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, 2002 Commission File Number 0-16093
CONMED CORPORATION
(Exact name of the registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 French Road, Utica, New York 13502
(Address of principal executive offices) (Zip Code)
(315) 797-8375
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of registrant's common stock, as of August
1, 2002 is 28,646,027 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 4. Submission of Matters to a Vote of
Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Net sales .................... $104,171 $111,269 $210,080 $224,474
-------- -------- -------- --------
Cost of sales ................ 49,965 51,711 99,639 105,815
Selling and administrative ... 33,922 35,141 68,751 69,609
Research and development ..... 3,476 4,078 7,172 7,902
-------- -------- -------- --------
87,363 90,930 175,562 183,326
-------- -------- -------- --------
Income from operations ....... 16,808 20,339 34,518 41,148
Interest expense, net ........ 7,848 6,355 16,179 12,983
-------- -------- -------- --------
Income before income taxes ... 8,960 13,984 18,339 28,165
Provision for income taxes ... 3,226 5,034 6,602 10,139
-------- -------- -------- --------
Net income ................... $ 5,734 $ 8,950 $ 11,737 $ 18,026
======== ======== ======== ========
Per share data:
Net Income
Basic ................ $ .25 $ .34 $ .51 $ .70
Diluted .............. 25 .33 .50 .68
Weighted average common shares
Basic ................ 23,111 26,584 23,084 25,735
Diluted .............. 23,399 27,359 23,352 26,422
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December 31, June 30,
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 1,402 $ 877
Accounts receivable, net ............................... 51,188 57,039
Inventories ............................................ 107,390 114,869
Deferred income taxes .................................. 1,105 1,105
Prepaid expenses and other current assets .............. 3,464 3,660
--------- ---------
Total current assets ................................. 164,549 177,550
--------- ---------
Property, plant and equipment, net ....................... 91,026 95,050
Goodwill, net ............................................ 251,140 252,499
Other intangible assets, net ............................. 189,752 187,073
Other assets ............................................. 5,141 5,741
--------- ---------
Total assets ......................................... $ 701,608 $ 717,913
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...................... $ 73,429 $ 78,727
Accounts payable ....................................... 19,877 25,953
Accrued compensation ................................... 11,863 10,169
Income taxes payable ................................... 2,507 2,015
Accrued interest ....................................... 4,954 3,607
Other current liabilities .............................. 7,207 7,914
--------- ---------
Total current liabilities ............................ 119,837 128,385
--------- ---------
Long-term debt ........................................... 262,500 179,006
Deferred income taxes .................................... 18,655 25,874
Other long-term liabilities .............................. 16,982 12,946
--------- ---------
Total liabilities .................................... 417,974 346,211
--------- ---------
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; 25,261,590 and
28,646,027 shares issued and outstanding in
2001 and 2002, respectively ........................ 253 287
Paid-in capital ........................................ 160,757 228,850
Retained earnings ...................................... 128,240 146,266
Accumulated other comprehensive loss ................... (5,197) (3,282)
Less 37,500 shares of common stock in treasury,
at cost .............................................. (419) (419)
--------- ---------
Total shareholders' equity ........................... 283,634 371,702
--------- ---------
Total liabilities and shareholders equity ...... $ 701,608 $ 717,913
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2002
(in thousands)
(unaudited)
2001 2002
---- ----
Cash flows from operating activities:
Net income ................................................................ $ 11,737 $ 18,026
-------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ................................................. 4,345 4,404
Amortization ................................................. 10,740 6,645
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable ..................... (5,992) (1,856)
Decrease in sale of accounts receivable . -- (4,000)
Inventories ............................. (991) (9,756)
Prepaid expenses and
other current assets .................. (311) (224)
Accounts payable ........................ (1,344) 6,067
Income taxes payable .................... 844 (492)
Accrued compensation .................... (736) (1,694)
Accrued interest ........................ 62 (1,347)
Other assets/liabilities, net ........... (785) 2,108
-------- --------
5,832 (145)
-------- --------
Net cash provided by operating activities .................... 17,569 17,881
-------- --------
Cash flows from investing activities:
Payments related to business acquisitions ........................... -- (1,359)
Purchases of property, plant, and equipment ......................... (8,655) (8,428)
-------- --------
Net cash used by investing activities ........................ (8,655) (9,787)
-------- --------
Cash flows from financing activities:
Borrowings (repayments)under revolving credit facility..................... 7,000 (2,000)
Net proceeds from issuance of common stock ................................ -- 66,594
Net proceeds from exercise of stock options ............................... 507 3,533
Repurchase of warrant on common stock ..................................... -- (2,000)
Payments on long-term debt ................................................ (18,050) (76,196)
-------- --------
Net cash used by financing activities ........................ (10,543) (10,069)
-------- --------
Effect of exchange rate changes
on cash and cash equivalents ............................................ (917) 1,450
-------- --------
Net increase (decrease) in cash and cash equivalents ........................ (2,546) (525)
Cash and cash equivalents at beginning of period ............................ 3,470 1,402
-------- --------
Cash and cash equivalents at end of period .................................. $ 924 $ 877
======== ========
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands except share amounts)
Note 1 - Organization and operations
- ------------------------------------
The consolidated condensed financial statements include the accounts of CONMED
Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). All
intercompany accounts and transactions have been eliminated. CONMED Corporation
is a medical technology company specializing in instruments, implants and video
equipment for arthroscopic sports medicine, and powered surgical instruments,
such as drills and saws, for orthopedic, ENT, neuro-surgery and other surgical
specialties. We are also a leading developer, manufacturer and supplier of
advanced medical devices, including radio frequency, or RF, electrosurgery
systems used routinely to cut and cauterize tissue in nearly all types of
surgical procedures worldwide and endoscopy products such as trocars, clip
appliers, scissors and surgical staplers. We also manufacture and sell a full
line of ECG electrodes for heart monitoring and other patient care products. Our
products are used in a variety of clinical settings, such as operating rooms,
surgery centers, physicians' offices and critical care areas of hospitals. 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 30, 2001 and 2002 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 31, 2002 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
30, 2002 are not necessarily indicative of the results of operations to be
expected for any other quarter nor for the year ending December 31, 2002. The
consolidated condensed financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the year ended December
31, 2001 included in our Annual Report to the Securities and Exchange Commission
on Form 10-K.
