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Securities and Exchange Commission
Washington, D.C.
20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission file number 0-16093
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 Broad Street, Utica, New York 13501
(Address of principal executive offices) (Zip Code)
(315) 797-8375
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ X ]
The aggregate market value of the shares of the voting stock held by
non-affiliates of the Registrant was approximately $335,743,729 based upon the
closing price of the Company's common stock, which was $21.81 on February 22,
2001.
The number of shares of the Registrant's $0.01 par value common stock
outstanding as of February 22, 2001 was 15,394,027.
DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, scheduled to be mailed on
or about April 8, 2001 for the annual meeting of stockholders to be held May 15,
2001, are incorporated by reference into Part III.
CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-K
Part I
Item Number Page
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Item 1. Business 2
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
Part III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management 31
Item 13. Certain Relationships and Related Transactions 31
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports 32
on Form 8-K
Signatures 33
Exhibit Index 34
CONMED CORPORATION
Item 1. Business
Forward Looking Statements
This Annual Report on Form 10-K for the Fiscal Year Ended December 31,
2000 ("Form 10-K") contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to CONMED Corporation ("CONMED", the "Company", "we" or "us" --
references to "CONMED", the "Company", "we" or "us" shall be deemed to include
our subsidiaries) that are based on the beliefs of our management, as well as
assumptions made by and information currently available to our management.
When used in this Form 10-K, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors, including those identified under
the caption "Item 1: Business -- Risk Factors" and elsewhere in this Form 10-K
that may cause our actual results, performance or achievements, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following:
o general economic and business conditions;
o changes in customer preferences;
o competition;
o changes in technology;
o the introduction of new products;
o the integration of any acquisition;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies might initiate enforcement actions
against us or our distributors;
o our indebtedness;
o quality of our management and business abilities and the judgment
of our personnel;
o the availability, terms and deployment of capital;
o the risk of litigation, especially patent litigation as well as
the cost associated with patent and other litigation;
o changes in regulatory requirements; and
o various other factors referenced in this Form 10-K.
See "Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 1: Business" for a further discussion of these
factors. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We do not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this Form 10-K or to
reflect the occurrence of unanticipated events.
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General
CONMED is a medical technology company specializing in instruments and
implants for arthroscopic sports medicine, and powered surgical instruments, for
orthopaedic, ENT, neurosurgery 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.
We have used strategic business acquisitions to broaden our product
offerings, to increase our market share in certain product lines and to realize
economies of scale. During the last five years, we have completed six
significant business acquisitions. The completed acquisitions, together with
internal growth, have resulted in a compound annual growth rate in net sales of
33% between 1996 and 2000.
Industry
The number of surgical procedures performed in the United States is
increasing. According to SMG Marketing Group, the total number of U.S. surgical
procedures increased at a compound annual growth rate of 5% from 25.1 million in
1989 to 40.7 million in 1999. This growth in surgical procedures reflects
demographic trends, such as the aging of the population, and technological
advancements which result in safer and less invasive surgical procedures.
Additionally, as people are living longer, more active lives, they are engaging
in contact sports and activities such as running, skiing, rollerblading, golf
and tennis which result in injuries with greater frequency and at an earlier age
than ever before. According to MDI, it is expected that the $1.0 billion sports
medicine industry will grow 20% in the next few years in categories such as
implantable devices. Sales of surgical products represented over 85% of our
total 2000 sales. See "Item 1: Business-Our Products".
In response to rising health care costs, managed care companies and
other payers have placed pressures on health care providers to reduce costs. As
a result, health care providers have focused on the high cost areas such as
surgery. To reduce costs, health care providers use minimally-invasive
techniques, which generally reduce patient trauma, recovery time and ultimately
the length of hospitalization. Many of our products are designed for use in
minimally invasive surgical procedures. See "Item 1: Business-Our Products."
Health care providers are also increasingly purchasing single-use, disposable
products, which reduce the costs associated with sterilizing surgical
instruments and products following surgery. The single-use nature of disposable
products lowers the risk of incorrectly sterilized instruments spreading
infection into the patient and increasing the cost of post-operative care.
Approximately 70% of our sales are derived from single-use disposable products.
In the United States, the pressure on health care providers to contain
costs has altered their purchasing patterns for general surgical instruments and
disposable medical products. Many health care providers have entered into
comprehensive purchasing contracts with fewer suppliers, which offer a broader
array of products at lower prices. In addition, many health care providers have
aligned themselves with group purchasing organizations ("GPOs"). GPOs aggregate
the purchasing volume of their members in order to negotiate competitive pricing
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with suppliers, including manufacturers of surgical products. We believe that
these trends will favor entities that offer a broad product portfolio. See "Item
1: Business-Business Strategy".
We believe that foreign markets offer growth opportunities for our
products. As economic conditions improve in developing countries, expenditures
on health care are expected to rise; according to Dorland's Biomedical,
expenditures on surgical products in developing countries are expected to grow
at a compound annual growth rate of 17% to $65 billion in 2005. We currently
distribute our products through our own sales subsidiaries or through local
dealers in over 100 foreign countries. International sales represent
approximately 27% of total sales in 2000.
Our Products
The following table sets forth the percentage of net sales for each
category of our products for 1998, 1999 and 2000:
1998 1999 2000
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Arthroscopy ...................................... 36% 39% 37%
Powered surgical instruments ..................... 21 23 29
Electrosurgery and minimally invasive surgery .... 20 18 17
Patient care ..................................... 23 20 17
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Total ................................... 100% 100% 100%
=== === ===
Arthroscopy
We offer a broad line of devices and products for use in arthroscopic
surgery. Arthroscopy refers to diagnostic and therapeutic surgical procedures
performed on joints with the use of minimally-invasive endoscopes and related
instruments. Minimally-invasive arthroscopy procedures enable surgical repairs
to be completed with less trauma to the patient, resulting in shorter recovery
times and cost savings. About 75% of all arthroscopy is performed on the knee,
although arthroscopic procedures are increasingly performed on smaller joints
and shoulders.
Our arthroscopy products include powered resection instruments,
arthroscopes, reconstructive systems, tissue repair sets, fluid management
systems, imaging products, implants and related disposable products. It is our
standard practice to transfer some of these products, such as shaver consoles
and pumps, to certain customers at no charge. These capital "placements" allow
for and accommodate the use of a variety of disposable products, such as shaver
blades, burs and pump tubing. We have benefited from the introduction of new
products and new technologies in the arthroscopic area, such as bioresorbable
screws, ablators, "push-in" and "screw-in" suture anchors, resection shavers and
cartilage repair implants.
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Arthroscopy
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Product Description Brand Name
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Resection Shavers Shaver consoles and handpieces, disposable blades and Apex(R)
and Ablators electrosurgical ablators to resect and remove soft XtraSharp(R)
tissue and bone; used in knee, shoulder and small joint Merlin(R)
surgery, as well as endoscopic sinus surgery. Polyblade(TM)
Sterling(R)
UltrAblator(TM)
Heatwave(TM)
Mako (TM)
Great White (TM)
Advantage (TM)
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Knee Reconstructive Products used in cruciate reconstructive surgery; Paramax(R)
Systems includes instrumentation, screws, pins and ligament Pinn-ACL(R)
harvesting and preparation devices. GraFix(TM)
- ------------------------------------ --------------------------------------------------------- ------------------------
Soft Tissue Repair Systems Instrument systems designed to attach specific torn or Spectrum(R)
damaged soft tissue to bone or other soft tissue in the Inteq(R)
knee, shoulder and wrist; includes instrumentation,
guides, hooks and suture devices.
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Fluid Management Systems Disposable tubing sets, disposable and reusable inflow Apex(R)
devices, pumps and suction/waste management systems for Quick-Flow(R)
use in arthroscopic and general surgeries. Quick-Connect(R)
- ------------------------------------ --------------------------------------------------------- ------------------------
Imaging Surgical video systems for endoscopic Apex(R)
procedures; includes autoclavable single 8180 Series
and three-chip camera heads and consoles,
endoscopes, light sources, monitors,
VCR's and printers.
- ------------------------------------ --------------------------------------------------------- ------------------------
Implants Products including bioabsorbable and metal interference BioScrew(R)
screws and suture anchors for attaching soft tissue to BioStinger(R)
bone in the knee, shoulder and wrist. Ultrafix(R)
Revo(R)
Super Revo (R)
- ------------------------------------ --------------------------------------------------------- ------------------------
Other Instruments and Accessories Forceps, graspers, punches, probes, sterilization Shutt(R)
cases and other general instruments for arthroscopic Concept(R)
procedures. TractionTower(R)
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Powered Surgical Instruments
Powered surgical instruments are used to perform orthopaedic,
arthroscopic and other surgical procedures, such as cutting, drilling or reaming
and are driven by electric, battery or pneumatic power. Each instrument consists
of one or more handpieces and related accessories as well as disposable and
limited reuse items (e.g., burs, saw blades, drills and reamers). Powered
instruments are generally categorized as either small bone, large bone or
specialty powered instruments. Speciality powered instruments include surgical
applications other than orthopaedics, such as neurosurgical, otolaryngological
(ENT), and cardiothoracic applications.
Our line of powered instruments are sold principally under the Hall(R)
Surgical brand name, for use in large and small bone orthopaedic, arthroscopic,
oral/maxillofacial, podiatric, plastic, otolaryngologic, neurological, spine and
cardiothoracic surgeries. Large bone, neurosurgical, spine and cardiothoracic
powered instruments are sold primarily to hospitals while small bone
arthroscopic, otolaryngological and oral/maxillofacial powered instruments are
sold to hospitals, outpatient facilities and physician offices. Our Linvatec
subsidiary has devoted substantial resources to developing a new technology base
for small bone, arthroscopic and otolaryngological instruments that can be
easily adapted and modified for new procedures.
Powered Surgical Instruments
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Product Description Brand Name
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Small Bone Powered saws, drills and related disposable accessories Hall(R)Surgical
for small bone and joint surgical procedures. E9000(R)
MiniDriver(TM)
MicroChoice(R)
Micro 100(TM)
Advantage (TM)
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Large Bone Powered saws, drills and related disposable accessories Hall(R)Surgical
for use primarily in total knee and hip joint MaxiDriver(TM)
replacements and trauma surgical procedures. VersiPower(R)
Plus Series 4(R)
Power Pro (TM)
Advantage (TM)
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Otolaryngology Specialty powered saws, drills and related disposable UltraPower(R)
Neurosurgery accessories for use in neurosurgery, spine, and Hall Osteon(R)
Spine otolaryngologic procedures. Hall Ototome(R)
E9000(R)
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Cardiothoracic Powered sternum saws, drills, and related disposable Hall(R)Surgical
Oral/maxillofacial accessories for use by cardiothoracic and E9000(R)
oral/maxillofacial surgeons. UltraPower(R)
Micro 100
VersiPower(R)
Plus
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Electrosurgery and Minimally Invasive Surgery
Electrosurgery
Electrosurgery is the technique of using a high-frequency electric
current which, when applied to tissue through special instruments, can be used
to cut tissue, coagulate, or cut and coagulate simultaneously. An
electrosurgical system consists of a generator, an active electrode in the form
of a pencil or other instrument which the surgeon uses to apply the current from
the generator to the target tissue and a ground pad to safely return the current
to the generator. Electrosurgery is routinely used in most forms of surgery,
including general, dermatologic, thoracic, orthopaedic, urologic, neurosurgical,
gynecological, laparoscopic, arthroscopic and other endoscopic procedures.
Our electrosurgical products include electrosurgical pencils and
blades, ground pads, generators, the argon-beam coagulation system (ABC(R)), and
related disposable products. ABC(R) technology is a special method of
electrosurgery, which allows a faster and more complete coagulation of many
tissues as compared to conventional electrosurgery. Unlike conventional
electrosurgery, the electrical current travels in a beam of ionized argon gas,
allowing the current to be dispersed onto the bleeding tissue without the
instrument touching the tissue. Clinicians have reported notable benefits of
ABC(R) over traditional electrosurgical coagulation in certain clinical
situations, including open-heart, liver, spleen and trauma surgery.
Minimally Invasive Surgery
Minimally Invasive Surgery ("MIS") is surgery performed without a major
incision, which results in less trauma for the patient and produces important
cost savings as a result of reduced hospitalization and therapy. Laparoscopic
surgery is an MIS procedure performed on organs in the abdominal cavity such as
the gallbladder, appendix and female reproductive organs. During a laparoscopic
procedure, devices called "trocars" are used to puncture the abdominal wall and
then are removed, leaving in place a trocar cannula. The trocar cannula provides
access into the abdomen for camera systems and surgical instruments.
Our MIS products include the Reflex(R) clip applier, UNIVERSAL S/I(TM)
(suction/irrigation) and UNIVERSAL PLUS(R) laparoscopic instruments,
specialized, suction/irrigation electrosurgical instrument systems for use in
laparoscopic surgery and the TroGARD Finesse(R) which incorporates a
blunt-tipped version of a trocar. The TroGARD Finesse(R) dilates access through
the body wall rather than cutting with the sharp, pointed tips of conventional
trocars. This results in smaller wounds, and less bleeding. We also market
cutting trocars, suction/irrigation accessories, laparoscopic scissors, active
electrodes, insufflation needles and ABC(R) handpieces for use in laparoscopic
surgery.
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Electrosurgery and Minimally Invasive Surgery
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Product Description Brand Name
- ------------------------------------ --------------------------------------------------------- -----------------------------
Pencils Disposable and reusable instruments designed to deliver Hand-trol(R)
high-frequency electric current to cut and/or coagulate Gold Line(R)
tissue. Clear Vac(R)
- ------------------------------------ --------------------------------------------------------- -----------------------------
Ground Pads Disposable ground pads to safely return the current to Macrolyte(R)
the generator; available in adult, pediatric and infant Bio-gard(R)
sizes. SureFit(TM)
- ------------------------------------ --------------------------------------------------------- -----------------------------
Blades Surgical blades with accessory electrode that uses a Ultra Clean(TM)
proprietary coating to eliminate tissue buildup on the
blade during surgery.
- ------------------------------------ --------------------------------------------------------- -----------------------------
Generators Monopolar and bipolar generators for surgical EXCALIBUR(R)Plus
procedures performed in a physician's office or clinic PC
setting. SABRE(R)
Hyfrecator(R)2000
- ------------------------------------ --------------------------------------------------------- -----------------------------
Argon Beam Coagulation Systems Specialized electrosurgical generators, disposable hand ABC(R)
pieces and ground pads for enhanced non-contact Beamer Plus(R)
coagulation of tissue. System 7500(R)
ABC Flex(R)
- ------------------------------------ --------------------------------------------------------- -----------------------------
Laparoscopic Instruments Specialized trocars, clip appliers, suction/irrigation UNIVERSAL Plus(R)
electrosurgical instrument systems for use in TroGard(R)
laparoscopic surgery; includes disposable handles, Finesse(TM)
valve/control assemblies with disposable accessories Reflex(R)
and monopolar and bipolar scissors, graspers and
loops.
