purchase price of approximately $23.0 million. We assumed the current debt on
the property for the majority of the purchase price and financed the remainder
with the seller.
In the third quarter of 2001, through a newly formed special-purpose subsidiary,
we expect to enter into a sales agreement that provides us with a five-year $50
million revolving accounts receivable securitization facility. The proceeds will
be used to repay a portion of our term loans.
We believe that cash generated from operations, our current cash resources and
funds available under our credit facility will provide sufficient liquidity to
ensure continued working capital for operations, debt service and funding of
capital expenditures in the foreseeable future.
19
Foreign Operations
Our foreign operations are subject to special risks inherent in doing business
outside the United States, including governmental instability, war and other
international conflicts, civil and labor disturbances, requirements of local
ownership, partial or total expropriation, nationalization, currency
devaluation, foreign exchange controls and foreign laws and policies, each of
which may limit the movement of assets or funds or result in the deprivation of
contract rights or the taking of property without fair compensation.
20
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Instrument
- ----------- -------------------------
10.1 The Asset Purchase Agreement, dated as of June 11, 2001 by and
between CONMED Corporation and Imagyn Medical, Inc., et al.
(included in EDGAR filing only)
10.2 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. (included in EDGAR filing only)
Reports on Form 8-K
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONMED CORPORATION
(Registrant)
Date: August 8, 2001
/s/ Robert D. Shallish, Jr.
---------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
22
Exhibit Index
Sequential Page
Exhibit Number
- ------- ------
10.1 The Asset Purchase Agreement, dated as of June 11, 2001 by and
between CONMED Corporation and Imagyn Medical, Inc. et al. (included in EDGAR
filing only)
10.2 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. (included in EDGAR
filing only)
23