Note 3 - Other comprehensive income (loss)
- ------------------------------------------
Comprehensive income (loss) consists of the following:
Three months ended Six months ended
June 30, June 30,
2001 2002 2001 2002
-------- -------- -------- --------
Net income ..................... $ 5,734 $ 8,950 $ 11,737 $ 18,026
-------- -------- -------- --------
Other comprehensive income:
Foreign currency
translation adjustment ..... 171 1,441 (892) 1,477
Cash flow hedging
(net of income taxes) ...... 114 (42) (1,436) 438
-------- -------- -------- --------
Comprehensive income ......... $ 6,019 $ 10,349 $ 9,409 $ 19,941
======== ======== ======== ========
Accumulated other comprehensive income (loss) consists of the following:
4
Accumulated
Minimum Cumulative Cash Other
Pension Translation Flow Comprehensive
Liability Adjustments Hedges Income (loss)
--------- ----------- ------ -------------
Balance, December 31, 2001 ......... $(1,062) $(2,169) $(1,966) $(5,197)
Foreign currency translation
adjustments .............. -- 1,477 -- 1,477
Cash flow hedging (net of
income taxes) ............ -- -- 438 438
------- ------- ------- -------
Balance, June 30, 2002 ............. $(1,062) $ (692) $(1,528) $(3,282)
======= ======= ======= =======
Note 4 - Inventories
- --------------------
The components of inventory are as follows:
December 31, June 30,
2001 2002
---- ----
Raw materials .............. $ 38,101 $ 37,474
Work-in-process ............ 11,921 14,211
Finished goods ............. 57,368 63,184
-------- --------
Total $107,390 $114,869
======== ========
Note 5 - Earnings per share
- ---------------------------
Basic earnings per share (EPS) is computed based on the weighted average number
of common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential shares outstanding (i.e., options and warrants) during the
period. The following is a reconciliation of the weighted average shares used in
the calculation of basic and diluted EPS (in thousands):
Three months ended Six months ended
June 30, June 30,
-------- --------
2001 2002 2001 2002
---- ---- ---- ----
Shares used in the calculation
of Basic EPS(weighted average
shares outstanding) ......... 23,111 26,584 23,084 25,735
Effect of dilutive potential
securities .................. 288 775 268 687
------ ------ ------ ------
Shares used in the calculation
of Diluted EPS .............. 23,399 27,359 23,352 26,422
====== ====== ====== ======
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 3,194,000 for the
three months ended June 30, 2001, and 3,446,000 for the six months ended June
30, 2001. There were no options or warrants whose exercise price exceeded the
average market price of common shares for the three and six months ended June
30, 2002.
5
Note 6 - Shareholders' equity
- -----------------------------
In 1997, in connection with the 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
approximated $66.6 million and was used to reduce indebtedness under our credit
facility.
Note 7 - New accounting pronouncements
- --------------------------------------
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142.