- ------------------------------------ --------------------------------------------------------- -----------------------------
Patient Care Products
We manufacture a variety of patient care products for use in monitoring
cardiac rhythms, wound care management and IV therapy. These products include
ECG electrodes and cables, wound dressings and catheter stabilization dressings.
These products are sold to hospitals, outpatient surgery centers and physician
offices primarily in the United States. The majority of our sales in this
category are derived from the sale of ECG electrodes. Although wound management
and intravenous therapy product sales are comparatively small, the application
of these products in the operating room complements our surgery business.
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Patient Care Products
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Product Description Brand Name
- ------------------------------------ --------------------------------------------------------- ---------------------
ECG Monitoring Line of disposable electrodes, monitoring cables, lead CONMED(R)
wire products and accessories designed to transmit ECG Ultratrace(R)
signals from the heart to an ECG monitor or recorder. Cleartrace(R)
- ------------------------------------ --------------------------------------------------------- ---------------------
Wound Care Disposable transparent wound dressings comprising ClearSite(R)
proprietary hydrogel; able to absorb 2 1/2 times its Hydrogauze(R)
weight in wound exudate.
- ------------------------------------ --------------------------------------------------------- ----------------------
Surgical Suction Disposable surgical suction instruments and connecting CONMED(R)
Instruments and tubing, including Yankauer, Poole, Frazier and
Tubing Sigmoidoscopic instrumentation, for use by physicians
in the majority of open surgical procedures.
- ------------------------------------ --------------------------------------------------------- ---------------------
Intravenous Therapy Disposable IV drip rate gravity controller and VENI-GARD(R)
disposable catheter stabilization dressing designed MasterFlow(R)
to hold and secure an IV needle or catheter Stat 2(R)
for use in IV therapy.
- ------------------------------------ --------------------------------------------------------- ---------------------
Competitive Strengths
We attribute our strong position in certain markets to the following
competitive factors:
o Leading Market Position in Key Product Areas. We are a leading
provider of arthroscopic surgery devices, electrosurgical
systems, powered surgical instruments and ECG electrodes. Our
product breadth has enhanced our ability to market our products
to surgeons, hospitals, surgery centers, GPOs and other
customers, particularly as institutions seek to reduce costs and
to minimize the number of suppliers. In addition, many of our
products are sold under leading brand names, including CONMED(R),
Linvatec(R), and Hall(R) Surgical.
o Broad Product Offering in Key Product Areas. We offer a broad
product line in our key product areas. For example, we offer a
complete set of the arthroscopy products a surgeon requires for
most arthroscopic procedures, including instrument and repair
sets, implants, shaver consoles and handpieces, video systems and
related disposables. Our product offerings have enabled us to
meet a wide range of customer requirements and preferences. In
addition, our customers are increasingly dealing with fewer
vendors and demanding a broader product offering from vendors in
order to reduce administrative costs.
o Marketing and Distribution Network. Our domestic sales force
consists of approximately 185 employee sales representatives and
an additional 90 sales professionals employed by eight exclusive
sales agent groups. All of our sales professionals are trained
and educated in the applications for the products they sell and
call directly on surgeons, hospital departments, outpatient
surgery centers and physician offices. Additionally, we have an
international presence through sales subsidiaries and branches
located in key international markets. We also maintain
distributor relationships domestically and in numerous countries
worldwide. See "Item 1: Business-Marketing".
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o Vertically-integrated Manufacturing. We manufacture most of our
products. Our vertically integrated manufacturing process has
allowed us to provide quality products, to react quickly to
changes in demand and to generate manufacturing efficiencies,
including purchasing raw materials used in a variety of
disposable products in bulk. We believe that our manufacturing
capabilities allow us to contain costs, control quality and
maintain security of proprietary processes. We continually
evaluate our manufacturing processes with the objective of
increasing automation, streamlining production and enhancing
efficiency in order to achieve cost savings.
o Research and Development Capabilities. We have utilized our
research and development capabilities to introduce new products,
product enhancements and new technologies. Research and
development expenditures were $14.9 million in 2000. Recent new
product introductions include the Advantage(TM) drive system,
BioTwist(TM) bioabsorbable shoulder anchor implant, UltrAblator
for the ablation and thermal modification of soft tissue, the
PowerPro(TM) electric-powered drive system, the Envision(TM)
Autoclavable 3CCD (three chip) Camera Head, the SureFit(TM)
electrosurgical grounding pad and the UltraClean(TM)
electrosurgical blade.
o Integrating Acquisitions. Since 1996, we have completed six
acquisitions including the 1997 acquisition of Linvatec
Corporation which more than doubled our size. These acquisitions
have enabled us to broaden our product categories, expand our
sales and distribution capabilities and increase our
international presence. Our management team has demonstrated a
historical ability to identify complementary acquisitions and to
integrate acquired companies into our operations.
Business Strategy
We intend to implement the following business strategies:
o Introduce New Products and Product Enhancements. Our research and
development program is focused on the development of new surgical
products, as well as the enhancement of existing products. In
addition to our own research and development, we benefit from the
dialogue and suggestions for product innovations from our
relationships with surgeons and other users of our products.
o Increase International Sales. We believe there are significant
sales opportunities for our surgical products outside the United
States. The Linvatec acquisition increased our access to
international markets. We intend to seek to expand our
international presence and increase our penetration into
international markets by utilizing Linvatec's relationships with
foreign surgeons, hospitals and third-party payers, as well as
foreign distributors. We also intend to utilize Linvatec's sales
relationships to introduce Linvatec's customers to our other
products. In 2000, our sales outside the United States grew by
18%.
o Pursue Strategic Acquisitions. We believe that strategic
acquisitions represent a cost-effective means of broadening our
product line. We have historically targeted companies with proven
technologies, established brand names and a significant portion
of sales from single-use, disposable products. Since 1996, we
have completed six acquisitions, expanding our product line to
include surgical suction instruments, wound care products and
most recently arthroscopic products and powered surgical
instruments.
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o Provide Broad Product Offering in Key Product Areas. As a result
of competitive pressures in the health care industry, many health
care providers have aligned themselves with GPOs, which are
increasingly dealing with fewer vendors and demanding a broader
product offering from their vendors in order to reduce
administrative costs. We believe that our broad product line is a
positive factor in our efforts to meet such demands. In addition,
we have a corporate sales department that markets our broad
product offering to GPOs.
o Realize Manufacturing and Operating Efficiencies. We expect to
continue to review opportunities for consolidating product lines
and streamlining production. We believe our vertically integrated
manufacturing process should produce further opportunities to
reduce overhead and to increase operating efficiencies and
capacity utilization.
Marketing
In the second quarter of 2000, we incurred a nonrecurring severance
charge of approximately $1.5 million in connection with a plan to change from
direct distribution to exclusive sales agent groups. Under the plan, specialty
sales agent groups were appointed as our exclusive sales agents in the eight
largest metropolitan areas of the United States with responsibility for
approximately 30% of our domestic orthopaedic sales. We completed this plan in
the third quarter of 2000. These sales agent groups employ and manage
approximately 90 sales professionals. They each bring to us many years of
experience in selling arthroscopic and powered surgical instrument products.
As a result of the restructuring described above and in order to
provide a high level of expertise to medical specialties served, our overall
domestic sales force consists of the following:
o 55 employee sales representatives selling arthroscopy products in
their own geographic regions.
o 35 employee sales representatives selling powered surgical
instruments in their own geographic regions.
o 90 sales professionals, employed by 8 sales agent groups, selling
both arthroscopy and powered surgical instruments in the largest
eight metropolitan areas of the country; all of these sales agent
groups, except one, are exclusive to CONMED.
o 65 employee sales representatives selling electrosurgery and
minimally invasive surgery products.
o 30 employee sales representatives selling patient care products.
Each employee sales representative has a defined geographic area and is
compensated on a commission basis or through a combination of salary and
commission. The sales force is supervised and supported by area directors. Home
office sales and marketing management provide the overall direction for the
sales of our products.
Our sales professionals call on surgeons, hospitals, outpatient surgery
centers and physician offices. We also have a corporate sales department that is
responsible for interacting with GPOs. We believe that we have contracts with
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many such organizations and that the lack of any individual group purchasing
contract will not adversely impact our competitiveness in the marketplace. The
sale of our products is accompanied by initial and ongoing in-service training
of the end user. Our sales professionals are trained in the technical aspects of
our products and their uses, and provide surgeons and medical personnel with
information relating to the technical features and benefits of our products. For
hospital inventory management purposes, at the hospitals' request, some products
are sold to hospitals through distributors. Our sales professionals are required
to work closely with distributors where applicable and to maintain close
relationships with end-users.
Our international sales accounted for approximately 27% of total
revenues in 2000. Products are sold in over 100 foreign countries. International
sales efforts are coordinated through local country dealers or with direct sales
efforts. We distribute our products through sales subsidiaries and branches with
offices located in Australia, Belgium, Canada, France, Germany, Korea, Spain and
the United Kingdom.
Manufacturing
We manufacture most of our products. We believe our vertically
integrated manufacturing process allows us to provide quality products and
generate manufacturing efficiencies by purchasing raw materials for our
disposable products in bulk. We also believe that our manufacturing capabilities
allow us to contain costs, control quality and maintain security of proprietary
processes. We use various manual and automated equipment for fabrication and
assembly of our products and are continuing to further automate our facilities.
We believe our production and inventory practices are generally
reflective of conditions in the industry. Our products are not generally made to
order or to individual customer specifications. Accordingly, we schedule
production and stock inventory on the basis of experience and our knowledge of
customer order patterns, and our judgment as to anticipated demand. Since
customer orders must generally be filled promptly for immediate shipment,
backlog of unfilled orders is not significant to an understanding of our
business.
Research and Development Activities
During the three years, 1998, 1999 and 2000, we spent approximately
$12.0 million, $12.1 million and $14.9 million for research and development. Our
research and development departments consist of 113 employees.
Our research and development programs focus on the development of new
products, as well as the enhancement of existing products with the latest
technology and updated designs. We are continually seeking to develop new
technologies to improve durability, performance and usability of existing
products. In addition to our own research and development, we receive new
product and technology disclosures, especially in procedure-specific areas, from
surgeons, inventors and operating room personnel. For disclosures that we deem
promising from a clinical and commercial perspective, we seek to obtain rights
to these ideas by negotiating agreements, which typically compensate the
originator of the idea through royalty payments based on a percentage of net
sales of licensed products.
We have rights to numerous U.S. patents and corresponding foreign
patents, covering a wide range of our products. We own a majority of these
patents and have licensed rights to the remainder, both on an exclusive and
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non-exclusive basis. In addition, certain patents are currently licensed to
third parties on a non-exclusive basis. Due to technological advancements, we do
not rely on our patents to maintain our competitive position, and we believe
that development of new products and improvement of existing ones is and will
continue to be more important than patent protection in maintaining our
competitive position.
Competition
The markets for our products are highly competitive, and many of our
competitors are substantially larger and stronger financially than us. However,
we do not believe that any one competitor competes with us across all our
product lines. Major competitors include Arthrex, Johnson & Johnson, Medtronic,
Inc., Minnesota Mining and Manufacturing Company, Smith & Nephew plc, Stryker
Corporation, and Tyco International Ltd.
We believe that product design, development and improvement, customer
acceptance, marketing strategy, customer service and price are critical elements
to compete in our industry. Other alternatives, such as medical procedures or
pharmaceuticals, could at some point prove to be interchangeable alternatives to
our products.
Government Regulation
Most if not all of our products are classified as medical devices
subject to regulation by the Food and Drug Administration (the "FDA"). Our new
products generally require FDA clearance under a procedure known as 510(k)
premarketing notification. A 510(k) premarketing notification clearance
indicates FDA agreement with an applicant's determination that the product for
which clearance has been sought is substantially equivalent to another medical
device that was on the market prior to 1976 or that has received 510(k)
premarketing notification clearance. Some products have been continuously
produced, marketed and sold since May 1976 and require no 510(k) premarketing
clearance. Our products generally are either Class I or Class II products with
the FDA, meaning that our products must meet certain FDA standards and are
subject to the 510(k) premarketing notification clearance discussed above, but
are not required to be approved by the FDA. FDA clearance is subject to
continual review, and later discovery of previously unknown problems may result
in restrictions on a product's marketing or withdrawal of the product from the
market.
We have quality control/regulatory compliance groups that are tasked
with monitoring compliance with design specifications and relevant government
regulations for all of our products. We and substantially all of our products
are subject to the provisions of the Federal Food, Drug and Cosmetic Act of
1938, as amended by the Medical Device Amendments of 1976, and the Safe Medical
Device Act of 1990, as amended in 1992, and similar foreign regulations.
As a manufacturer of medical devices, our manufacturing processes and
facilities are subject to periodic on-site inspections and continuing review by
the FDA to insure compliance with Quality System Regulations as specified in
Title 21, Code of Federal Regulation (CFR) part 820. Many of our products are
subject to industry-set standards. Industry standards relating to our products
are generally formulated by committees of the Association for the Advancement of
Medical Instrumentation. We believe that our products presently meet applicable
standards. We market our products in a number of foreign markets. Requirements
pertaining to our products vary widely from country to country, ranging from
simple product registrations to detailed submissions such as those required by
-13-
the FDA. We believe that our products currently meet applicable standards for
the countries in which they are marketed.
We are subject to product recall. No recall has had a material effect
on our financial condition, but there can be no assurance regulatory issues may
not have a material adverse effect in the future.
Any change in existing federal, state or foreign laws or regulations,
or in the interpretation or enforcement thereof, or the promulgation or any
additional laws or regulations could have an adverse effect on our financial
condition or results of operations.
Employees
As of December 2000, we had 2,388 full-time employees, of whom 1,633
were in manufacturing, 113 in research and development, and the balance were in
sales, marketing, executive and administrative positions. None of our employees
are represented by a union, and we consider our employee relations to be
excellent. We have never experienced any strikes or work stoppages.
Risk Factors
Investors should carefully consider the specific factors set forth
below as well as the other information included or incorporated by reference in
this Form 10-K. See "Item 1: Business -- Forward Looking Statements" relating to
certain forward-looking statements in this Form 10-K.
Significant Leverage and Debt Service
We have indebtedness which is substantial in relation to our
shareholders' equity, as well as interest and debt service requirements that are
significant compared to our cash flow from operations. As of December 2000, we
had $378.7 million of debt outstanding, which represented 62.2% of total
capitalization. In addition, at December 2000, we had $53.0 million available
for borrowing under the revolving portion of our principal bank credit agreement
(our "credit facility").
