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 March 31, 1998 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
May 1, 1998 is 15,074,308 shares.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
Item Number
Item 1. Financial Statements
- Consolidated Statements of Income
- Consolidated Balance Sheets
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
Item 1.
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 1997 and 1998
(in thousands except per share amounts)
(unaudited)
1997 1998
-------- --------
Net sales .......................................... $ 31,472 $ 80,242
-------- --------
Cost and expenses:
Cost of sales .................................... 16,475 44,390
Facility consolidation expense (Note 6) .......... 2,328 --
Selling and administrative ....................... 8,336 21,779
Research and development ......................... 751 2,727
-------- --------
Total operating expenses .................. 27,890 68,896
-------- --------
Income from operations ............................. 3,582 11,346
Interest income (expense), net ..................... 262 (7,515)
-------- --------
Income before income taxes
and extraordinary item ........................... 3,844 3,831
Provision for income taxes ......................... (1,384) (1,379)
-------- --------
Income before extraordinary item ................... 2,460 2,452
Extraordinary item, net of income taxes(Note 5) .... -- (1,569)
-------- --------
Net income ......................................... $ 2,460 $ 883
======== ========
Per share data:
Income before extraordinary item
Basic ..................................... $ .16 $ .16
Diluted ................................... .16 .16
Extraordinary item (Note 5)
Basic ..................................... $ -- $ (.10)
Diluted ................................... -- (.10)
Net income
Basic ..................................... $ .16 $ .06
Diluted ................................... .16 .06
See notes to consolidated financial statements.
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December March
1997 1998
--------- ---------
Current assets:
Cash and cash equivalents .............................. $ 13,452 $ 13,504
Accounts receivable, net ............................... 47,188 53,277
Income taxes receivable ................................ 245 --
Inventories, net (Note 3) .............................. 61,971 60,667
Deferred income taxes .................................. 1,898 1,898
Prepaid expenses and other current assets .............. 1,186 2,070
--------- ---------
Total current assets ............................ 125,940 131,416
Property, plant and equipment, net ....................... 55,339 56,341
Deferred income taxes .................................... 10,783 10,783
Goodwill, net ............................................ 153,360 154,544
Patents, trademarks, and other assets, net ............... 216,215 216,033
--------- ---------
Total assets .................................... $ 561,637 $ 569,117
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5) ............. $ 11,000 $ 11,020
Accrued interest ....................................... -- 1,938
Accounts payable ....................................... 9,556 15,943
Income taxes payable ................................... -- 1,103
Accrued payroll and withholdings ....................... 7,014 8,027
Accrued pension ........................................ -- 246
Other current liabilities .............................. 3,037 764
--------- ---------
Total current liabilities ....................... 30,607 39,041
Long-term debt (Note 5) .................................. 354,000 351,123
Accrued pension .......................................... 3,276 3,276
Deferred compensation .................................... 1,235 1,291
Long-term leases ......................................... 2,651 2,518
Other long-term liabilities .............................. 7,132 8,175
--------- ---------
398,901 405,424
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(unaudited)
December March
1997 1998
--------- ---------
Shareholders' equity:
Preferred stock, par value $.01 per share;
authorized 500,000 shares; none outstanding ..... -- --
Common stock, par value $.01 per share;
40,000,000 shares authorized; 15,061,538 and
15,068,208 shares issued and outstanding in
1997 and 1998, respectively ........................ 151 151
Paid-in capital ........................................ 123,451 123,525
Retained earnings ...................................... 39,553 40,436
Less 25,000 shares of common stock in treasury,
at cost, ............................................. (419) (419)
--------- ---------
162,736 163,693
--------- ---------
Total liabilities and shareholders' equity ...... $ 561,637 $ 569,117
========= =========
See notes to consolidated financial statements.