During 2002, we performed tests of goodwill and indefinite-lived intangible
assets as of January 1, 2002. We tested for impairment using the two-step
process prescribed in SFAS 142. The first step is a screen for potential
impairment. The second step, which has been determined not to be necessary,
measures the amount of any impairment. No impairment losses have been recognized
as a result of these tests. The following is a reconciliation assuming goodwill
and other intangible assets had been accounted for in accordance with SFAS 142
in the three and six months ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Reported net income $ 5,734 $ 8,950 $11,737 $18,026
------- ------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization 1,030 -- 2,060 --
Add back: Trademarks and trade
names amortization 383 -- 766 --
------- ------- ------- -------
Adjusted net income $ 7,147 $ 8,950 $14,563 $18,026
======= ======= ======= =======
6
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Basic earnings per share
Reported net income $ .25 $ .34 $ .51 $ .70
------- ------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization .04 -- .09 --
Add back: Trademarks and trade
names amortization .02 -- .03 --
------- ------- ------- -------
Adjusted net income $ .31 $ .34 $ .63 $ .70
======= ======= ======= =======
Three Months Ended Six Months Ended
June 30, June 30,
2001 2002 2001 2002
---- ---- ---- ----
Diluted earnings per share
Reported net income $ .25 $ .33 $ .50 $ .68
------- ------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization .04 -- .09 --
Add back: Trademarks and trade
names amortization .02 -- .03 --
------- ------- ------- -------
Adjusted net income $ .31 $ .33 $ .62 $ .68
======= ======= ======= =======
Note 8 - Guarantor financial statements
- ---------------------------------------
Our credit facility and subordinated notes (the "Notes") are guaranteed (the
"Subsidiary Guarantees") by each of our subsidiaries (the "Subsidiary
Guarantors") except CONMED Receivables Corporation (the "Non-Guarantor
Subsidiary"). The Subsidiary Guarantees provide that each Subsidiary Guarantor
will fully and unconditionally guarantee our obligations under the credit
facility and the Notes on a joint and several basis. Each Subsidiary Guarantor
and Non-Guarantor Subsidiary is wholly-owned by CONMED Corporation. The
following supplemental financial information sets forth on a condensed
consolidating basis, condensed consolidating balance sheet, statement of income
and statement of cash flows for the Parent Company Only, Subsidiary Guarantors
and Non-Guarantor Subsidiary and for the Company as of December 31, 2001 and
June 30, 2002 and for the three and six months ended June 30, 2001 and 2002.
7
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 ............ 8,177 181,575 -- -- 189,752
Other assets ............................ 477,798 2,376 -- (475,033) 5,141
--------- --------- --------- --------- ---------
Total assets .................... $ 643,224 $ 489,206 $ 44,211 $(475,033) $ 701,608
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 72,241 $ 1,188 $ -- $ -- $ 73,429
Accounts payable ................ 5,078 14,799 -- -- 19,877
Accrued compensation ............ 3,979 7,884 -- -- 11,863
Income taxes payable ............ 2,372 135 -- -- 2,507
Accrued interest ................ 4,760 37 157 -- 4,954
Other current liabilities ....... 4,634 2,573 -- -- 7,207
--------- --------- --------- --------- ---------
Total current liabilities ... 93,064 26,616 157 -- 119,837
--------- --------- --------- --------- ---------
Long-term debt .......................... 241,404 21,096 -- -- 262,500
Deferred income taxes ................... 18,655 -- -- -- 18,655
Other long-term liabilities ............. 6,467 285,329 41,947 (316,761) 16,982
--------- --------- --------- --------- ---------
Total liabilities ............... 359,590 333,041 42,104 (316,761) 417,974
--------- --------- --------- --------- ---------
Shareholders' equity:
Preferred stock ................. -- -- -- -- --
Common stock .................... 253 1 -- (1) 253
Paid-in capital ................. 160,757 -- 2,000 (2,000) 160,757
Retained earnings ............... 128,240 158,333 107 (158,440) 128,240
Accumulated other comprehensive
loss ..................... (5,197) (2,169) -- 2,169 (5,197)
Less common stock in
treasury, at cost .................. (419) -- -- -- (419)
--------- --------- --------- --------- ---------
Total shareholders' equity 283,634 156,165 2,107 (158,272) 283,634
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 643,224 $ 489,206 $ 44,211 $(475,033) $ 701,608
========= ========= ========= ========= =========
8
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
June 30, 2002
(in thousands)(unaudited)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
ASSETS
Current assets:
Cash and cash equivalents ....... $ -- $ 840 $ 37 $ -- $ 877
Accounts receivable, net ........ -- 12,605 44,434 -- 57,039
Inventories ..................... 24,509 90,360 -- -- 114,869
Deferred income taxes ........... 880 -- 225 -- 1,105
Prepaid expenses and other
current assets ........... 809 2,851 -- -- 3,660
--------- --------- --------- --------- ---------
Total current assets ... 26,198 106,656 44,696 -- 177,550
--------- --------- --------- --------- ---------
Property, plant and equipment, net ...... 47,189 47,861 -- -- 95,050
Goodwill, net ........................... 87,768 164,731 -- -- 252,499
Other intangible assets, net ............ 7,950 179,123 -- -- 187,073
Other assets ............................ 488,871 2,412 -- (485,542) 5,741
--------- --------- --------- --------- ---------
Total assets .................... $ 657,976 $ 500,783 $ 44,696 $(485,542) $ 717,913
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 77,462 $ 1,265 $ -- $ -- $ 78,727
Accounts payable ................ 6,253 19,700 -- -- 25,953
Accrued compensation ............ 2,396 7,773 -- -- 10,169
Income taxes payable ............ 2,015 -- -- -- 2,015
Accrued interest ................ 3,527 36 44 -- 3,607
Other current liabilities ....... 4,593 3,321 -- -- 7,914
--------- --------- --------- --------- ---------
Total current liabilities ... 96,246 32,095 44 -- 128,385
--------- --------- --------- --------- ---------
Long-term debt .......................... 158,290 20,716 -- -- 179,006
Deferred income taxes ................... 25,874 -- -- -- 25,874