The degree to which we are leveraged could have important consequences
to investors, including but not limited to the following:
o a substantial portion of our cash flow from operations must be
dedicated to debt service and will not be available for
operations, capital expenditures, acquisitions and other
purposes;
o our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or general
corporate purposes may be limited or impaired; and
o certain of our borrowings, including our borrowings under the
credit facility, are and will continue to be at variable rates of
interest, which exposes us to the risk of increased interest
rates.
Our ability to satisfy our obligations will depend upon our future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, many of which are beyond our control.
There can be no assurance that our operating results will be sufficient for us
to meet our obligations. If we are unable to service our indebtedness, we will
be forced to adopt an alternative strategy that may include actions such as
-14-
forgoing acquisitions, reducing or delaying capital expenditures, selling
assets, restructuring or refinancing our indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
implemented on terms acceptable to us, if at all. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" for a discussion of our indebtedness and its
implications.
Effects of Acquisitions Generally
An element of our business strategy has been to expand through
acquisitions and we may seek, without further notice, to pursue acquisitions in
the future. In this regard, for confidentiality, competitive and other reasons,
we may not disclose that such acquisitions are being negotiated or are subject
to agreements until such acquisitions close. Our success is dependent in part
upon our ability to effectively integrate acquired operations with our
operations. While we believe that we have sufficient management and other
resources to accomplish the integration of our past and future acquisitions,
there can be no assurance in this regard or that we will not experience
difficulties with customers, suppliers, distributors, personnel or others. In
addition, while we are generally entitled to customary indemnification from
sellers of businesses for any difficulties that may have arisen prior to our
acquisition of each business, the amount and time for claiming under these
indemnification provisions is limited. There can be no assurance that we will be
able to identify and make acquisitions on acceptable terms or that we will be
able to obtain financing for such acquisitions on acceptable terms. As a result,
our financial performance is now and will continue to be subject to various
risks associated with the acquisition of businesses, including the financial
effects associated with any increased borrowing required to fund such
acquisitions or with the integration of such businesses.
Limitations Imposed by Certain Indebtedness
Our credit facility contains certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other
things, our ability to:
o incur indebtedness;
o make prepayments of certain indebtedness;
o make investments;
o engage in transactions with affiliates;
o sell assets;
o engage in mergers and acquisitions; and
o realize important elements of our business strategy.
Our credit facility also requires us to meet certain financial ratios
and tests. These covenants may prevent us from integrating our acquired
businesses, pursuing acquisitions, significantly limit our operating and
financial flexibility and limit our ability to respond to changes in our
business or competitive activities. Our ability to comply with such provisions
may be affected by events beyond our control. In the event of any default under
our credit facility, the credit facility lenders could elect to declare all
-15-
amounts borrowed under our credit facility, together with accrued interest, to
be due and payable. If we were unable to repay such borrowings, the credit
facility lenders could proceed against the collateral securing the credit
facility, which consists of substantially all of our property and assets.
Significant Competition and Other Market Considerations
The market for our products is highly competitive. Many of these
competitors offer a range of products in areas other than those in which we
compete, which may make such competitors more attractive to surgeons, hospitals,
GPOs and others. In addition, many of our competitors are larger and have
greater financial resources than we do and offer a range of products broader
than our products. Competitive pricing pressures or the introduction of new
products by our competitors could have an adverse effect on our revenues and
profitability. Some of the companies with which we now compete or may compete in
the future have or may have more extensive research, marketing and manufacturing
capabilities and significantly greater technical and personnel resources than we
do, and may be better positioned to continue to improve their technology in
order to compete in an evolving industry. See "Item 1: Business -- Competition"
for a further discussion of these competitive forces.
Demand for and use of our products may fluctuate as a result of:
o changes in surgeon preferences;
o the introduction of new products or new features to existing
products;
o the introduction of alternative surgical technology; and
o advances in surgical procedures and discoveries or developments
in the health care industry.
In recent years, the health care industry has undergone significant
change driven by various efforts to reduce costs, including efforts at national
health care reform, trends toward managed care, cuts in Medicare, consolidation
of health care distribution companies and collective purchasing arrangements by
office-based health care practitioners. There can be no assurance that demand
for our products will not be adversely affected by such fluctuations and trends.
Patents and Proprietary Technology
Much of the technology used in the markets in which we compete is
covered by patents. We have numerous U.S. patents and corresponding foreign
patents on products expiring at various dates from 2001 through 2018 and have
additional patent applications pending. See "Item 1: Business -- Research and
Development Activities" for a further description of our patents. Although we do
not rely solely on our patents to maintain our competitive position, the loss of
our patents could reduce the value of the related products and any related
competitive advantage. Competitors may also be able to design around our patents
and to compete effectively with our products. In addition, the cost to prosecute
infringements of our patents or the cost to defend our products against patent
infringement actions by others could be substantial. There can be no assurance
that pending patent applications will result in issued patents, that patents
issued to or licensed by us will not be challenged by competitors or that such
-16-
patents will be found to be valid or sufficiently broad to protect our
technology or provide us with a competitive advantage.
Government Regulation of Products
All of our products are classified as medical devices subject to
regulation by the FDA. As a manufacturer of medical devices, our manufacturing
processes and facilities are subject to on-site inspection and continuing review
by the FDA for compliance with their "Quality System Regulations." Failure to
comply with applicable domestic and/or foreign requirements can result in:
o fines or other enforcement actions;
o recall or seizure of products;
o total or partial suspension of production;
o withdrawal of existing product approvals or clearances;
o refusal to approve or clear new applications or notices; and
o criminal prosecution.
Many of our products are also subject to industry-set standards. The
failure to comply with Quality System Regulations or industry-set standards
could have a material adverse effect on our business, financial condition or
results of operations.
We are subject to product recall. Although no recall has had a material
adverse effect on our business, financial condition or results of operations,
there can be no assurance that regulatory issues may not have a material adverse
effect in the future.
Risks Relating to International Operations
A portion of our operations are conducted outside the United States.
About 27% of our 2000 net sales constituted foreign sales. As a result of our
international operations, we are subject to risks associated with operating in
foreign countries, including:
o devaluations and fluctuations in currency exchange rates;
o imposition of limitations on conversions of foreign currencies
into dollars or remittance of dividends and other payments by
foreign subsidiaries;
o imposition or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries;
o trade barriers;
o political risks, including political instability;
o hyperinflation in certain foreign countries; and
o imposition or increase of investment and other restrictions by
foreign governments.
-17-
There can be no assurance that such risks will not have a material
adverse effect on our business and results of operations.
Risk of Product Liability Actions
The nature of our products as medical devices and today's litigious
environment in the United States should be regarded as potential risks that
could significantly and adversely affect our financial condition and results of
operations. We maintain insurance to protect against claims associated with the
use of our products, but there can be no assurance that our insurance coverage
would adequately cover the amount or nature of any claim asserted against us.
See "Item 3: Legal Proceedings" for a further discussion of the risk of product
liability actions and our insurance coverage.
-18-
Item 2. Properties
Facilities
We manufacture most of our products. Substantially all of our property
and assets are pledged as collateral under our credit facility. The following
table provides information regarding our facilities. We believe our facilities
are adequate in terms of space and suitability for our needs over the next
several years.
Lease
Location Square Feet Own or Lease Expiration
-------- ----------- ------------ ----------
Utica, NY (two facilities) 650,000 Own --
Largo, FL 213,000 Lease 2009
Rome, NY 120,000 Own --
Englewood, CO 65,000 Own --
Irvine, CA 31,000 Lease August 2003
El Paso, TX 29,000 Lease April 2002
Juarez, Mexico 25,000 Lease December 2001
Santa Barbara, CA 18,000 Lease December 2001
-19-
Item 3. Legal Proceedings
From time to time, we are a defendant in certain lawsuits alleging
product liability, patent infringement, or other claims incurred in the ordinary
course of business. These claims are generally covered by various insurance
policies, subject to certain deductible amounts and maximum policy limits. When
there is no insurance coverage, we establish sufficient reserves to cover
probable losses associated with such claims. We do not expect that the
resolution of any pending claims will have a material adverse effect on our
financial condition or results of operations. There can be no assurance,
however, that existing or future claims, the costs associated with claims,
especially claims not covered by insurance, will not have a material adverse
effect on the Company's future performance.
Manufacturers of medical products may face exposure to significant
product liability claims. To date, we have not experienced any material product
liability claims, but any such claims arising in the future could have a
material adverse effect on our business or results of operations. We currently
maintain commercial product liability insurance of $25,000,000 per incident and
$25,000,000 in the aggregate annually, which we, based on our experience,
believe is adequate. This coverage is on a claims-made basis. There can be no
assurance that claims will not exceed insurance coverage or that such insurance
will be available in the future at a reasonable cost to us.
Our operations are subject to a number of environmental laws and
regulations governing, among other things, air emissions, wastewater discharges,
the use, handling and disposal of hazardous substances and wastes, soil and
groundwater remediation and employee health and safety. In some jurisdictions
environmental requirements may be expected to become more stringent in the
future. In the United States certain environmental laws can impose liability for
the entire cost of site restoration upon each of the parties that may have
contributed to conditions at the site regardless of fault or the lawfulness of
the party's activities.
While we do not believe that the present costs of environmental
compliance and remediation are material, there can be no assurance that future
compliance or remedial obligations could not have a material adverse effect on
our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 2000.
-20-
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Our Common Stock, par value $.01 per share, is traded on the Nasdaq
Stock Market (symbol - CNMD). At December 31, 2000, there were 1,229 registered
holders of our Common Stock and, in addition, we have been notified that, on
such date, there were approximately 6,700 accounts held in "street name".
The following table shows the high-low last sales prices for the years
ended December 31, 1999 and 2000, as reported by the Nasdaq Stock Market. Such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down and commission and may not necessarily represent actual
transactions.
1999
-------------------------------------
Period High Low
-------- ------
First Quarter $33.62 $27.09
Second Quarter 34.25 28.12
Third Quarter 33.18 24.50
Fourth Quarter 27.62 22.37
2000
-------------------------------------
Period High Low
-------- ------
First Quarter $30.75 $22.56
Second Quarter 27.56 23.62
Third Quarter 26.12 12.12
Fourth Quarter 18.06 12.93
We did not pay cash dividends on our common stock during 1999 and 2000.
Our Board of Directors presently intends to retain future earnings to finance
the development of our business and does not intend to declare cash dividends.
Should this policy change, the declaration of dividends will be determined by
the Board in light of conditions then existing, including our financial
requirements and condition and the prohibition on the declaration and payment of
cash dividends contained in debt agreements.
-21-
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December
- ------------------------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
Statements of Operations Data (1):
Net sales ..................................... $ 125,630 $ 138,270 $ 336,442 $ 372,617 $ 392,230
Cost of sales (2) ............................. 65,393 74,220 169,599 178,480 188,223
Selling and administrative
expense (3) .................................. 31,620 35,299 93,647 107,233 124,673
Research and development expense .............. 2,953 3,037 12,029 12,108 14,870
Unusual items (3) ............................. -- 37,242 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from operations ................... 25,664 (11,528) 61,167 74,796 64,464
Interest income (expense), net .................. (217) 823 (30,891) (32,360) (34,286)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item ..................... 25,447 (10,705) 30,276 42,436 30,178
Provision (benefit) for
income taxes ................................ 9,161 (3,640) 10,899 15,277 10,864
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item .......................... 16,286 (7,065) 19,377 27,159 19,314
Extraordinary item,
net of income taxes (4) ..................... -- -- (1,569) -- --
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 16,286 $(7,065) $ 17,808 $ 27,159 $ 19,314
========= ======= ========= ========= =========
Earnings (Loss) Per Share Before Extraordinary Item:
Basic ......................................... $ 1.16 $ (0.47) $ 1.28 $ 1.78 $ 1.26
========= ========= ========= ========= =========
Diluted ....................................... $ 1.12 $ (0.47) $ 1.26 $ 1.76 $ 1.24
========= ========= ========= ========= =========
Earnings (Loss) Per Share:
Basic ......................................... $ 1.16 $ (0.47) $ 1.18 $ 1.78 $ 1.26
========= ========= ========= ========= =========
Diluted ....................................... $ 1.12 $ (0.47) $ 1.16 $ 1.76 $ 1.24
========= ========= ========= ========= =========
Weighted Average Number of Common Shares In
Calculating:
Basic earnings (loss) per share ............... 14,045 14,997 15,085 15,241 $ 15,311
========= ========= ========= ========= =========
Diluted earnings (loss) per share ............. 14,496 14,997 15,321 15,430 $ 15,514
========= ========= ========= ========= =========
Other Financial Data:
Depreciation and amortization ................. $ 6,410 $ 6,954 $ 23,601 $ 26,291 $ 29,487
EBITDA(5) ..................................... 32,074 32,668 86,576 100,110 94,044
Capital expenditures .......................... 4,946 8,178 12,924 9,352 14,050
Ratio of earnings to
fixed charges (6) ........................... 79.30 (6) 1.95 2.27 1.85
December
---------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
Balance Sheet Data(7):
Cash and cash equivalents ........... $ 20,173 $ 13,452 $ 5,906 $ 3,747 $ 3,470
Total assets ........................ 170,083 561,637 628,784 662,161 679,571
Long-term debt (including
current portion) .................. -- 365,000 384,872 394,669 378,748
Total shareholders' equity .......... 158,635 162,736 182,168 211,261 230,603
-22-
(1) Includes, based on the purchase method of accounting, the results of (i)
NDM, Inc., the subsidiary formed as a result of the product lines acquired
from New Dimensions in Medicine, Inc., from February 1996; (ii) the
surgical suction product line acquired from the Davol subsidiary of C.R.
Bard, Inc., from July 1997; (iii) Linvatec Corporation from December 31,
1997; (iv) the arthroscopy product line acquired from Minnesota Mining and
Manufacturing (3M) from November 1998; (v) the powered instrument product
line acquired from 3M from August 1999; and (vi) the minimally invasive
surgical product lines acquired from Imagyn Medical Technologies, Inc. from
November 2000; in each such case from the date of acquisition.
(2) Includes for 1998, $3,000,000 of incremental expense related to the excess
of the fair value at the acquisition date of Linvatec inventory over the
cost to produce; includes for 1999, $1,600,000 of incremental expense
related to the excess of the fair value at the acquisition date over the
cost to produce inventory related to the powered instrument product line
acquired from 3M.