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 1997 and 1998
(in thousands)
(unaudited)
1997 1998
--------- ---------
Cash flows from operating activities:
Net income ..................................... $ 2,460 $ 883
--------- ---------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................ 946 1,959
Amortization ............................ 799 3,629
Extraordinary write-off of deferred
financing fees (Note 5) ............... -- 2,451
Increase (decrease) in cash flows
from changes in assets and liabilities:
Accounts receivable ............ (279) (6,089)
Inventories .................... 1,213 600
Prepaid expenses and
other current assets ......... (354) (884)
Other assets ................... (19) 1,855
Accounts payable ............... (112) 6,387
Income taxes payable ........... 2,192 1,348
Accrued payroll and withholdings (239) 1,013
Accrued pension ................ 294 109
Accrued facility consolidation . 2,328 --
Accrued interest ............... -- 1,938
Other current liabilities ...... (410) (2,269)
Deferred compensation and
other long-term liabilities .. 52 1,099
--------- ---------
6,411 13,146
Net cash provided by operating activities 8,871 14,029
--------- ---------
Cash flows from investing activities:
Payments related to acquisition of Linvatec .... -- (4,180)
Acquisition of property, plant, and equipment .. (950) (2,961)
--------- ---------
Net cash used by investing activities ... (950) (7,141)
--------- ---------
Cash flows from financing activities:
Proceeds of long term debt ..................... -- 126,100
Proceeds from issuance of common stock ......... 81 74
Payments related to issuance of debt ........... -- (4,053)
Payments on long-term debt and leases .......... -- (128,957)
--------- ---------
Net cash provided (used) by financing
activities ............................. 81 (6,836)
--------- ---------
Net increase in cash and cash equivalents ........ 8,002 52
Cash and cash equivalents at beginning of period . 20,173 13,452
--------- ---------
Cash and cash equivalents at end of period ....... $ 28,175 $ 13,504
========= =========
See notes to consolidated financial statements.
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Consolidation
The consolidated financial statements include the accounts of CONMED
Corporation (the "Company"), and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company is
a leading developer, manufacturer and supplier of a range of medical instruments
and systems used in surgical and other medical procedures. The Company's product
offerings include electrosurgical systems, electrocardiogram ("ECG") electrodes
and accessories, surgical suction instruments, intravenous ("IV") therapy
accessories and wound care products. Through its acquisition of Linvatec
Corporation (Note 4), the Company has expanded its arthroscopic surgery product
line and broadened its product offerings to include powered surgical instruments
and imaging products for minimally invasive surgery. The Company's products are
used in a variety of clinical settings, such as operating rooms, surgery
centers, physicians' offices and critical care areas of hospitals.
Note 2 - Interim financial information
The statements for the three months ended March 1997 and 1998 are
unaudited; in the opinion of the Company 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 financial
statements for the year ending December 1998 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 months ended March 1997 and 1998 are not
necessarily indicative of the results of operations to be expected for any other
quarter nor for the year ending December 1998. The consolidated financial
statements and notes thereto should be read in conjunction with the financial
statements and notes for the year ended December 1997 included in the Company's
Annual Report to the Securities and Exchange Commission on Form 10-K. Certain
1997 amounts previously reported have been reclassified to conform with the
current year presentation.
Note 3 - Inventories
The components of inventory are as follows (in thousands):
December March
1997 1998
Raw materials......... $28,097 $28,200
Work-in-process....... 6,569 7,154
Finished goods........ 27,305 25,313
------- -------
Total........... $61,971 $60,667
======= =======
Note 4 - Business Acquisitions
On July 1, 1997, the Company completed the acquisition of the surgical
suction instrument and tubing product line from Davol, Inc., a subsidiary of
C.R. Bard, Inc., for a cash purchase price of $24,000,000. This acquisition is
being accounted for using the purchase method. Accordingly, the results of
operations of the acquired product line are included in the consolidated results
of the Company from the date of acquisition. Goodwill associated with the
acquisition is being amortized on a straight-line basis over a 40-year period.
On December 31, 1997, the Company acquired the business and certain
assets of Linvatec Corporation, a wholly-owned subsidiary of Bristol-Myers
Squibb Company, for a cash purchase price of $370,000,000 and the assumption of
$16,608,000 of liabilities. Bristol-Myers Squibb Company also received a warrant
to purchase 1,000,000 shares of the Company's common stock at $34.23 per share.
This warrant expires December 31, 2007, and was valued at $10,625,000.