Other long-term liabilities ............. 5,864 277,833 42,451 (313,202) 12,946
--------- --------- --------- --------- ---------
Total liabilities ............... 286,274 330,644 42,495 (313,202) 346,211
--------- --------- --------- --------- ---------
Shareholders' equity:
Preferred stock ................. -- -- -- -- --
Common stock .................... 287 1 -- (1) 287
Paid-in capital ................. 228,850 -- 2,000 (2,000) 228,850
Retained earnings ............... 146,266 170,830 201 (171,031) 146,266
Accumulated other comprehensive
loss ..................... (3,282) (692) -- 692 (3,282)
Less common stock in
treasury, at cost .................. (419) -- -- -- (419)
--------- --------- --------- --------- ---------
Total shareholders' equity 371,702 170,139 2,201 (172,340) 371,702
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 657,976 $ 500,783 $ 44,696 $(485,542) $ 717,913
========= ========= ========= ========= =========
9
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 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
======== ======== ======== ========
10
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2002
(in thousands)
(unaudited)
Parent
Company Subsidiary Non-Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net sales ......................... $ 25,999 $ 85,270 $ -- $ -- $111,269
-------- -------- -------- -------- --------
Cost of sales ..................... 13,600 38,111 -- -- 51,711
Selling and administrative
expense ................... 7,929 27,622 (410) -- 35,141
Research and development
expense ................... 398 3,680 -- -- 4,078
-------- -------- -------- -------- --------
21,927 69,413 (410) -- 90,930
-------- -------- -------- -------- --------
Income from operations ............ 4,072 15,857 410 -- 20,339
Interest expense, net ............. -- 6,078 277 -- 6,355
-------- -------- -------- -------- --------
Income before income taxes ........ 4,072 9,779 133 -- 13,984
Provision for income taxes ........ 1,466 3,520 48 -- 5,034
-------- -------- -------- -------- --------
Income before equity in
earnings of unconsolidated
subsidiaries .............. 2,606 6,259 85 -- 8,950
Equity in earnings of
unconsolidated subsidiaries 6,344 -- -- (6,344) --
-------- -------- -------- -------- --------
Net income ........................ $ 8,950 $ 6,259 $ 85 $ (6,344) $ 8,950
======== ======== ======== ======== ========
11
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 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
========= ========= ========= =========
12
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2002
(in thousands)
(unaudited)
Parent
Company Subsidiary Non-Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net sales ......................... $ 52,298 $ 172,176 $ -- $ -- $ 224,474
--------- --------- --------- --------- ---------
Cost of sales ..................... 27,603 78,212 -- -- 105,815
Selling and administrative
expense ................... 15,376 54,977 (744) -- 69,609
Research and development
expense ................... 827 7,075 -- -- 7,902
--------- --------- --------- --------- ---------
43,806 140,264 (744) -- 183,326
--------- --------- --------- --------- ---------
Income from operations ............ 8,492 31,912 744 -- 41,148
Interest expense, net ............. -- 12,386 597 -- 12,983
--------- --------- --------- --------- ---------
Income before income taxes ........ 8,492 19,526 147 -- 28,165
Provision for income taxes ........ 3,057 7,029 53 -- 10,139
--------- --------- --------- --------- ---------
Income before equity in
earnings of unconsolidated
subsidiaries .............. 5,435 12,497 94 -- 18,026
Equity in earnings of
unconsolidated subsidiaries 12,591 -- -- (12,591) --
--------- --------- --------- --------- ---------
Net income ........................ $ 18,026 $ 12,497 $ 94 $ (12,591) $ 18,026
========= ========= ========= ========= =========
13
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 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 increase (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
======== ======== ======== ========
14
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2002
(in thousands)
(unaudited)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
---- ---------- ---------- ------------ -----
Net cash flows from operating
activities ......................... $ 4,158 $ 14,284 $ (561) $ -- $ 17,881
-------- -------- -------- -------- --------
Cash flows from investing activities:
Net distributions from subsidiaries 10,133 -- -- (10,133) --
Payments related to business
acquisitions ..................... (1,359) -- -- -- (1,359)
Purchases of property, plant and
equipment ................... (2,863) (5,565) -- -- (8,428)
-------- -------- -------- -------- --------
Net cash provided (used)
by investing activities . 5,911 (5,565) -- (10,133) (9,787)
-------- -------- -------- -------- --------
Cash flows from financing:
Borrowing on note payable
from parent ...................... -- -- 377 (377) --
Net distributions to parent ........ -- (10,510) -- 10,510 --
Borrowings (repayments) under
revolving credit facility ........ (2,000) -- -- -- (2,000)
Net proceeds from issuance of
common stock ..................... 66,594 -- -- -- 66,594
Net proceeds from option exercise .. 3,533 -- -- -- 3,533
Repurchase of warrant on
common stock ..................... (2,000) -- -- -- (2,000)
Payments on long-term debt ......... (76,196) -- -- -- (76,196)
-------- -------- -------- -------- --------
Net cash provided (used) by
financing activities ... (10,069) (10,510) 377 10,133 (10,069)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents ............... -- 1,450 -- -- 1,450
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................... -- (341) (184) -- (525)
Cash and cash equivalents at
beginning of period ................ -- 1,181 221 -- 1,402
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period ...................... $ -- $ 840 $ 37 $ -- $ 877
======== ======== ======== ======== ========
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements Made in this Form 10-Q
In this Form 10-Q, we make forward-looking statements about our financial
condition, results of operations and business. Forward-looking statements are
statements made by us concerning events that may or may not occur in the future.