(3) Included in unusual items for 1997, a $34,000,000 non-cash acquisition
charge for the write-off of all of the in-process research and development
products (comprised of products in the development stage) acquired in the
Linvatec acquisition, $914,000 write-off of deferred financing fees
resulting from refinancing our loan agreements in connection with the
Linvatec acquisition, and $2,328,000 charge for the closing of our Dayton,
Ohio manufacturing facility. Included in selling and administrative expense
for 1999, a $1,256,000 benefit related to a previously recorded litigation
accrual which was settled on favorable terms. Included in selling and
administrative expense for 2000, a severance charge of $1,509,000 related
to the restructuring of the Company's arthroscopy sales force.
(4) In March 1998, we recorded an extraordinary item of $1,569,000 net of
income taxes related to the write-off of deferred financing fees.
(5) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, (except amortization of deferred financing
fees included in interest expense) unusual items and inventory adjustments
pursuant to purchase accounting. EBITDA is included herein because certain
investors consider it to be a useful measure of our ability to service our
debt; however, EBITDA does not represent cash flow from operations, as
defined in generally accepted accounting principles, and should not be
considered in isolation or as a substitute for net income or cash flow from
operations or as a measure of profitability or liquidity.
(6) The ratio of earnings to fixed charges is calculated by dividing fixed
charges into income before income taxes and extraordinary items plus fixed
charges. Fixed charges include interest expense, amortization of deferred
financing fees and the estimated interest component of rent expense. In
1997, the Company had a deficiency of earnings to cover fixed charges of
$10,558,000.
-23-
(7) Linvatec is included in the Historical Balance Sheet Data as of December
31, 1997, its date of acquisition, after a one-time non-cash acquisition
charge of $34,000,000.
-24-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with Selected
Financial Data (Item 6) and our consolidated financial statements, which are
included elsewhere or incorporated by reference in this Form 10-K.
General
We are a medical technology company specializing in instruments and
implants for arthroscopic sports medicine, and powered surgical instruments, for
orthopaedic, ENT, neurosurgery 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.
Results of Operations
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the periods
indicated:
Years Ended December
-------------------------------
1998 1999 2000
----- ----- -----
Net sales ............................... 100.0% 100.0% 100.0%
Cost of sales ........................... 50.4 47.9 48.0
----- ----- -----
Gross margin ......................... 49.6 52.1 52.0
Selling and administrative expense ...... 27.8 28.8 31.8
Research and development expense ........ 3.6 3.3 3.8
----- ----- -----
Income from operations .................. 18.2 20.0 16.4
Interest expense, net ................... 9.2 8.6 8.7
----- ----- -----
Income before income taxes
and extraordinary item .................. 9.0 11.4 7.7
Provision for income taxes .............. 3.2 4.1 2.8
----- ----- -----
Income before extraordinary item ..... 5.8% 7.3% 4.9%
===== ===== =====
2000 Compared to 1999
Sales for 2000 were $392,230,000, an increase of 5.3% compared to sales
of $372,617,000 in 1999. Sales in our orthopaedic businesses grew 12.2% to
$256,600,000 in 2000 from $228,700,000 in 1999. Adjusted for constant foreign
currency exchange rates, orthopaedic sales growth would have been 13.6%.
Arthroscopy sales, which represent approximately 56% of orthopaedic revenues,
were essentially flat at $143,600,000 in 2000, as compared to $144,000,000 in
1999. Powered surgical instrument sales, which represent approximately 44% of
orthopaedic revenues, grew 33.4% in 2000 to $113,000,000 as compared to
$84,700,000 in 1999. The increase in powered surgical instrument sales of 33.4%
consists of 14.5% internal growth and 18.9% growth due to our acquisition of the
powered instrument business from 3M in August 1999 (the "Powered Instrument
acquisition"--Note 2). Patient care, electrosurgery and minimally invasive
-25-
surgical sales declined 5.8% to $135,600,000 from $143,900,000 in 1999. This
decline primarily occurred in the surgical suction product line as a result of
increased competition and pricing pressure.
Cost of sales increased to $188,223,000 in 2000 compared to
$178,480,000 in 1999. Gross margin percentage for 2000 was 52.0%. In connection
with the August 1999 Powered Instrument acquisition, we increased the acquired
value of inventory by $1,600,000; this inventory was sold during the quarter
ended September 1999 and served to increase cost of sales in 1999 by $1,600,000.
Excluding the impact of this non-recurring adjustment, cost of sales was
$176,859,000 in 1999. Excluding the nonrecurring adjustment, our gross margin
percentage for 1999 was 52.5%. The decline in gross margin percentage in 2000 as
compared to 1999 is primarily a result of the negative impact of foreign
currency exchange rate fluctuations discussed above.
Selling and administrative costs increased to $124,673,000 in 2000 as
compared to $107,233,000 in 1999. During the second quarter of 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 recorded a nonrecurring severance charge of $1,509,000 in the
second quarter of 2000 which is included in selling and administrative expense.
Also included in selling and administrative expense is the $1,256,000 benefit,
recorded in the fourth quarter of 1999, of a previously recorded litigation
accrual which was settled on favorable terms. Excluding these non-recurring
items, as a percentage of sales, selling and administrative expense increased to
31.4% in 2000 as compared to 29.1% in 1999. This increase, as a percentage of
sales, is a result of increased spending on sales and marketing programs,
including higher commission and other costs associated with the change to
exclusive sales agent groups.
Research and development expense was $14,870,000 in 2000 as compared to
$12,108,000 in 1999. As a percentage of sales, research and development expense
increased to 3.8% in 2000 as compared to 3.3% in 1999. This increase represents
expanded research and development efforts primarily focused in the orthopaedic
product lines.
Interest expense for 2000 was $34,286,000 compared to $32,360,000 in
1999. The increase is primarily due to an increase in the overall weighted
average interest rate on our borrowings from 8.35% in 1999 to 8.93% in 2000.
(See discussion under Liquidity and Capital Resources section of Management's
Discussion and Analysis of Financial Condition and Results of Operations).
1999 Compared to 1998
Sales for 1999 were $372,617,000, an increase of 10.8% compared to
sales of $336,442,000 in 1998. Sales in our orthopaedic businesses grew 19.8% to
$228,700,000 from $190,900,000 in 1998. Arthroscopy sales, which represent
approximately 63% of orthopaedic revenues, grew 19.4% to $144,000,000 in 1999,
as compared to $120,600,000 in 1998. Approximately 10.3% of the total increase
in arthroscopy sales is internal growth and 9.1% is due to our acquisition of an
arthroscopy product line from 3M in November 1998 (the "Arthroscopy
acquisition"--Note 2). Powered surgical instrument sales, which represent
approximately 37% of orthopaedic revenues, grew 20.5% to $84,700,000 in 1999 as
compared to $70,300,000 in 1998. Approximately 7.3% of the total increase in
powered surgical instrument sales is internal growth and 13.2% is due to our
acquisition of the powered instrument business from 3M in August 1999 (the
"Powered Instrument acquisition"--Note 2). Patient care, electrosurgery and
minimally invasive surgical sales declined 1.1% to $143,900,000 in 1999 from
-26-
$145,500,000 in 1998. Approximately 2% of the total orthopaedic sales growth in
1999 as compared to 1998 reflects the pricing impact of changes in distribution
from 1999 as compared to the first six months of 1998. In connection with the
December 1997 acquisition of Linvatec Corporation (the "Linvatec acquisition")
from Bristol-Myers Squibb ("BMS"), we entered into fixed price distribution
agreements with Zimmer, Inc., a wholly-owned subsidiary of BMS, to distribute
certain of our products in selected geographic markets. Beginning in the third
quarter of 1998, most of the products formerly distributed by Zimmer were sold
and distributed directly by us, resulting in improved pricing for the affected
products.
Cost of sales increased to $178,480,000 in 1999 compared to
$169,599,000 in 1998. In connection with the August 1999 Powered Instrument
acquisition, we increased the acquired value of inventory by $1,600,000; this
inventory was sold during the quarter ended September 1999 and served to
increase cost of sales in 1999 by $1,600,000. Similarly, in connection with
purchase accounting for the Linvatec acquisition, we increased the acquired
value of inventory by $3,000,000 over our production cost; this inventory was
sold during the quarter ended March 1998 and served to increase cost of sales in
1998 by $3,000,000. Excluding the impact of these non-recurring adjustments,
cost of sales increased to $176,859,000 in 1999 from $166,606,000 in 1998, as a
result of increased sales volumes as described above. Excluding the nonrecurring
adjustments, our gross margin percentage for 1999 was 52.5% compared to 50.5%
for 1998. The increase in gross margin percentage is primarily attributable to
higher sales volumes in our orthopaedic product lines which carry higher gross
margins than certain of our other product lines as well as improved pricing
resulting from the elimination of most of the fixed price product distribution
agreements with Zimmer discussed previously.
Selling and administrative costs increased to $107,233,000 in 1999 as
compared to $93,647,000 in 1998. The increase in selling and administrative
expense is primarily a result of additional selling expense associated with the
increase in sales in 1999 as compared to 1998, including increased costs
associated with the direct selling and distribution of products formerly
distributed through Zimmer during the first half of 1998. Partially offsetting
these increases, during the fourth quarter of 1999, we recognized the benefit
amounting to $1,256,000 of a previously recorded litigation accrual which was
settled on favorable terms and is included in selling and administrative
expense. Excluding this nonrecurring benefit, as a percentage of sales, selling
and administrative expense increased to 29.1% in 1999 as compared to 27.8% in
1998.
Research and development expense was $12,108,000 in 1999 as compared to
$12,029,000 in 1998. As a percentage of sales, research and development expense
was 3.3% in 1999 as compared to 3.6% in 1998. The amount of research and
development expense incurred in 1999 is consistent with 1998 representing our
ongoing efforts in this area; the decrease in 1999 expense as a percentage of
sales is primarily a result of higher sales in 1999 as compared to 1998.
Interest expense for 1999 was $32,360,000 compared to $30,891,000 in
1998. In connection with the Powered Instrument acquisition, our existing credit
facility was amended in the third quarter of 1999 to provide for an additional
$40,000,000 loan commitment which was used to fund the acquisition purchase
price. The increase in interest expense is a result of these higher term loan
borrowings and higher average borrowings under our revolving credit facility
during 1999 as compared to 1998. We funded our Arthroscopy acquisition during
the fourth quarter of 1998 through borrowings under the revolving credit
facility which resulted in the higher average borrowings. (See discussion under
-27-
Liquidity and Capital Resources section of Management's Discussion and Analysis
of Financial Condition and Results of Operations).
During the first quarter of 1998, we completed an offering of
subordinated notes (the "Notes") and used the net proceeds to repay a portion of
our term loans under our credit facility. Deferred financing fees relating to
the portion of the credit facility repaid amounting to $2,451,000 ($1,569,000
net of income taxes) were written-off as an extraordinary charge. (See Note 5
and discussion under 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 $4,229,000 or 3.9% to
$113,755,000 at December 2000 compared to $109,526,000 at December 1999. Net
cash provided by operations was $35,950,000 in 2000 compared to $37,441,000 in
1999. Operating cash flow in 2000 decreased primarily as a result of lower net
income in 2000 as compared to 1999. Operating cash flow in 2000 was positively
impacted primarily by depreciation, amortization and deferred income taxes.
Operating cash flow in 2000 was negatively impacted primarily as a result of
increased inventories. The increase in inventories is a result of overall higher
quantities on hand in support of higher sales volumes in 2000 as compared to
1999. Net cash provided by operations was $37,441,000 in 1999 compared to
$20,927,000 in 1998. Operating cash flow in 1999 increased primarily as a result
of higher net income in 1999 as compared to 1998. Operating cash flow in 1999
was positively impacted primarily by depreciation, amortization and deferred
income taxes. Operating cash flow in 1999 was negatively impacted primarily as a
result of increases in accounts receivable and inventories. The increase in
accounts receivable was primarily related to the increase in sales; the increase
in inventory is related to the Arthroscopy acquisition and Powered Instrument
acquisition and overall higher quantities on-hand. Adversely impacting operating
cash flows in 1998 was an increase in accounts receivable and inventories
primarily as a result of the timing of our assumption of Linvatec's
international operations previously managed by Zimmer. In connection with the
Linvatec acquisition, we assumed responsibility for the majority of Linvatec's
international operations on July 1, 1998. Accordingly, the receivables and
inventory of the international operations were not acquired or funded by the
Company until the second half of 1998.
Net cash used by investing activities in 2000 included $6,000,000 paid
related to the Imagyn acquisition. Net cash used by investing activities in 1999
included $40,600,000 paid related to the Powered Instrument acquisition. Net
cash used by investing activities in 1998 included $17,500,000 related to the
Arthroscopy acquisition and $14,400,000 of payments related to the Linvatec
acquisition and the 1997 acquisition of a surgical suction instrument and tubing
product line from Davol, Inc. Capital expenditures for 2000, 1999 and 1998
amounted to $14,100,000, $9,400,000 and $12,900,000, respectively.
Financing activities in 2000 consisted primarily of $17,000,000 in
borrowings under the revolving credit facility and $32,900,000 in scheduled
payments on our term loans. Financing activities during 1999 consisted primarily
of a $40,000,000 term loan used to fund the Powered Instrument acquisition,
scheduled payments of $23,100,000 on our previously existing term loans and
$8,000,000 in repayments on our revolving credit facility. Financing activities
during 1998 involved the completion of the Notes offering in the aggregate
principal amount of $130,000,000; net proceeds from the offering amounting to
$126,100,000 were used to repay a portion of our term loans under our credit
-28-
facility. Additionally, we borrowed $23,000,000 under the revolving credit
facility primarily to finance the Arthroscopy acquisition and made scheduled
payments of $7,000,000 on our term loans.
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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal market risks involve foreign currency exchange rates and
interest rates.
We manufacture our products in the United States and distribute our
products throughout the world. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. As of December 2000, we
have not entered into any forward foreign currency exchange contracts to hedge
the effect of foreign currency exchange fluctuations. We have mitigated and will
continue to mitigate our foreign currency exposure by transacting the majority
of our foreign sales in United States dollars. During 2000, changes in foreign
currency exchange rates reduced our sales and income before income taxes by
approximately $3,200,000. We will continue to monitor and evaluate our foreign
currency exposure and the need to enter into a forward foreign currency exchange
contract or other hedging arrangement.
Our exposure to market risk for changes in interest rates relates to
our borrowings. We do not use derivative financial instruments for trading or
other speculative purposes. Interest rate swaps, a form of derivative, are used
to manage interest rate risk. Currently, we have entered into two interest rate
swaps (each with a $50,000,000 notional amount) expiring in June 2001 and June
2003 which effectively convert $100,000,000 of the approximate $248,000,000 of
floating rate borrowings under our credit facility into fixed rate borrowings
with a base interest rate averaging 6.50%. Provisions in one of the interest
rate swaps cancels such agreement when LIBOR exceeds 7.35%. If market interest
rates for similar borrowings average 1% more in 2001 than they did in 2000, our
interest expense, after considering the effects of our interest rate swaps,
would increase, and income before income taxes would decrease by $1,100,000.