This acquisition is being accounted for using the purchase method. The
allocation of purchase price resulted in identifiable intangible assets,
including patents and technology ($9,500,000), trademarks and tradenames
($96,000,000) and customer relationships ($102,000,000), aggregating
$204,000,000, which will be amortized over periods from 5 to 40 years. Goodwill
associated with the Linvatec acquisition approximated $70,000,000 and will be
amortized on a straight-line basis over a 40-year period. Additionally, a
portion of the purchase price was allocated to purchased in-process research and
development ("R&D"). Purchased in-process R & D includes the value of products
in the development stage and not considered to have reached technological
feasibility. In accordance with applicable accounting rules, purchased
in-process R&D is required to be expensed. Accordingly, $34,000,000 of the
acquisition cost was expensed on December 31, 1997.
In connection with the Linvatec acquisition, the Company entered into
agreements with Zimmer, Inc., a wholly-owned subsidiary of Bristol-Myers Squibb
Company, pursuant to which Zimmer has agreed to distribute certain of Linvatec's
products for periods ranging from six months to three years.
The allocation of the purchase price for the Davol and Linvatec
acquisitions are based on management's preliminary estimates. It is possible
that re-allocation will be required as additional information becomes available.
Management does not believe that such re-allocations will have a material effect
on the Company's financial position or results of operations.
On an unaudited pro forma basis, assuming the Davol and Linvatec
acquisitions had occurred as of January 1, 1997, the consolidated results of the
Company for the three months ended March 31, 1997 are estimated to be as follows
(in thousands, except per share amounts):
Pro forma revenues....................... $ 76,525
Pro forma net income..................... $ 2,588
Pro forma earnings per share:
Basic.............................. $ .17
Diluted............................ $ .17
Note 5 - Subordinated Note Offering
As discussed under "Liquidity and Capital Resources", the Company
completed a subordinated note offering in the aggregate principal amount of
$130.0 million in March 1998. Proceeds from the offering amounting to $126.1
million were used to reduce the Company's term loans under its Credit Facility.
Deferred financing fees related to the portion of the Credit Facility repaid
amounting to $2.5 million were written-off as an extraordinary charge.
Note 6 - Facility Consolidation
During the first quarter of 1997, the Company recorded a pre-tax charge
of $2,328,000 related to the closure of the Company's Dayton, Ohio manufacturing
facility. Operations of the Dayton facility, which was acquired in connection
with the February 1996 acquisition of NDM, were transferred to the Company's
manufacturing location in Rome, New York in 1997. The components of the charge
consisted primarily of costs associated with employee severance and termination,
and the impairment of the carrying value of fixed assets.
Note 7 - Subsidiary Guarantees
The Company's Credit Facility and subordinated notes (the "Notes") are
guaranteed (the "Subsidiary Guarantees") by each of the Company's subsidiaries
in existance on the closing date of the Credit Facility and the Notes (the
"Subsidiary Guarantors"). The Subsidiary Guarantees provide that each Subsidiary
Guarantor will fully and unconditionally guarantee the Company's obligations on
a joint and several basis. Each Subsidiary Guarantor is wholly-owned by the
Company.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined such
financial statements and other disclosures are not material to investors. The
combined condensed financial information of the Company's Subsidiary Guarantors
as of and for the three months ended March 1997 is as follows (in thousands):
Current assets.......................................... $ 69,344
Non-current assets...................................... 329,256
Current liabilities..................................... 19,770
Non-current liabilities................................. 345,267
Revenues................................................ $ 56,908
Operating income........................................ 7,680
Net income.............................................. 24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements. Such
forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from the forward-looking statements.
Three months ended March 1998 compared to three months ended March 1997
Sales for the quarter ended March 1998 were $80,242,000, an increase of
155% compared to sales of $31,472,000 in the quarter ended March 1997. The
increase was the result of the acquisition of Linvatec on December 31, 1997 and
the surgical suction instrument and tubing product line acquired from Davol on
July 1, 1997. Offsetting the incremental sales associated with these
acquisitions was decreased sales related to the Company's ECG electrode product
line. The Company believes that its line of ECG electrodes will continue to face
pricing and other competitive pressures due to cost containment efforts by
health care providers.