These statements may be made directly in this document or may be "incorporated
by reference" from other documents. You can find many of these statements by
looking for words like "believes," "expects," "anticipates," "estimates" or
similar expressions.
Forward-Looking Statements are not Guarantees of Future Performance
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, including those that may cause our actual results, performance or
achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include those identified under "Risk
Factors" in our Annual Report on Form 10-K for the year-ended December 31, 2001
and the following, among others:
o general economic and business conditions;
o changes in customer preferences;
o changes in technology;
o the introduction of new products;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies might initiate enforcement actions against us or
our distributors;
o quality of our management and business abilities and the judgment of our
personnel; and
o the availability, terms and deployment of capital.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and "Business" in our Annual Report on Form 10-K for the
year-ended December 31, 2001 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 10Q or to reflect the occurrence of
unanticipated events.
Critical Accounting Policies
The accounting policies discussed below are considered by management to be
critical to understanding our financial condition and results of operations.
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"), our wholly-owned special-purpose subsidiary. CRC may in turn sell up to
an aggregate $50.0 million undivided percentage ownership interest in such
receivables to a commercial paper
16
conduit (the "conduit purchaser"). For receivables that have been sold, we
retain collection and administrative responsibilities as agent for the conduit
purchaser. As of December 31, 2001 and June 30, 2002, the undivided percentage
ownership interest in receivables sold by CRC to the conduit purchaser
aggregated $40.0 million and $36.0 million, respectively, which has been
accounted for as a sale and reflected in the balance sheet as a reduction in
accounts receivable. We used the initial $40.0 million in proceeds from the sale
of accounts receivable in November 2001 to repay a portion of our term loans
under our credit agreement. Expenses associated with the sale of accounts
receivable, including the conduit purchaser's financing cost of issuing
commercial paper, were $0.3 million and $0.6 million, in the three and six
months ended June 30, 2002, respectively.
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. We
believe 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 were to occur, we
would need to access an alternate source of working capital.
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of identifiable
net assets of acquired businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets of acquired
businesses. Goodwill and other intangible assets have been amortized over
periods ranging from 5 to 40 years. Because of our history of growth through
acquisitions, goodwill and other intangible assets comprise a substantial
portion (61.2% at June 30, 2002) of our total assets.
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. Under this
standard, amortization of goodwill and certain intangible assets, including
certain intangibles recorded as a result of past business combinations, is to be
discontinued upon adoption of SFAS 142.
During 2002, we performed tests of goodwill and indefinite-lived intangible
assets as of January 1, 2002. We tested for impairment using the two-step
process prescribed in SFAS 142. The first step is a screen for potential
impairment. The second step, which has been determined not to be necessary,
measures the amount of any impairment. No impairment losses have been recognized
as a result of these tests. During the three and six months ended June 30, 2002,
net income increased by approximately $1.4 million and $2.8 million
respectively, as a result of the adoption of SFAS 142.
Derivative financial instruments
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 $50.0 million 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 $2.4 million.
During the six months ended June 30, 2002, gross holding losses on the interest
rate swap were $.6 million, before income taxes, and holding losses of $1.3
million, before income taxes, were reclassified and included
17
in net income. There were no material changes in our market risk during the
three and six months ended June 30, 2002. For a detailed discussion of market
risk, see our Annual Report on Form 10-K for the year ended December 31, 2001,
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Revenue recognition
Revenue is recognized when title to the goods and risk of loss pass to our
customers. Amounts billed to customers related to shipping and handling costs
are included in net sales. 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. We believe
the allowance for doubtful accounts of $1.3 million at June 30, 2002 is adequate
to provide for any potential losses from accounts receivable.
Results of Operations
Three months ended June 30, 2002 compared to three months ended June 30, 2001
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
Three Months Ended
June 30,
2001 2002
---- ----
(unaudited)
Net sales ............................... 100.0% 100.0%
Cost of sales ........................... 48.0 46.5
----- -----
Gross margin ................... 52.0 53.5
Selling and administrative expense ...... 32.6 31.6
Research and development expense ........ 3.3 3.7
----- -----
Income from operations ......... 16.1 18.2
Interest expense, net ................... 7.5 5.7
----- -----
Income before income taxes ..... 8.6 12.5
Provision for income taxes .............. 3.1 4.5
----- -----
Net income ..................... 5.5% 8.0%
===== =====
Sales for the quarter ended June 30, 2002 were $111.3 million, an increase of
6.8% compared to sales of $104.2 million in the same quarter a year ago.