Comparatively, if market interest rates averaged 1% less in 2001 than they did
during 2000, our interest expense, after considering the effects of our interest
rate swaps, would decrease, and income before income taxes would increase by
$900,000. These amounts are determined by considering the impact of hypothetical
interest rates on our borrowing cost and interest rate swap agreements and does
not consider any actions by management to mitigate our exposure to such a
change.
-29-
Item 8. Financial Statements and Supplementary Data
Our 2000 Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP dated February 7, 2001, are included elsewhere
herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
We have had no disagreements with PricewaterhouseCoopers LLP that would
be required to be reported under this Item 9.
-30-
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Executive Officers is
incorporated herein by reference to the sections captioned "Proposal One:
Election of Directors" and "Directors, Executive Officers and Senior Officers"
in CONMED Corporation's definitive Proxy Statement to be mailed on or about
April 8, 2001 for the annual meeting of shareholders to be held on May 15, 2001.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated
herein by reference to the sections captioned "Compensation of Executive
Officers", "Stock Option Plans", "Pension Plans" and "Board of Directors
Interlocks and Insider Participation; Certain Relationships and Related
Transactions" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 8, 2001 for the annual meeting of shareholders to be held on May
15, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the section
captioned "Security Ownership of Certain Beneficial Owners and Management" in
CONMED Corporation's definitive Proxy Statement to be mailed on or about April
8, 2001 for the annual meeting of shareholders to be held on May 15, 2001.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
incorporated herein by reference to the section captioned "Board of Directors
Interlocks and Insider Participation; Certain Relationships and Related
Transactions" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 8, 2001 for the annual meeting of shareholders to be held on May
15, 2001.
-31-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements
(a)(1) List of Financial Statements Form 10-K Page
Report of Independent Accountants F-1
Consolidated Balance Sheets at December
1999 and 2000 F-2
Consolidated Statements of Income for the F-3
Years Ended December 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity F-4
for the Years Ended December 1998, 1999 and 2000
Consolidated Statements of Cash Flows
for the Years Ended December 1998, 1999 and 2000 F-5
Notes to Consolidated Financial Statements F-7
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule VIII) F-28
All other schedules have been omitted
because they are not applicable, or the
required information is shown in the
financial statements or notes thereto.
(3) List of Exhibits
The exhibits listed on the accompanying
Exhibit Index on page 34 below are filed
as part of this Form 10-K.
(b) Reports on Form 8-K
None
-32-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the date indicated
below.
CONMED CORPORATION
March 21, 2001
By: /s/ Eugene R. Corasanti
-----------------------
Eugene R. Corasanti
(Chairman of the Board, Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrants and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ EUGENE R. CORASANTI Chairman of the Board
- ----------------------- Chief Executive Officer
Eugene R. Corasanti And Director March 21, 2001
/s/ ROBERT D. SHALLISH, JR. Vice President-Finance
- --------------------------- and Chief Financial Officer
Robert D. Shallish, Jr. (Principal Financial Officer) March 21, 2001
/s/ JOSEPH J. CORASANTI President, Chief Operating
- ------------------------ Officer and Director March 21, 2001
Joseph J. Corasanti
/s/ LUKE A. POMILIO Vice President - Corporate
- ------------------- Controller (Principal Accounting
Luke A. Pomilio Officer) March 21, 2001
/s/ BRUCE F. DANIELS Director March 21, 2001
- --------------------
Bruce F. Daniels
/s/ ROBERT E. REMMELL Director March 21, 2001
- ---------------------
Robert E. Remmell
/s/ WILLIAM D. MATTHEWS Director March 21, 2001
- -----------------------
William D. Matthews
/s/ STUART J. SCHWARTZ Director March 21, 2001
- ----------------------
Stuart J. Schwartz
-33-
Exhibit Index
Exhibit
No. Description of Instrument
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement between Linvatec Corporation and
Minnesota Mining & Manufacturing Company dated October 8,
1998-- incorporated herein by reference to our Annual Report
on Form 10-K for the year ended December 31, 1998.
2.2 The Asset Purchase Agreement, dated June 29, 1999 by and
between Linvatec Corporation and Minnesota Mining and
Manufacturing Company, as amended by an amendment dated
August 11, 1999-- incorporated herein by reference to
Exhibit 10.1 of our report on Form 10-Q filed on August 13,
1999.
3.1 Amended and Restated By-Laws, as adopted by the Board of
Directors on December 26, 1990-- incorporated herein by
reference to the exhibit in our Current Report on Form 8-K,
dated March 7, 1991 (File No. 0-16093).
3.2 1999 Amendment to Certificate of Incorporation and Restated
Certificate of Incorporation of CONMED Corporation -
incorporated herein by reference to our Annual Report on
Form 10-K for the year ended December 31, 1999.
4.1 See Exhibit 3.1.
4.2 See Exhibit 3.2.
4.3 Amended and Restated Credit Agreement, dated August 11,
1999, among CONMED Corporation and the several banks and
other financial institutions or entities from time to time
parties thereto, -- incorporated herein by reference to
Exhibit 10.2 of our report on Form 10-Q filed on August 13,
1999.
4.4 Guarantee and Collateral Agreement, dated December 31, 1997,
made by CONMED Corporation and certain of its subsidiaries
in favor of The Chase Manhattan Bank-- incorporated herein
by reference to Exhibit 10.2 in our Current Report on Form
8-K filed on January 8, 1998.
4.5 Indenture, dated as of March 5, 1998, by and among CONMED
Corporation, the Subsidiary Guarantors named therein and
First Union National Bank, as Trustee--incorporated by
reference to the exhibit in our Registration Statement on
Form S-8 filed on March 26, 1998 (File No. 333-48693).
4.6 Acknowledgement and Consent, dated August 11, 1999, among
CONMED Corporation and each of its subsidiaries--
incorporated herein by reference to Exhibit 10.3 of our
report on Form 10-Q filed on August 13, 1999.
10.1 Employment Agreement between the Company and Eugene R.
Corasanti, dated December 16, 1996-- incorporated herein by
reference to the exhibit in our Annual Report on Form 10-K
for the year ended December 31, 1996.
-34-
Exhibit
No. Description of Instrument
- --------------------------------------------------------------------------------
10.2 Amended and Restated Employee Stock Option Plan (including
form of Stock Option Agreement)-- incorporated herein by
reference to the exhibit in our Annual Report on Form 10-K
for the year ended December 25, 1992-- incorporated herein
by reference to the exhibit in our Annual Report on Form
10-K for the year ended December 31, 1996.
10.3 (a) Eugene R. Corasanti disability income plans with
Northwestern Mutual Life Insurance Company, dated January
14, 1980 and March 7, 1981-- policy specification sheets--
incorporated herein by reference to Exhibit 10.0(a) of our
Registration Statement on Form S-2 (File No. 33-40455).
(b) William W. Abraham disability income plan with
Northwestern Mutual Life Insurance Company, dated March 24,
1981 -- policy specification sheet -- incorporated herein by
reference to Exhibit 10.0(b) of our Registration Statement
on Form S-2 (File No. 33-40455).
(c) Eugene R. Corasanti life insurance plan with Northwestern
Mutual Life Insurance Company, dated October 6, 1979 --
policy specification sheet -- incorporated herein by
reference to Exhibit 10.0(c) of our Registration Statement
on Form S-2 (File No. 33-40455).
10.4 Eugene R. Corasanti life insurance plans with Northwestern
Mutual Life Insurance Company dated August 25, 1991--
Statements of Policy Cost and Benefit Information, Benefits
and Premiums, Assignment of Life Insurance Policy as
Collateral -- incorporated herein by reference to our Annual
Report on Form 10-K for the year ended December 27, 1991.
10.5 1992 Stock Option Plan (including form of Stock Option
Agreement)-- incorporated herein by reference to the exhibit
in our Annual Report on Form 10-K for the year ended
December 25, 1992.
10.6 Stock Option Plan for Non-Employee Directors of CONMED
Corporation-- incorporated by reference to our Annual Report
on Form 10-K for the year ended December 31, 1996.
10.7 Amendment to 1992 Stock Option Plan-- incorporated by
reference to our Annual Report on Form 10-K for the year
ended December 31, 1996.
10.8 CONMED Corporation 1999 Long-Term Incentive Plan -
incorporated by reference to the Definitive Proxy Statement
for the 1999 annual meeting as filed on April 16, 1999.
10.9 Employment Agreement between the Company and Joseph J.
Corasanti, dated May 2, 2000.
-35-
Exhibit
No. Description of Instrument
- --------------------------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings.
12 Statement re: Computation of Ratios of Earnings to Fixed
Charges.
21 Subsidiaries of the Registrant.
23 Consent, dated March 29, 2001, of PricewaterhouseCoopers
LLP, independent auditors for CONMED Corporation.
-36-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of CONMED Corporation
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14 (a)(1) on Page 32 present fairly, in all material
respects, the financial position of CONMED Corporation and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14 (a)(2) on Page 32 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Syracuse, New York
February 7, 2001
F-1
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 1999 and 2000
(In thousands except share amounts)
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 3,747 $ 3,470
Accounts receivable, less allowance for doubtful
accounts of $1,434 in 1999 and $1,479 in 2000 ..... 76,413 78,626
Inventories ........................................... 89,681 104,612
Deferred income taxes ................................. 1,453 1,761
Prepaid expenses and other current assets ............. 5,423 3,562
--------- ---------
Total current assets .......................... 176,717 192,031
--------- ---------
Property, plant and equipment, net ........................ 57,834 62,450
Goodwill, net ............................................. 223,174 225,801
Other intangible assets, net .............................. 201,458 195,008
Other assets .............................................. 2,978 4,281
--------- ---------
Total assets .................................. $ 662,161 $ 679,571
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................... $ 32,875 $ 36,068
Accounts payable ...................................... 16,518 20,350
Accrued compensation .................................. 9,658 9,913
Income taxes payable .................................. 226 1,979
Accrued interest ...................................... 4,588 5,130
Other current liabilities ............................. 3,326 4,836
--------- ---------
Total current liabilities ..................... 67,191 78,276
--------- ---------
Long-term debt ............................................ 361,794 342,680
Deferred income taxes ..................................... 3,330 12,154
Other long-term liabilities ............................... 18,585 15,858
--------- ---------
Total liabilities ............................. 450,900 448,968
--------- ---------
Shareholders' equity:
Preferred stock, par value $.01 per share; authorized
500,000 shares, none outstanding .................. -- --
Common stock, par value $.01 per share; 100,000,000
authorized; 15,303,806 and 15,352,186, issued and
outstanding in 1999 and 2000, respectively ........ 153 153
Paid-in capital ....................................... 127,394 128,062
Retained earnings ..................................... 84,520 103,834
Accumulated other comprehensive loss .................. (387) (1,027)
Less 25,000 shares of common stock in treasury, at cost (419) (419)
--------- ---------
Total shareholders' equity .................... 211,261 230,603
--------- ---------
Total liabilities and shareholders' equity .... $ 662,161 $ 679,571
========= =========
See notes to consolidated financial statements.
F-2
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 1998, 1999 and 2000
(In thousands except per share amounts)
1998 1999 2000
--------- --------- ---------
Net sales ........................... $ 336,442 $ 372,617 $ 392,230
--------- --------- ---------
Cost of sales ....................... 169,599 178,480 188,223
Selling and administrative expense .. 93,647 107,233 124,673
Research and development expense .... 12,029 12,108 14,870
--------- --------- ---------
275,275 297,821 327,766
--------- --------- ---------
Income from operations .............. 61,167 74,796 64,464
Interest expense, net ............... 30,891 32,360 34,286
--------- --------- ---------
Income before income taxes and
extraordinary item .............. 30,276 42,436 30,178
Provision for income taxes .......... 10,899 15,277 10,864
--------- --------- ---------
Income before extraordinary item .... 19,377 27,159 19,314
Extraordinary item, net of income
taxes ........................... (1,569) -- --
--------- --------- ---------
Net income .......................... $ 17,808 $ 27,159 $ 19,314
========= ========= =========
Per share data:
Income before extraordinary item
Basic ....................... $ 1.28 $ 1.78 $ 1.26
Diluted ..................... 1.26 1.76 1.24
Extraordinary item
Basic ....................... (.10) -- --
Diluted ..................... (.10) -- --
Net income
Basic ....................... 1.18 1.78 1.26
Diluted ..................... 1.16 1.76 1.24
See notes to consolidated financial statements.
F-3
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 1998, 1999 and 2000
(In thousands)
Accumulated
Common Stock Other
------------ Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ ------ ------- -------- ------------- ----- ------
Balance at December 1997............. 15,062 $151 $123,451 $39,553 $ - $(419) $162,736
Exercise of stock options........ 121 1 1,087 1,088
Tax benefit arising from
exercise of stock
options...................... 501 501
Comprehensive income:
Translation adjustments...... 35
Net income................... 17,808
Total comprehensive income....... 17,843
------ ----- -------- -------- ------- ------ --------
Balance at December 1998............. 15,183 152 125,039 57,361 35 (419) 182,168
Exercise of stock options........ 121 1 1,611 1,612
Tax benefit arising from
exercise of stock
options...................... 744 744
Comprehensive income:
Translation adjustments...... (422)
Net income................... 27,159
Total comprehensive income......... 26,737
------ ----- -------- -------- ------- ------ --------
Balance at December 1999............. 15,304 153 127,394 84,520 (387) (419) 211,261
Exercise of stock options........ 48 449 449
Tax benefit arising
from exercise of
stock options................ 219 219
Comprehensive income:
Translation adjustments..... (640)
Net income.................. 19,314
Total comprehensive income....... 18,674
------ ----- -------- -------- ------- ------ --------
Balance at December 2000............. 15,352 $ 153 $128,062 $103,834 $(1,027) $ (419) $230,603
====== ===== ======== ======== ======= ====== ========
See notes to consolidated financial statements.