In connection with the Linvatec acquisition, the Company entered into
agreements with Zimmer, Inc., a wholly-owned subsidiary of Bristol-Myers Squibb
Company, pursuant to which Zimmer has agreed to distribute certain of Linvatec's
products for periods ranging from six months to three years. Zimmer's
distribution of a significant number of these products will end in the second
quarter of 1998 as the Company assumes responsibility for distribution of such
products.
Cost of sales increased to $44,390,000 in the current quarter compared
to the $16,475,000 in the same quarter a year ago as a result of increased sales
volume. The Company's gross margin percentage was 44.7% for the first quarter of
1998 as compared to 47.7% in the first quarter of 1997. In connection with
purchase accounting for the Linvatec acquisition, the Company increased the
acquired value of inventory by $2.9 million over its production cost. This
inventory was sold during the quarter ended March 1998 and, accordingly, this
non-recurring adjustment served to reduce the Company's gross margin percentage
by 3.7 percentage points. Excluding the impact of this nonrecurring adjustment,
the Company's gross margin percentage was 48.4% reflecting the overall higher
gross margin percentage of the Linvatec product lines as compared to the
Company's other products.
Selling and administrative costs increased to $21,779,000 in the
current quarter as compared to $8,336,000 in the first quarter of 1997,
primarily as a result of the Linvatec acquisition. As a percentage of sales,
selling and administrative expense was 27.1% in the first quarter of 1998 as
compared to 26.5% in the comparable 1997 period. The Linvatec business has
required a higher level of selling and administrative expense as a percentage of
sales as compared to the Company's historic levels. Additionally, goodwill and
intangible amortization related to the Linvatec acquisition amounts to
approximately $2.0 million or 2.5% of the Company's consolidated sales for the
current quarter.
Research and development expense was $2,727,000 in the first quarter of
1998 as compared to $751,000 in the first quarter of 1997. The increase reflects
expense related to the Linvatec research and development activities.
During the first quarter of 1997, the Company recorded a charge of
$2,328,000 related to the closure of its Dayton, Ohio manufacturing facility.
Operations of the Dayton facility, which was acquired in connection with the
February 1996 acquisition of NDM, were transferred to the Company's
manufacturing location in Rome, New York.
The first quarter of 1998 had interest expense of $7,515,000 compared
to interest income of $262,000 in the first quarter of 1997. As discussed under
Liquidity and Capital Resources, the Company acquired Linvatec Corporation on
December 31, 1997 for $370 million that was borrowed under its Credit Facility.
The Company had no borrowings outstanding during the first quarter of 1997. The
Company completed an offering of subordinated notes during the quarter ended
March 1998 and used the net proceeds to repay a portion of the Company's term
loans under its Credit Facility. Deferred financing fees relating to the portion
of the Credit Facility repaid amounting to $2.5 million were written-off as an
extraordinary item.
Liquidity and Capital Resources
Net cash provided by operations was $14,029,000 for the first three
months of 1998 as compared to $8,871,000 for the first three months of 1997.
Operating cash flow for the three months of 1998 were negatively impacted by
lower net income resulting from acquisition related charges as compared to the
first three months of 1997. Depreciation and amortization increased in 1998
primarily as a result of the completed acquisitions. Additionally, during the
first quarter of 1998, the Company recorded a non-cash charge related to the
write-off of deferred financing fees. Operating cash flow for the first three
months of 1998 were positively impacted by an increase in accrued interest and
accounts payable, and a reduction in other assets. Adversely impacting operating
cash flows for the first three months of 1998 was an increase in accounts
receivable which reflects a one-time buildup of Linvatec international
receivables as no such receivables were acquired with the Linvatec acquisition.
Net cash used by investing activities for the first three months of
1998 included $4,180,000 of transaction costs related to the Linvatec
acquisition. Capital expenditures for the first three months of 1998 and 1997
amounted to $2,961,000 and $950,000, respectively.
Financing activities during the first quarter of 1998 involved the
completion of a subordinated note offering in the aggregate principal amount of
$130.0 million. Net proceeds from the offering amounting to $126.1 million were
used to repay a portion of the Company's term loans under its Credit Facility.