Adjusted for constant foreign currency exchange rates, sales growth in the
second quarter of 2002 would have been approximately 6.3% as compared to the
same period a year ago.
o Sales in our orthopedic businesses increased 2.7% to $68.2 million from
$66.4 million in the comparable quarter last year.
o Arthroscopy sales, which represented approximately 60.4% of total second
quarter 2002 orthopedic revenues, grew 8.4% to $41.2 million from $38.0
million in the same period a year ago on strength in sales of disposable
products and video equipment.
o Powered surgical instrument sales, which represented approximately 39.6% of
orthopedic revenues, decreased 4.9% to $27.0 million from $28.4 million in
the same quarter last year. We introduced our PowerPro(R)battery powered
product line in February 2002, replacing older versions of battery powered
instruments. First shipments of this new product line were made in March
2002. We expect that once PowerPro(R)becomes established in the
marketplace, it will enable us to resume overall growth in powered surgical
instrument sales.
18
o Patient care sales for the three months ended June 30, 2002 were $17.1
million, a 2.8% decline from $17.6 million in the same period a year ago,
driven primarily by declines in sales of our surgical suction product lines
as a result of significant competition and pricing pressures. Sales of ECG
and other patient care products were largely stable in the second quarter
of 2002 as compared with the same period a year ago.
o Electrosurgery sales for the three months ended June 30, 2002 were $17.0
million, a decrease of 1.0% from $17.1 million in the second quarter of
last year, as sales of electrosurgical generators and disposables were flat
compared with the same period a year ago.
o Sales of endoscopy products increased to $9.0 million in the three months
ended June 30, 2002 from $3.0 million in the same period a year ago,
primarily as a result of our acquisition of the minimally invasive surgical
business of Imagyn Medical Technologies, Inc. on July 6, 2001 (the "second
Imagyn acquisition").
Cost of sales increased to $51.7 million in the second quarter of 2002 as
compared to $50.0 million in the same quarter a year ago as a result of the
increased sales volumes described above, while gross margin percentage increased
to 53.5% in the second quarter of 2002 compared to 52.0% in the second quarter
of 2001, primarily as a result of increased sales in the arthroscopy and
endoscopy product lines which carry higher gross margins than certain of our
other product lines.
Selling and administrative expense increased to $35.1 million in the second
quarter of 2002 as compared to $33.9 million in the second quarter of 2001. As a
percentage of sales, selling and administrative expense totaled 31.6% in the
second quarter of 2002 compared to 32.6% in the second quarter of 2001. During
the quarter ended June 30, 2002, selling and administrative expense decreased by
approximately $2.2 million, before income taxes, as a result of the adoption of
SFAS 142. Excluding the impact of the adoption of SFAS 142, selling and
administrative expense in the second quarter of 2002 would have been
approximately $37.3 million or 33.5% as a percentage of sales, increasing by
approximately .9% when compared with the same period a year ago, but remaining
within the range of our historical percentages.
Research and development expense increased to $4.1 million in the second quarter
of 2002 as compared to $3.5 million in the second quarter of 2001. This increase
represents continued research and development efforts primarily focused on new
product development in the orthopedic product lines. As a percentage of sales,
research and development expense increased to 3.7% in the current quarter
compared to 3.3% in the same quarter a year ago but remains within the range of
our historical percentages.
Interest expense in the second quarter of 2002 was $6.4 million compared to $7.8
million in the second quarter of 2001. The decrease in interest expense is
primarily a result of lower total borrowings outstanding during the current
quarter as compared to the same period a year ago, as borrowings have declined
to $257.7 million at June 30, 2002 as compared to $367.7 million at June 30,
2001. Additionally, the weighted average interest rates on our borrowings has
declined to 7.03% at June 30, 2002 as compared to 7.17% at June 30, 2001.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
The following table presents, as a percentage of net sales, certain categories
included in our unaudited consolidated statements of income for the periods
indicated:
19
Six Months Ended
June 30,
2001 2002
---- ----
(unaudited)
Net sales ................................. 100.0% 100.0%
Cost of sales ............................. 47.4 47.1
----- -----
Gross margin ..................... 52.6 52.9
Selling and administrative expense ........ 32.7 31.1
Research and development expense .......... 3.5 3.5
----- -----
Income from operations ........... 16.4 18.3
Interest expense, net ..................... 7.7 5.8
----- -----
Income before income taxes ....... 8.7 12.5
Provision for income taxes ................ 3.1 4.5
----- -----
Net income ....................... 5.6% 8.0%
===== =====
Sales for the six months ended June 30, 2002 were $224.5 million, an increase of
6.9% compared to sales of $210.1 million in the same period a year ago.
Fluctuations in foreign currency exchange rates in the first half of 2002 as
compared to the same period a year ago did not have a significant effect on
sales.
o Sales in our orthopedic businesses increased 0.5% to $137.9 million from
$137.2 million in the comparable period last year.
o Arthroscopy sales, which represented approximately 59.8% of total first
half 2002 orthopedic revenues, grew 5.5% to $82.5 million from $78.2
million in the same period a year ago on strength in sales of disposable
products and video equipment.
o Powered surgical instrument sales, which represented approximately 40.2% of
total first half 2002 orthopedic revenues, decreased 6.1% to $55.4 million
from $59.0 million in the same period last year. We introduced our
PowerPro(R) battery powered product line in February 2002, replacing older
versions of battery powered instruments. First shipments of this new
product line were made in March 2002. We expect that once PowerPro(R)
becomes established in the marketplace, it will enable us to resume overall
growth in powered surgical instrument sales.
o Patient care sales for the six months ended June 30, 2002 were $34.4
million, a 2.3% decline from $35.2 million in the same period a year ago,
driven primarily by declines in sales of our surgical suction product lines
as a result of significant competition and pricing pressures. Sales of ECG
and other patient care products were largely stable in the first half of
2002 as compared with the same period a year ago.
o Electrosurgery sales for the six months ended June 30, 2002 were $33.8
million, an increase of 5.3% from $32.1 million in the same period a year
ago, driven by strong increases in electrosurgical disposables sales.
o Sales of endoscopy products increased to $18.4 million in the six months
ended June 30, 2002 from $5.6 million in the same period a year ago,
primarily as a result of the second Imagyn acquisition.