F-4
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 1998, 1999 and 2000
(In thousands)
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net income ................................... $ 17,808 $ 27,159 $ 19,314
-------- -------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................. 8,098 9,207 9,434
Amortization ............................. 15,503 17,084 20,053
Deferred income taxes .................... 8,779 8,978 7,974
Extraordinary item, net of income
taxes ................................ 1,569 -- --
Increase (decrease) in cash flows from
changes in assets and liabilities, net
of effects from acquisitions:
Accounts receivable .................. (19,630) (9,192) (2,166)
Inventories .......................... (19,322) (9,086) (18,035)
Prepaid expenses and other current
assets ............................. (1,180) (799) 1,811
Accounts payable ..................... 10,028 (3,060) 3,824
Income taxes payable ................. (2,587) 1,986 2,514
Accrued compensation ................. 2,834 (7) 255
Accrued interest ..................... 6,069 (1,481) 542
Other assets/liabilities, net ........ (7,042) (3,348) (9,570)
-------- -------- --------
3,119 10,282 16,636
-------- -------- --------
Net cash provided by operations ...... 20,927 37,441 35,950
-------- -------- --------
Cash flows from investing activities:
Payments related to business acquisitions .... (31,909) (40,585) (6,042)
Purchases of property, plant and
equipment ................................ (12,924) (9,352) (14,050)
-------- -------- --------
Net cash used by investing activities (44,833) (49,937) (20,092)
-------- -------- --------
Cash flows from financing activities:
Proceeds of long-term debt ................... 130,000 40,900 --
Borrowings (repayments)under revolving
credit facility .......................... 23,000 (8,000) 17,000
Proceeds from issuance of common stock ....... 1,088 1,612 449
Payments related to issuance of long-
term debt ................................ (4,635) (661) --
Payments on long-term debt ................... (133,128) (23,103) (32,921)
-------- -------- --------
Net cash provided (used)by financing
activities ..................... 16,325 10,748 (15,472)
-------- -------- --------
(continued)
See notes to consolidated financial statements.
F-5
1998 1999 2000
-------- -------- --------
Effect of exchange rate changes
on cash and cash equivalents ...................... 35 (411) (663)
-------- -------- --------
Net decrease in cash and cash equivalents ........... (7,546) (2,159) (277)
Cash and cash equivalents at beginning
of year ......................................... 13,452 5,906 3,747
-------- -------- --------
Cash and cash equivalents at end of year ............ $ 5,906 $ 3,747 $ 3,470
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................ $ 24,078 $ 32,662 $ 33,788
Income taxes ............................ 4,121 4,502 4,141
See notes to consolidated financial statements.
F-6
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Operations and Significant Accounting Policies
Organization and operations
The consolidated financial statements include the accounts of CONMED
Corporation and its subsidiaries (the "Company"). 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. The Company is 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. 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.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventories
The inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out basis.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using
the straight-line method over the following estimated useful lives:
Building and improvements 40 years
Leasehold improvements Remaining life of lease
Machinery and equipment 2 to 15 years
Goodwill
Goodwill represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses. Goodwill is amortized on a
straight-line basis over periods ranging from 13 to 40 years. Accumulated
amortization of goodwill amounted to $16,901,000 and $23,340,000 at December
1999 and 2000, respectively.
F-7
When events and circumstances so indicate, the Company will assess the
recoverability of its goodwill based upon cash flow forecasts (undiscounted and
without interest). No impairment losses have been recognized in any of the
periods presented.
Other intangible assets
Other intangible assets primarily represent allocations of purchase
price to identifiable intangible assets of acquired businesses. Customer
relationships and trademarks and tradenames are amortized on a straight-line
basis over 40 and 38 years, respectively. Patents and other intangible assets
are amortized on a straight-line basis over periods from 5 to 17 years.
When events and circumstances so indicate, the Company will assess the
recoverability of its intangible assets based upon cash flow forecasts
(undiscounted and without interest). No impairment losses have been recognized
in any of the periods presented.
1999 2000
--------- ---------
Customer relationships ..................... $ 96,712 $ 96,712
Trademarks and tradenames .................. 95,715 95,715
Patents and other intangible assets ........ 29,227 31,479
--------- ---------
221,654 223,906
Less: Accumulated amortization ............ (20,196) (28,898)
--------- ---------
Other intangible assets, net ............... $ 201,458 $ 195,008
========= =========
Derivative financial instruments
The Company does not trade in derivative securities. The Company does
use interest rate swaps to manage the interest risk associated with its variable
rate debt. The Company accounted for interest rate swaps on the accrual method
at December 1999 and 2000, whereby the net receivable or payable is recognized
on a periodic basis and included as a component of interest expense.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
the changes in the values of the derivatives would be accounted for depending on
whether it qualifies for hedge accounting. The Company adopted this standard
beginning January 1, 2001. Adoption of this statement did not have a material
impact on the financial statements.
F-8
Fair value of financial instruments
The estimated fair value of cash and cash equivalents, accounts
receivable, and accounts payable, approximate their carrying amount. The
estimated fair values and carrying amounts of interest rate swaps and long-term
debt are as follows (in thousands):
1999 2000
------------------------ ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Interest rate swaps ..... $ 37 $ 248 $ 5 $ (1,436)
Long-term debt (including
current maturities) . (394,669) (386,219) (378,748) (352,748)
Fair values were determined from quoted market prices or discounted cash flows
analysis.
Translation of foreign currency financial statements
Assets and liabilities of foreign subsidiaries have been translated
into United States dollars at the applicable rates of exchange in effect at the
end of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected in accumulated other
comprehensive income (loss). Any transaction gains and losses are included in
net income.
Revenue recognition
Revenue is recognized upon shipment of goods to customers and upon
performance of services. Amounts billed to customers related to shipping and
handling are not material. Shipping and handling costs were $8,250,000,
$9,450,000 and $8,100,000 for the years ended December 1998, 1999 and 2000,
respectively, and are included in selling and administrative expense. The
Company sells to a diversified base of customers around the world and,
therefore, believes there is no material concentration of credit risk.
Earnings per share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires presentation of basic earnings per share ("EPS"), computed
based on the weighted average number of common shares outstanding for the
period, and diluted EPS, which gives effect to all dilutive potential shares
outstanding (i.e., options and warrants) during the period. Income used in the
EPS calculation is net income for each year. Shares used in the calculation of
basic and diluted EPS were (in thousands):
1998 1999 2000
---- ---- ----
Shares used in the calculation of Basic EPS
(weighted average shares outstanding)......... 15,085 15,241 15,311
Effect of dilutive potential securities .......... 236 189 203
------ ------ ------
Shares used in the calculation of Diluted EPS..... 15,321 15,430 15,514
====== ====== ======
F-9
The shares used in the calculation of diluted EPS exclude warrants and
options to purchase shares where the exercise price was greater than the average
market price of common shares for the year. Such shares aggregated 1,440,000,
1,326,000 and 2,264,000 at December 1998, 1999 and 2000, respectively.
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", requires companies to
report a measure of operations called comprehensive income. This measure, in
addition to net income, includes as income or loss, the following items, which
if present are included in the equity section of the balance sheet: 1)
unrealized gains and losses on certain investments in debt and equity
securities; 2) foreign currency translation; and 3) minimum pension liability
adjustments. The Company has reported comprehensive income within the
Consolidated Statements of Shareholders' Equity.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation used in 2000.
Note 2 -- Business Acquisitions
On November 16, 1998, the Company acquired the assets related to an
arthroscopy product line from Minnesota Mining and Manufacturing Company ("3M")
for a purchase price of $17,500,000 (the "Arthroscopy acquisition") which was
funded through borrowings under the Company's revolving credit facility (Note
5). The acquisition was accounted for using the purchase method. 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 June 29, 1999, the Company agreed to purchase certain assets of the
powered surgical instrument business of 3M (the "Powered Instrument
acquisition"). The acquisition was completed on August 11, 1999 for a purchase
price of $40,000,000, which was funded through borrowings under the Company's
credit facility (Note 5). The acquisition was accounted for using the purchase
method. The results of operations of the acquired business 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. In connection with the Powered Instrument acquisition, the
Company increased the acquired value of inventory by $1,600,000. This inventory
was sold during the quarter ended September 1999 resulting in a non-recurring
adjustment to increase cost of sales during 1999 by $1,600,000.
On November 20, 2000 the Company agreed to purchase 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. Under the terms of the agreement, the Company also agreed to pay up
to $2,000,000 in contingent consideration dependent upon product sales within
the first twelve months following the closing date. The acquisition was funded
through borrowings under the Company's revolving credit facility (Note 5) and is
being accounted for using the purchase method. The results of operations of the
acquired business 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.
F-10
On an unaudited pro forma basis, assuming the completed acquisitions
had occurred as of the beginning of the periods presented, the consolidated
results of the Company would have been as follows (in thousands, except per
share amounts):
Year Ended December
--------------------------
1999 2000
--------- ---------
Pro forma net sales.............. $ 389,717 $ 396,320
========= =========
Pro forma net income............. $ 27,663 $ 19,475
========= =========
Pro forma net income per share:
Basic.................. $ 1.82 $ 1.27
========= =========
Diluted................ $ 1.79 $ 1.25
========= =========
The unaudited pro forma financial information presented above gives
effect to purchase accounting adjustments which have resulted or are expected to
result from the acquisitions. This pro forma information is not necessarily
indicative of the results that would actually have been obtained had the
companies been combined for the periods presented.
Note 3 -- Inventories
The components of inventory are as follows (in thousands):
1999 2000
-------- --------
Raw materials............................ $ 35,651 $ 38,278
Work in process.......................... 9,803 12,612
Finished goods........................... 44,227 53,722
-------- --------
$ 89,681 $104,612
======== ========
Note 4 -- Property, Plant and Equipment
Details of property, plant and equipment are as follows (in thousands):
1999 2000
-------- --------
Land........................................ $ 1,511 $ 1,511
Leasehold improvements...................... 2,837 3,293
Building and improvements................... 23,118 24,393
Machinery and equipment..................... 60,231 63,970
Construction in progress.................... 4,643 12,283
-------- --------
92,340 105,450
Less: Accumulated depreciation... (34,506) (43,000)
-------- --------
$ 57,834 $ 62,450
======== ========
F-11
The Company leases various manufacturing and office facilities and
equipment under operating leases. Rental expense on these operating leases was
approximately $2,650,000, $2,935,000 and $3,376,000 for the years ended December
1998, 1999 and 2000, respectively. The aggregate future minimum lease
commitments for operating leases at December 2000 are as follows:
Year ending December (in thousands):
2001.............................. $ 3,490
2002.............................. 3,118
2003.............................. 2,858
2004.............................. 2,425
2005.............................. 2,483
Thereafter........................ 9,027
Note 5 -- Long Term Debt
The Company has a credit agreement with several banks providing for a
$490,000,000 credit facility. The credit facility is comprised of four
sub-facilities: (i) a $210,000,000 five-year term loan with quarterly principal
repayments; (ii) a $140,000,000 seven-year term loan with quarterly principal
repayments; (iii) a $40,000,000 six-year term loan with quarterly principal
repayments; and (iv) a $100,000,000 revolving credit facility. The revolving
credit facility expires on December 30, 2002. During the commitment period, the
Company is obligated to pay a fee of .375% per annum on the unused portion of
the revolving credit facility. A covenant under the credit facility required the
Company to complete a senior subordinated note offering, which was completed in
March 1998 with the net proceeds of $126,100,000 being used to reduce the term
loans under the credit facility. Deferred financing fees related to the portion
of the term loans repaid amounting to $2,451,000 ($1,569,000 net of income
taxes) were written off in March 1998 as an extraordinary item.
As of December 1999, the Company had $105,380,000, $88,497,000,
$39,925,000 and $30,000,000 outstanding under the five-year term loan, the
seven-year term loan, the six year term loan and the revolving credit facility,
respectively. As of December 2000, the Company had $73,447,000, $87,856,000,
$39,625,000 and $47,000,000 outstanding under the five-year term loan, the
seven-year term loan, the six-year term loan and the revolving credit facility,
respectively. The borrowings under the credit facility carry interest rates
based on a spread over LIBOR or an alternative base interest rate. The covenants
of the credit facility provide for increases and decreases to this interest rate
spread based on the operating results of the Company. Additionally, certain
events of default under the credit facility limit interest rate options
available to the Company. The weighted average interest rates at December 1999
under the five-year term loan, the seven-year term loan, the six year term loan
and the revolving credit facility, were 7.65%, 8.15%, 8.59% and 7.45%,
respectively. The weighted average interest rates at December 2000 under the
five-year term loan, the seven-year term loan, the six-year term loan and
revolving credit facility, were 8.36%, 8.80%, 9.25% and 9.06%, respectively.
The Company has entered into two interest rate swaps (each with a
$50,000,000 notional amount) expiring in June 2001 and June 2003 which
effectively convert $100,000,000 of LIBOR-based floating rate debt under the
Company's credit facility into fixed rate debt with a base interest rate
F-12
averaging 6.50%. Provisions in one of the interest rate swaps cancels such
agreement when LIBOR exceeds 7.35%.
The term debt and revolving credit facility are collateralized by all
the Company's personal property. The agreement contains covenants and
restrictions which, among other things, require maintenance of certain working
capital levels and financial ratios, prohibit dividend payments and restrict the
incurrence of certain indebtedness and other activities, including acquisitions
and dispositions. The Company is 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.
As discussed above, in March 1998 the Company issued $130,000,000 of 9%
Senior Subordinated Notes (the "Notes"). The Notes mature on March 15, 2008,
unless previously redeemed by the Company. Interest on the Notes is payable
semi-annually on March 15 and September 15 of each year. The Notes are
redeemable for cash at anytime on or after March 15, 2003, at the option of the
Company, in whole or in part, at the redemption prices set forth therein, plus
accrued and unpaid interest to the date of redemption.
Excluding the revolving credit facility which expires and is expected
to be renegotiated in 2002, the scheduled maturities of long-term debt
outstanding at December 2000 are as follows:
Year ending December (in thousands):
2001.............................. $ 36,068
2002.............................. 39,298
2003.............................. 42,018
2004.............................. 45,223
2005.............................. 38,457
Thereafter........................ 130,684
Note 6 -- Income Taxes
The provision for income taxes consists of the following (in
thousands):
1998 1999 2000
------- ------- -------
Current tax expense:
Federal .......................... $ 1,652 $ 5,027 $ 1,634
State ............................ 258 350 300
Foreign .......................... 210 922 956
------- ------- -------
2,120 6,299 2,890
Deferred income tax expense .......... 8,779 8,978 7,974
------- ------- -------
Provision for income taxes ....... $10,899 $15,277 $10,864
======= ======= =======
F-13
A reconciliation between income taxes computed at the statutory federal
rate and the provision for income taxes follows (in thousands):
1998 1999 2000
-------- -------- --------
Tax provision at statutory rate based
on income before income taxes and
extraordinary item ............... $ 10,597 $ 14,853 $ 10,562
Foreign sales corporation ............ (313) (543) (725)
State taxes .......................... 165 257 180
Nondeductible intangible amortization 243 320 321
Other, net ........................... 207 390 526
-------- -------- --------
$ 10,899 $ 15,277 $ 10,864
======== ======== ========
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities at December 1999 and 2000 are as follows
(in thousands):
1999 2000
------- -------
Assets:
Receivables................................... $ 135 $ 138
Inventory .................................... 330 1,115
Deferred compensation......................... 597 761
Employee benefits............................. 794 221
Deferred rent................................. 243 570
Other......................................... 1,690 1,011
Net operating losses of acquired subsidiary... 4,258 3,834
Valuation allowance for deferred tax assets... (4,258) (3,834)
------- -------
3,789 3,816
------- -------
Liabilities:
Goodwill and intangible assets................ 4,051 11,559
Depreciation.................................. 1,500 2,650
Other......................................... 115 -
------- -------
5,666 14,209
------- -------
Net liability .................................... $(1,877) $(10,393)
======= ========
Net operating losses related to a 1995 acquisition are subject to
certain limitations and expire over the period 2008 to 2010. Management has
established a valuation allowance of $3,834,000 to reflect the uncertainty of
realizing the benefit of certain of these carryforwards.