In connection with the Linvatec acquisition, the Company borrowed
$350.0 in term loans available under its Credit Facility. Upon the application
of mandatory principal payments including the subordinated note proceeds, the
Company's term loans at March 31, 1998 aggregate $222.1 million and are
repayable quarterly commencing March 31, 1998 over terms of five and seven
years. The Company's Credit Facility also includes a $100 million revolving
credit facility which expires December 2002, of which $90 million was available
on March 31, 1998. The Credit Facility borrowings carry interest rates based on
LIBOR plus 2.00% on the revolving credit facility and five-year term loan, and
LIBOR plus 2.25% on the seven-year term loan. The interest rates at March 31,
1998 were 7.69%,7.94% and 7.69% for the five-year term loan, the seven-year term
loan and revolving credit facility, respectively. Additionally, during the
commitment period, the Company is obligated to pay a fee of .5% per annum on the
unused portion of the revolving credit facility.
The Credit Facility is collateralized by all the Company's 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
indebtedness and certain other activities, including acquisitions and
dispositions. The Company is also required to make mandatory prepayments from
net cash proceeds from any issue of equity and asset sales and also from any
excess cash flow, as defined.
The subordinated notes are in aggregate principal amount of $130
million and have a maturity date of March 15, 2008. The subordinated notes bear
interest at 9.0% per annum which is payable semi-annually. The indenture
governing the subordinated notes has certain restrictive covenants and provides
for, among other things, mandatory and optional redemptions by the Company.
The Credit Facility and subordinated notes (the "Notes") are guaranteed
(the "Subsidiary Guarantees") by each of the Company's subsidiaries in existance
on the closing dates of the Credit Facility and the Notes (the "Subsidiary
Guarantors"). The Subsidiary Guarantees provide that each Subsidiary Guarantor
will fully and unconditionally guarantee the Company's obligations on a joint
and several basis. Each Subsidiary Guarantor is wholly-owned by the Company.
Under the Credit Facility and subordinated note indenture, the Company's
subsidiaries are subject to the same covenants and restrictions that apply to
the Company (except that the Subsidiary Guarantors are permitted to make
dividend payments and distributions, including cash dividend payments, to the
Company or another Subsidiary Guarantor).
Management believes that cash generated from operations, its current
cash resources and funds available under its Credit Facility will provide
sufficient liquidity to ensure continued working capital for operations and
funding of capital expenditures in the foreseeable future.
Item 6. Exhibits and Reports on Form 8-K
List of Exhibits
Exhibit No. Description of Instrument
----------- -------------------------
11 Computation of weighted average
number of shares of common stock
Reports on Form 8-K
(1) On January 8, 1998 (as amended on February 17, 1998), the
Company filed a report on Form 8-K which included: (a) the
financial statements of a business acquired and related
proforma financial information, (b) Exhibits related to an
acquired business including the Stock and Asset Purchase
Agreement and (c) Exhibits related to the Company's current
Credit Agreement.
(2) On March 10, 1998, the Company filed a report on Form 8-K
which reported the issuance of a press release related to the
completion of a $130 million subordinated note offering and
unusual charges which would be recorded in the Company's
results for the first quarter of 1998.
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: May 13, 1998
/s/ Robert D. Shallish, Jr.
---------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
Exhibit Index
Exhibit
11 - Computations of weighted average
number of shares of common stock
EXHIBIT 11
Computation of weighted average number of shares of common stock
For the three months
ended March
(in thousands)
1997 1998
Shares outstanding at beginning of period
(net of 25,000 shares held in treasury).. ...... 14,989 15,036
Weighted average shares issued ................... 10 2
------ ------
Shares used in the calculation of
Basic EPS (weighted average shares
outstanding) .................................. 14,999 15,038
Effect of dilutive securities .................... 206 282
------ ------
Shares used in the calculation of
Diluted EPS .................................... 15,205 15,320
====== ======
5
3-MOS
DEC-31-1998
MAR-31-1998
13,504
0
55,513
(2,236)
60,667
131,416
56,341
0
569,117
35,049
351,123
0
0
151
163,274
569,117
80,242
80,242
44,390
68,896
0
0
7,515
3,831
1,379
2,452
0
1,569
0
883
.06
.06