Cost of sales increased to $105.8 million in the first half of 2002 as compared
to $99.6 million in the same period a year ago as a result of the increased
sales volumes described above, while gross margin percentage increased to 52.9%
in the first half of 2002 compared to 52.6% in the first half of 2001, primarily
as a result of increased sales in the arthroscopy and endoscopy product lines
which carry higher gross margins than certain of our other product lines.
20
Selling and administrative expense increased to $69.6 million in the first half
of 2002 as compared to $68.8 million in the first half of 2001. As a percentage
of sales, selling and administrative expense totaled 31.1% in the first half of
2002 compared to 32.7% in the first half of 2001. During the six months ended
June 30, 2002, selling and administrative expense decreased by approximately
$4.4 million, before income taxes, as a result of the adoption of SFAS 142.
Excluding the impact of the adoption of SFAS 142, selling and administrative
expense in the first half of 2002 would have been approximately $74.0 million or
33.0% as a percentage of sales, increasing slightly when compared with the same
period a year ago but remaining within the range of our historical percentages.
Research and development expense increased to $7.9 million in the first half of
2002 as compared to $7.2 million in the first half of 2001. This increase
represents continued research and development efforts primarily focused on new
product development in the orthopedic product lines. As a percentage of sales,
research and development expense remained constant at 3.5% in the first half of
2002 compared to the same period a year ago.
Interest expense in the first six months of 2002 was $13.0 million compared to
$16.2 million in the first six months of 2001. The decrease in interest expense
is primarily a result of lower total borrowings outstanding during the current
period as compared to the same period a year ago, as borrowings have declined to
$257.7 million at June 30, 2002 as compared to $367.7 million at June 30, 2001.
Additionally, the weighted average interest rates on our borrowings has declined
to 7.03% at June 30, 2002 as compared to 7.17% at June 30, 2001.
Liquidity and Capital Resources
Cash generated from our operations and borrowings under our revolving credit
facility have traditionally provided the working capital for our operations,
debt service under our credit facility and the funding of our capital
expenditures. In addition, we have used term borrowings, including:
o borrowings under our credit facility;
o Senior Subordinated Notes issued to refinance borrowings under our credit
facility, 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 offering of 3.0 million shares of our
common stock. Net proceeds to the Company related to the sale of the shares
approximated $66.6 million and was used to reduce indebtedness under our credit
facility. We expect to continue to use cash flow from our operations and
borrowings under our revolving credit facility to finance our operations, our
debt service under our credit facility and term borrowings and the funding of
our capital expenditures.
Our term loans under our credit facility at June 30, 2002 aggregate $49.0
million. Our term loans are repayable quarterly over remaining terms of
approximately three years. Our credit facility also includes a $100.0 million
revolving credit facility which expires December 31, 2002, of which $44.0
million was available at June 30, 2002. The borrowings under the credit facility
carry interest rates based on a spread over LIBOR or an alternative base
interest rate. The weighted average interest rates at June 30, 2002 under the
term loans and the revolving credit facility were 3.98% and 5.00%, respectively.
21
The Senior Subordinated 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.
We used term loans to purchase the property in Largo, Florida utilized by our
Linvatec subsidiary. The term loans consist of a Class A note bearing interest
at 7.50% per annum with semiannual payments of principal and interest through
June 2009, 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 a seller-financed note
bearing interest at 6.50% per annum with monthly payments of principal and
interest through July 2013. The principal balances outstanding on the Class A
note, Class C note and seller-financed note aggregate $11.2 million, $6.7
million and $4.1 million, respectively, at June 30, 2002.
Our net working capital position was $49.2 million at June 30, 2002 as compared
to $44.7 million at December 31, 2001. Included in net working capital is $56.0
million owed on our revolving credit facility which terminates on December 31,
2002. We are currently in discussions with our bank group to refinance our
credit agreement including the revolving credit facility. Based on our
discussions, we believe that we will be able to successfully complete a new
credit arrangement in the third quarter of 2002 which will provide sufficient
capital for our business. However, because of changed economic conditions
compared to market conditions in 1997 when our present credit agreement was
completed, we expect, based on discussions with our bank group, that any new
facility will carry interest costs 75 to 100 basis points higher than our
present credit agreement. Based on the amounts outstanding at June 30, 2002
under the credit agreement, an increase of 75 to 100 basis points would result
in an increase in annual interest expense of approximately $.8 million to $1.1
million. Assuming an all new credit facility is entered into in the third
quarter, we expect to record an extraordinary charge in the third quarter of
approximately $1.0 million, net of income taxes, related to the early
extinguishment of debt, to write off the remaining unamortized deferred
financing costs associated with the remaining three years on the current credit
facility.