F-14
Note 7 -- Shareholders' Equity
The shareholders have authorized 500,000 shares of preferred stock, par
value $.01 per share, which may be issued in one or more series by the Board of
Directors without further action by the shareholders. As of December 2000, no
preferred stock had been issued.
In connection with the 1997 acquisition of Linvatec Corporation, the
Company issued to Bristol-Myers Squibb Company a ten-year warrant to purchase
1.0 million shares of the Company's common stock at a price of $34.23 per share.
During 1997, the Company was authorized to repurchase up to $30,000,000
of its common stock in the open market or in private transactions. The Company
repurchased 25,000 shares of common stock in 1997 at an aggregate price of
$419,000. The Company's credit agreement (Note 5) prohibits future repurchases
of common stock during its term.
The Company has reserved shares of common stock for issuance to
employees and directors under four stock option plans (the "Plans"). The option
price on all outstanding options is equal to the estimated fair market value of
the stock at the date of grant. Stock options are non-transferable other than on
death and generally become exercisable over a five year period from date of
grant and expire ten years from date of grant.
The following is a summary of incentive stock option activity under the
Plans (in thousands, except per share amounts):
Weighted-
Number Average
of Exercise
Shares Price
------ -----
Outstanding at December 1997 ................ 1,205 $ 15.39
Granted during 1998 ................. 509 23.64
Forfeited ........................... (93) 24.44
Exercised ........................... (121) 8.99
------ ---------
Outstanding at December 1998 ................ 1,500 17.90
Granted during 1999 ................. 401 29.62
Forfeited ........................... (9) 22.91
Exercised ........................... (121) 13.32
------ ---------
Outstanding at December 1999 ................ 1,771 20.94
Granted during 2000 ................. 456 21.07
Forfeited ........................... (139) 25.80
Exercised ........................... (48) 9.35
------ ---------
Outstanding at December 2000 ................ 2,040 $ 20.86
====== =========
Exercisable:
December 1998 ....................... 856 $ 14.24
December 1999 ....................... 945 16.33
December 2000 ....................... 1,116 18.46
F-15
Stock
Weighted Options Weighted
Stock Options Weighted Average Exercisable Average
Range of Outstanding at Average Remaining Exercise at December Exercise
Exercise Prices December 2000 Life (Years) Price 2000 Price
--------------- ------------- ------------ ----- ---- -----
Less than $10.00 85,000 1.2 $ 5.07 85,000 $ 5.07
$10 to $15 546,000 4.6 11.67 388,000 10.83
$15 to $20 146,000 6.5 18.13 104,000 18.61
$20 to $25 408,000 8.0 23.19 157,000 22.47
$25 to $35 855,000 7.5 27.65 382,000 27.48
SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair
value based method of accounting for an employee stock option whereby
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period. A company may elect to adopt
SFAS No. 123 or elect to continue accounting for its stock option or similar
equity awards using the method of accounting prescribed by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", where
compensation cost is measured at the date of grant based on the excess of the
market value of the underlying stock over the exercise price. The Company has
elected to continue to account for its stock-based compensation plans under the
provisions of APB No. 25. No compensation expense has been recognized in the
accompanying financial statements relative to the Company's stock option plans.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The weighted average fair value of options granted in 1998, 1999 and 2000 was
$11.57, $13.28 and $12.82, respectively. The fair value of these options was
estimated at the date of grant using a Black-Scholes options pricing model with
the following weighted-average assumptions for options granted in 1998, 1999 and
2000, respectively: Risk-free interest rates of 5.41%, 6.46% and 5.06%;
volatility factors of the expected market price of the Company's common stock of
48.72%, 39.23% and 68.01%; a weighted-average expected life of the option of
five years; and that no dividends would be paid on common stock.
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for earnings per
share information):
1998 1999 2000
------- ------- -------
Net income-- as reported............ $17,808 $27,159 $19,314
Net income-- pro forma.............. 15,420 24,678 16,167
EPS-- as reported:
Basic ...................... 1.18 1.78 1.26
Diluted ...................... 1.16 1.76 1.24
EPS-- pro forma:
Basic ...................... 1.02 1.62 1.06
Diluted ...................... 1.01 1.60 1.04
The pro-forma disclosures include only options granted after January 1,
1995.
F-16
Note 8 -- Business Segments, Geographic Areas and Major Customers
CONMED's business is organized, managed and internally reported as a
single segment comprised of medical instruments and systems used in surgical and
other medical procedures. The Company believes its various product lines have
similar economic, operating and other related characteristics.
The following is net sales information for geographic areas (in
thousands):
1998 1999 2000
--------- --------- ---------
United States.......... $ 266,668 $ 281,439 $ 284,837
All other countries.... 69,774 91,178 107,393
--------- --------- ---------
Total ................. $ 336,442 $ 372,617 $ 392,230
========= ========= =========
There were no significant investments in long-lived assets located
outside the United States at December 1999 and 2000.
Note 9 -- Pension Plans
The Company maintains defined benefit plans covering substantially all
employees. The Company makes annual contributions to the plans equal to the
maximum deduction allowed for federal income tax purposes.
Net pension cost for 1998, 1999 and 2000 included the following
components (in thousands):
1998 1999 2000
------- ------- -------
Service cost-- benefits earned during
the period .............................. $ 2,324 $ 2,592 $ 2,658
Interest cost on projected benefit obligation 1,143 1,349 1,608
Expected return on plan assets .............. (1,046) (1,090) (1,121)
Net amortization and deferral ............... 27 41 21
------- ------- -------
Net pension cost ............................ $ 2,448 $ 2,892 $ 3,166
======= ======= =======
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 1999 and
2000 (in thousands):
1999 2000
-------- --------
Change in benefit obligation
Projected benefit obligation at beginning of year $ 19,536 $ 19,737
Service cost .................................... 2,592 2,658
Interest cost ................................... 1,349 1,608
Actuarial loss (gain) ........................... (228) 2,834
Benefits paid ................................... (3,512) (3,888)
-------- --------
Projected benefit obligation at end of year ..... $ 19,737 $ 22,949
-------- --------
F-17
1999 2000
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year .. $ 13,501 $ 12,759
Actual return on plan assets .................... 1,507 312
Employer contribution ........................... 1,263 3,894
Benefits paid ................................... (3,512) (3,888)
-------- --------
Fair value of plan assets at end of year ........ $ 12,759 $ 13,077
-------- --------
Change in funded status
Funded status ................................... $ 6,978 $ 9,872
Unrecognized net actuarial loss ................. (200) (3,837)
Unrecognized transition liability ............... (64) (60)
Unrecognized prior service cost ................. (162) (151)
-------- --------
Accrued pension cost ............................ $ 6,552 $ 5,824
======== ========
For 1998, 1999 and 2000 actuarial calculation purposes, the weighted
average discount rate was 7.0%, 7.0% and 7.5%, respectively, the expected long
term rate of return was 8.0% and the rate of increase in future compensation
levels was 4.5%.
Note 10 -- Legal Matters
From time to time, the Company has been named as a defendant in certain
lawsuits alleging product liability, patent infringement, or other claims
incurred in the ordinary course of business. Certain of these claims are covered
by various insurance policies, subject to deductible amounts and maximum policy
limits. Ultimate liability with respect to these contingencies, if any, is not
considered to be material to the consolidated financial statements of the
Company.
Note 11 -- Unusual Items
During the fourth quarter of 1999, the Company recognized a benefit
amounting to $1,256,000 related to a previously recorded litigation accrual
which was settled on favorable terms and is included in selling and
administrative expense.
During the second quarter of 2000, the Company announced it would
replace its arthroscopy direct sales force with non-stocking, exclusive sales
agent groups in certain geographic regions of the United States. As a result,
the Company incurred a severance charge of $1,509,000 which is included in
selling and administrative expense.
Note 12 -- Selected Quarterly Financial Data ( Unaudited)
Selected quarterly financial data for 1999 and 2000 are as follows (in
thousands, except per share amounts):
Three Months Ended
------------------
March June September December
----- ---- --------- --------
1999
Net sales .................. $90,869 $90,483 $91,712 $99,553
Gross profit ............... 47,327 47,658 46,676 52,476
Net income ................. 6,323 6,690 5,613 8,533
Earnings per share:
Basic .................. 0.42 0.44 0.37 0.56
Diluted ................ 0.41 0.43 0.36 0.55
F-18
Three Months Ended
------------------
March June September December
----- ---- --------- --------
2000
Net sales................... $101,913 $96,986 $91,922 $101,409
Gross profit................ 53,252 49,659 47,786 53,310
Net income.................. 7,409 3,516 2,729 5,660
Earnings per share:
Basic .......... 0.48 0.23 0.18 0.37
Diluted .......... 0.48 0.23 0.18 0.37
As discussed in Note 2, the Company increased the acquired value of
inventory in connection with the Powered Instrument acquisition which resulted
in a non-recurring adjustment to increase cost of sales during the quarter ended
September 1999 by $1,600,000. As discussed in Note 11, the Company recorded a
nonrecurring benefit of $1,256,000 in the fourth quarter of 1999 and a
nonrecurring charge of $1,509,000 in the second quarter of 2000.
Note 13 - Guarantor Financial Statements
The credit facility and the Notes are guaranteed (the
"Subsidiary Guarantees")by the Company's subsidiaries (the "Subsidiary
Guarantors"). The Subsidiary Guarantees provide that each Subsidiary Guarantor
will fully and unconditionally guarantee the Company's obligations under the
credit facility and the Notes on a joint and several basis. Each Subsidiary
Guarantor is wholly-owned by the Company. 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 1999 and 2000 and
for the years ended December 1998, 1999 and 2000.