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation, a
wholly-owned special-purpose subsidiary. CRC may in turn sell up to an aggregate
$50.0 million undivided percentage ownership interest in those receivables to a
commercial paper conduit. As of December 31, 2001 and June 30, 2002, the
undivided percentage ownership interest in receivables sold by CRC to a
commercial paper conduit aggregated $40.0 million and $36.0 million,
respectively, which has been accounted for as a sale and reflected in the
balance sheet as a reduction in accounts receivable. We used the initial $40.0
million in proceeds from the sale of accounts receivable in November 2001 to
repay a portion of our term loans under our credit agreement. 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. We believe 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 were to occur, we would need to access an
alternate source of working capital.
Net cash provided by operations, which we also refer to as "operating cash
flow," increased to $17.9 million for the
22
first half of 2002 compared to $17.6 million for the same period a year ago.
During the six months ended June 30, 2002, operating cash flow decreased by $4.0
million due to a decrease in the sale of accounts receivable under the accounts
receivable sales agreement. Excluding the decrease in accounts receivable sales,
operating cash flow increased to $21.9 million.
In reconciling net income to operating cash flow, operating cash flow in the
first half of 2002 was positively impacted by depreciation, amortization and
increases in accounts 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 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 the six months ended June 30, 2002 were $8.4 million
compared to $8.7 million in the same period a year ago. These capital
expenditures represent the ongoing capital investment requirements of our
business and are expected to continue at the rate of approximately $12.0 to
$14.0 million annually. Net cash used by investing activities in the six months
ended June 30, 2002 also included $1.4 million related to the purchase of a
product line.
Financing activities in the first half of 2002 consisted primarily of the net
proceeds of $66.6 million received by the Company as a result of the completion
of a public offering of 3.0 million shares of our common stock. The proceeds of
the stock offering were used to repay term loans under our credit facility.
Repayments on our term debt and revolving credit facility as a result of the
stock offering and cash generated from operations in the first half of 2002
totaled $76.2 million and $2.0 million, respectively. 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 in the first half of 2002 totaled $3.5 million.
Assuming the successful renegotiation of our credit facility discussed above,
management believes that cash generated from operations, our current cash
resources and funds available under our revolving credit facility will provide
sufficient liquidity to ensure continued working capital for operations, debt
service and funding of capital expenditures in the foreseeable future.
Contractual Obligations
There were no capital lease obligations or unconditional purchase obligations as
of June 30, 2002. The following table summarizes our contractual obligations
related to operating leases and long-term debt as of June 30, 2002:
(Amounts in thousands)
2002 2003 2004 2005 2006 Thereafter
---- ---- ---- ---- ---- ----------
Long-term debt ..................... $ 57,109 $ 37,023 $ 1,854 $ 14,313 $ 1,943 $145,491
Operating lease
obligations ...................... 866 1,255 1,036 962 933 1,950
-------- -------- -------- -------- -------- --------
Total contractual
cash obligations ................. $57,975 $38,278 $ 2,890 $ 15,275 $ 2,876 $147,441
======== ======== ======== ======== ======== ========
Included in long-term debt obligations in 2002 is $56.0 million due under our
revolving credit facility.
23
As indicated under "Liquidity and Capital Resources", we are currently in
discussions with our bank group to refinance our credit agreement including the
revolving credit facility. If these negotiations are successful, payments on a
substantial portion of our long-term debt due in 2002 through 2005, including
the current portion of that long-term debt represented by our revolving credit
facility, would be due at later dates.
24
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Shareholders of CONMED Corporation (the "Company")
was held on May 14, 2002.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with respect
to such matters are as follows:
Proposals and Vote Tabulations
Votes Cast
----------
Broker
Management Proposals For Against Abstain Non-votes
- -------------------- --- ------- ------- ---------
To ratify the appointment of
Independent accountants for the
Company for 2002; 22,099,783 554,174 12,668 --
To approve and authorize an
an amendment to the Company's 1999
Long Term Incentive Plan; 14,709,167 5,313,246 60,380 2,583,832
To approve and authorize amendments to
the Company's Stock Option Plan for
Non-Employee Directors; 15,709,496 4,272,779 100,518 2,583,832
To approve and adopt an employee stock
purchase plan 19,124,783 883,162 73,882 2,584,798
Election of Directors
Director Votes Received Votes Withheld
- -------- -------------- --------------
Eugene R. Corasanti 18,878,224 3,788,401
Joseph J. Corasanti 19,058,496 3,608,129
Bruce F. Daniels 21,442,676 1,223,949
William D. Matthews 21,442,697 1,223,928
Robert E. Remmell 21,163,886 1,502,739
Stuart J. Schwartz 21,442,676 1,223,949
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Reports on Form 8-K
None
25
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 14, 2002
/s/ Robert D. Shallish, Jr.
---------------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
26
Exhibit Index
Sequential Page
Exhibit Number
- ------- ------
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 E-1
99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 E-2
27