F-19
CONMED CORPORATION
CONSOLIDATING BALANCE SHEET
December 1999
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
--------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents ....... $ 598 $ 3,149 $ -- $ 3,747
Accounts receivable, net ........ 35,146 41,267 -- 76,413
Inventories ..................... 19,704 69,977 -- 89,681
Deferred income taxes ........... 1,453 -- -- 1,453
Prepaid expenses and other
current assets .............. 1,955 3,468 -- 5,423
--------- --------- --------- ---------
Total current assets ...... 58,856 117,861 -- 176,717
--------- --------- --------- ---------
Property, plant and equipment, net .. 30,797 27,037 -- 57,834
Goodwill, net ....................... 58,869 164,305 -- 223,174
Other intangible assets, net ........ 8,622 192,836 -- 201,458
Other assets ........................ 340,064 39,759 (376,845) 2,978
--------- --------- --------- ---------
Total assets .................... $ 497,208 $ 541,798 $(376,845) $ 662,161
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 32,875 $ -- $ -- $ 32,875
Accounts payable ................ 2,996 13,522 -- 16,518
Accrued compensation ............ 2,491 7,167 -- 9,658
Income taxes payable ............ 226 -- -- 226
Accrued interest ................ 4,588 -- -- 4,588
Other current liabilities ....... 1,918 1,408 -- 3,326
--------- --------- --------- ---------
Total current liabilities ... 45,094 22,097 -- 67,191
--------- --------- --------- ---------
Long-term debt ...................... 361,794 -- -- 361,794
Deferred income taxes ............... 3,330 -- -- 3,330
Other long-term liabilities ......... 1,705 393,724 (376,844) 18,585
--------- --------- --------- ---------
Total liabilities ............... 411,923 415,821 (376,844) 450,900
--------- --------- --------- ---------
Shareholders' equity:
Preferred stock ................. -- -- -- --
Common stock .................... 153 1 (1) 153
Paid-in capital ................. 127,394 -- -- 127,394
Retained earnings ............... (41,843) 126,363 -- 84,520
Accumulated other comprehensive
loss ........................ -- (387) -- (387)
Less common stock in
treasury, at cost ............. (419) -- -- (419)
--------- --------- --------- ---------
Total shareholders' equity .. 85,285 125,977 (1) 211,261
--------- --------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 497,208 $ 541,798 $(376,845) $ 662,161
========= ========= ========= =========
F-20
CONMED CORPORATION
CONSOLIDATING 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 ........................ 334,677 5,217 (335,613) 4,281
--------- --------- --------- ---------
Total assets .................... $ 499,852 $ 515,332 $(335,613) $ 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 ............... (35,924) 139,758 -- 103,834
Accumulated other comprehensive
loss ........................ -- (1,027) -- (1,027)
Less common stock in
treasury, at cost .............. (419) -- -- (419)
--------- --------- --------- ---------
Total shareholders' equity .. 91,872 138,732 (1) 230,603
--------- --------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 499,852 $ 515,332 $(335,613) $ 679,571
========= ========= ========= =========
F-21
CONMED CORPORATION
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 1998
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Total
--------- --------- ---------
Net sales ............................. $ 96,951 $ 239,491 $ 336,442
--------- --------- ---------
Cost of sales ......................... 54,296 115,303 169,599
Selling and administrative expense .... 33,367 60,280 93,647
Research and development expense ...... 1,802 10,227 12,029
--------- --------- ---------
89,465 185,810 275,275
--------- --------- ---------
Income from operations ................ 7,486 53,681 61,167
Interest expense, net ................. -- 30,891 30,891
--------- --------- ---------
Income before income taxes and
extraordinary item .................. 7,486 22,790 30,276
Provision for income taxes ............ 2,695 8,204 10,899
--------- --------- ---------
Income before extraordinary item ...... 4,791 14,586 19,377
Extraordinary item, net of income taxes -- (1,569) (1,569)
--------- --------- ---------
Net income ............................ $ 4,791 $ 13,017 $ 17,808
========= ========= =========
F-22
CONMED CORPORATION
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 1999
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Total
--------- --------- ---------
Net sales ............................... $ 82,309 $290,308 $372,617
-------- -------- --------
Cost of sales ........................... 47,178 131,302 178,480
Selling and administrative expense ...... 25,035 82,198 107,233
Research and development expense ........ 1,626 10,482 12,108
-------- -------- --------
73,839 223,982 297,821
-------- -------- --------
Income from operations .................. 8,470 66,326 74,796
Interest expense, net ................... -- 32,360 32,360
-------- -------- --------
Income before income taxes .............. 8,470 33,966 42,436
Provision for income taxes .............. 3,049 12,228 15,277
-------- -------- --------
Net income .............................. $ 5,421 $ 21,738 $ 27,159
======== ======== ========
F-23
CONMED CORPORATION
CONSOLIDATING STATEMENT OF INCOME
Year Ended December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Total
--------- --------- ---------
Net sales ............................... $ 72,462 $319,768 $392,230
-------- -------- --------
Cost of sales ........................... 42,461 145,762 188,223
Selling and administrative expense ...... 18,845 105,828 124,673
Research and development expense ........ 1,907 12,963 14,870
-------- -------- --------
63,213 264,553 327,766
-------- -------- --------
Income from operations .................. 9,249 55,215 64,464
Interest expense, net ................... -- 34,286 34,286
-------- -------- --------
Income before income taxes .............. 9,249 20,929 30,178
Provision for income taxes .............. 3,330 7,534 10,864
-------- -------- --------
Net income .............................. $ 5,919 $ 13,395 $ 19,314
======== ======== ========
F-24
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 1998
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Total
--------- --------- ---------
Net cash flows from operating activities ........ $ 10,639 $ 10,288 $ 20,927
--------- --------- ---------
Cash flows from investing:
Payments related to business acquisitions ... (1,700) (30,209) (31,909)
Purchases of property, plant and
equipment ............................... (9,702) (3,222) (12,924)
--------- --------- ---------
Net cash used by investing activities (11,402) (33,431) (44,833)
--------- --------- ---------
Cash flows from financing:
Distributions to subsidiaries ............... (25,856) 25,856 --
Proceeds of long-term debt .................. 130,000 -- 130,000
Borrowings under revolving credit facility .. 23,000 -- 23,000
Proceeds from issuance of common stock ...... 1,088 -- 1,088
Payments related to issuance
Of long-term debt ....................... (4,635) -- (4,635)
Payments on long-term debt .................. (133,128) -- (133,128)
--------- --------- ---------
Net cash provided (used)by financing
activities .................... (9,531) 25,856 16,325
--------- --------- ---------
Effect of exchange rate changes on cash
and cash equivalents .......................... -- 35 35
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ............................... (10,294) 2,748 (7,546)
Cash and cash equivalents at beginning of year .. 13,452 -- 13,452
--------- --------- ---------
Cash and cash equivalents at end of year ........ $ 3,158 $ 2,748 $ 5,906
========= ========= =========
F-25
CONMED CORPORATION
CONSOLIDATING STATMENT OF CASH FLOWS
Year Ended December 1999
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Total
--------- --------- ---------
Net cash flows from operating activities ........ $ 11,784 $ 25,657 $ 37,441
-------- -------- --------
Cash flows from investing activities:
Payments related to business acquisitions ... -- (40,585) (40,585)
Purchases of property, plant and
equipment ............................... (4,801) (4,551) (9,352)
-------- -------- --------
Net cash used by investing activities (4,801) (45,136) (49,937)
-------- -------- --------
Cash flows from financing:
Proceeds of long-term debt .................. 40,900 -- 40,900
Distributions to subsidiaries ............... (21,885) 21,885 --
Repayments under
revolving credit facility ................. (8,000) -- (8,000)
Proceeds from issuance of common stock ...... 1,612 -- 1,612
Payments related to issuance
of long-term debt ......................... (661) -- (661)
Payments on long-term debt .................. (23,103) -- (23,103)
-------- -------- --------
Net cash provided (used)by financing
activities .................... (11,137) 21,885 10,748
-------- -------- --------
Effect of exchange rate changes on cash
And cash equivalents .......................... -- (411) (411)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ............................... (4,154) 1,995 (2,159)
Cash and cash equivalents at beginning of year .. 4,752 1,154 5,906
-------- -------- --------
Cash and cash equivalents at end of year ........ $ 598 $ 3,149 $ 3,747
======== ======== ========
F-26
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Total
--------- --------- ---------
Net cash flows from operating activities ........ $ 18,238 $ 17,712 $ 35,950
-------- -------- --------
Cash flows from investing activities:
Payments related to business acquisitions ... (6,042) -- (6,042)
Purchases of property, plant and
equipment ............................... (10,940) (3,110) (14,050)
-------- -------- --------
Net cash used by investing activities (16,982) (3,110) (20,092)
-------- -------- --------
Cash flows from financing:
Distributions from subsidiaries ............. 13,618 (13,618) --
Borrowings under revolving credit facility .. 17,000 -- 17,000
Proceeds from issuance of common stock ...... 449 -- 449
Payments on long-term debt .................. (32,921) -- (32,921)
-------- -------- --------
Net cash provided (used)by financing
activities .................... (1,854) (13,618) (15,472)
-------- -------- --------
Effect of exchange rate changes on cash
And cash equivalents .......................... -- (663) (663)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ............................... (598) 321 (277)
Cash and cash equivalents at beginning of year .. 598 3,149 3,747
-------- -------- --------
Cash and cash equivalents at end of year ........ $ - $ 3,470 $ 3,470
======== ======== ========
F-27
SCHEDULE VIII--Valuation and Qualifying Accounts
(in thousands)
Column C
Additions
---------------------------
Column B (1) (2)
Balance at Charged to Charged to Column E
---------- ---------- ---------- --------
Column A Beginning of Costs and Other Column D Balance at End
Description Period Expenses Accounts Deductions of Period
----------- ------ -------- -------- ---------- ---------
2000
- ----
Allowance for bad debts............. $ 1,434 $ 246 $ (201) $ 1,479
Inventory reserves.................. $ 7,175 $ 520 $ 100 $ (2,574) $ 5,221
Deferred tax asset
Valuation allowance................. $ 4,258 $ (424) $ 3,834
1999
- ----
Allowance for bad debts............. $ 2,213 $ 263 $ (1,042) $ 1,434
Inventory reserves.................. $ 6,618 $ 220 $ 1,500 $ (1,163) $ 7,175
Deferred tax asset
Valuation allowance................. $ 4,681 $ (423) $ 4,258
1998
- ----
Allowance for bad debts............. $ 2,708 $ 459 $ (954) $ 2,213
Inventory reserves.................. $ 7,411 $ 918 $ (61) $ (1,650) $ 6,618
Deferred tax asset
Valuation allowance................. $ 5,105 $ (424) $ 4,681
F-28
EMPLOYMENT AGREEMENT
May 2, 2000
Mr. Joseph J. Corasanti
310 Broad Street
Utica, New York 13501
Dear Mr. Corasanti:
In consideration of the mutual promises herein contained, CONMED
Corporation, a New York corporation (hereinafter the "Company"), and you hereby
agree that you will be employed by the Company on the following terms and
conditions:
1. Employment.
----------
The Company hereby agrees that you will be employed to serve as the
President and Chief Operating Officer of the Company during the term of
employment set forth in Section 2 of this Agreement. You hereby agree to serve
as President and Chief Operating Officer of the Company during such term of
employment.
2. Term of Employment.
------------------
Subject to the provisions for early termination pursuant to Section 5
of the Agreement, your term of employment under this Agreement shall be for a
period beginning January 1, 2000 and ending December 31, 2004.
3. Duties During Term of Employment.
--------------------------------
During your term of employment under this Agreement, you shall devote
your full business time and attention and all reasonable efforts to the affairs
of the Company and its subsidiaries and affiliates and shall perform such
executive and administrative duties for the Company and subsidiaries and
affiliates as you may be called upon to perform, from time to time, by the Board
of Directors of the Company (the "Board").
4. Compensation and Benefits.
-------------------------
(a) Base Annual Salary.
------------------
The Company shall pay to you during your term of employment under this
Agreement a base annual salary at the rate of at least $200,000 per year,
payable in equal weekly installments during each year of your term of
employment. It is understood that the Board of Directors of the Company may in
its discretion review from time to time your base annual salary and in its
discretion may from time to time increase your base annual salary and/or grant
bonuses if it determines that circumstances justify any such increase and/or
bonuses.
(b) Deferred Compensation.
---------------------
In addition to your base annual salary, the Company shall establish a
deferred compensation account on your behalf, which shall be credited with the
amount of $100,000 on December 31, 2000 and on each subsequent December 31
during the term of this Agreement. This account shall also be credited on
December 31, 2001 and each December 31 thereafter with an amount equal to
interest on the amount outstanding in the account on the day prior to such
December 31 at the rate of 10% per annum. Commencing within 60 days after
retirement or termination of employment, the Company shall pay you, for 120
months, an amount equal to the amount then outstanding in the deferred
compensation account divided by the number of payments remaining to be made. The
account shall be reduced by the amount of any payments and shall continue to be
credited with interest annually on the amount outstanding in the account. Such
payments may be accelerated at the option of the Company; you may elect to
receive payments over a period of less than 120 months (including a lump sum),
provided that your election is made prior to the beginning of the year before
the year of your retirement or termination of employment. In the event of your
death the Company shall make payments to the beneficiary or beneficiaries
designated by you in writing to the Company or to your estate in the absence of
such designation or if no designated beneficiary should survive you. Such
payments to your beneficiary (or beneficiaries) or estate, as the case may be,
shall be made in the same manner as specified above, except that such payments
shall commence within one month of your death. In the event of the death of the
last designated beneficiary prior to the completion of all payments, the balance
credited to the deferred compensation account shall be made to the estate of the
last surviving beneficiary. You understand and agree, and the Company agrees,
that the deferred compensation account is solely a bookkeeping account, does not
represent a segregated amount of money for your benefit, and that you shall not
have by virtue of this Agreement a security interest in the foregoing account or
in any assets or funds of the Company.
(c) Benefit Plans.
-------------
You also shall be entitled to participate in all life and health
insurance plans, pension plans and other plans, benefits or bonus arrangements
provided by the Company from time to time during your term of employment under
this Agreement and made available by the Company to its executives generally, if
and to the extent that you are eligible to participate in accordance with the
provisions of any such plan or for such benefits. Specifically, you shall be
entitled to participate in the Company's stock option plans and shall continue
to be entitled to participate in the Company's pension and disability plans and
be provided with split-dollar life insurance coverage and reimbursement of club
memberships and automobile expenses as under present practices, with initial
coverage of $1.0 million. In no event shall the benefits provided you be less,
in the aggregate, than those provided you under present plans and practices.
Life and health insurance benefits and split-dollar life insurance coverage
shall continue for your and your wife during the terms of your lives. In
addition, the Company shall reimburse you for your reasonable personal legal and
accounting expenses related to your estate and tax planning and to preparing and
filing your tax returns.
-2-
5. Early Termination of the Term of Employment.
-------------------------------------------
(a) Early Termination Other Than for Just Cause.
-------------------------------------------
If at any time during your term of employment under this Agreement, the
Board of Directors of the Company shall fail to reelect you as the President and
Chief Operating Officer of the Company, shall remove you from such office, shall
substantially reduce your duties and responsibilities or shall terminate your
employment under this Agreement, in each case other than for "just cause" as
such term is defined in paragraph (c) of this Section 5, such event shall be
deemed an early termination other than for just cause. After an early
termination other than for just cause, you shall have no obligations under this
Agreement (other than your obligations under Sections 8 and 9 of this
Agreement), you shall have no obligation to seek other employment in mitigation
of damages in respect of any period following the date of such early termination
and you shall be entitled to receive from the Company an immediate lump sum
payment equal to the result of multiplying (i) the greater of (A) three or (B)
the number of years and fractions thereof (rounded to the nearest month) then
remaining in the term of employment by (ii) the sum of (A) your base annual
salary to which you are then entitled and (B) an amount equal to the average of
the bonuses, deferred compensation and incentive compensation earned by you in
each of the Company's three fiscal years prior to the date of your early
termination. If such lump sum payment is not made in full within ten days of
such early termination other than for just cause, the Company shall also pay you
interest on the amount of the remaining payment at the prime rate of The Chase
Manhattan Bank, in effect from time to time.
In addition, in the event of your early termination other than for just
cause, you shall be entitled to continued coverage under the benefit plans of
the Company specified in paragraph (c) of Section 4 of this Agreement as if such
early termination had not occurred, for a period equal to the greater of (x)
three years from the date of such early termination or (y) the remainder of the
term of employment. You shall also be entitled to receive payment of the
deferred compensation account as specified in paragraph (b) of Section 4 of this
Agreement, and you or your beneficiary or your estate shall be entitled to
receive from the Company all payments and benefits required pursuant to the
provisions of Section 6 of this Agreement, as if such early termination had not
occurred.
(b) Early Termination for Just Cause.
--------------------------------
If at any time during your term of employment under this Agreement, the
Board of Directors of the Company shall fail to reelect you as the Chief
Operating Officer of the Company, shall remove you from such office, shall
substantially reduce your duties and responsibilities or shall terminate your
employment under this Agreement, in the case for "just cause" as such term is
defined in paragraph (c) of this Section 5, subject to the provisions of Section
6 for additional payments and benefits in the event of your death or permanent
disability (as such term is defined in Section 6), the Company shall only be
obligated to pay you (i) your then base salary and to provide continued coverage
under the benefit plans of the Company specified in paragraph (c) of Section 4
of this Agreement through the end of the month during which such early
termination occurs, and (ii) the deferred compensation account as specified in
paragraph (b) of Section 4 of this Agreement, plus an additional amount of
deferred compensation equal to a pro rata amount of such deferred compensation
under paragraph (b) of Section 4 for the year of your termination.
-3-
(c) Definition of Just Cause.
------------------------
"Just cause" under this Agreement shall mean a breach by you of your
obligations under this Agreement, willful misconduct, dishonesty, conviction of
a crime (other than traffic or other similar violations or minor misdemeanors),
intoxication on the job or excessive absenteeism not related to illness.
6. Death or Disability.
-------------------
If before the expiration date of your term of employment under this
Agreement you shall die, or become permanently disabled, the Company shall be
obligated to pay (in the case of death) to your beneficiary in writing or to
your estate in the absence or lapse of such designation, or (in the case of such
disability) to you or your representative, 100% of your annual base salary to
which you are then entitled to the end of such term of employment. In addition,
in the event of such disability, you shall continue to fully participate in all
benefit plans of the Company specified in paragraph (c) of Section 4 of this
Agreement to the expiration date of such term of employment, and in the case of
life and health insurance benefits and split-dollar life insurance coverage, the
benefits will continue for you and your wife during the terms of your lives. For
purposes of this Agreement, "permanent disability" means inability to perform
the services required under this Agreement due to physical or mental disability
which continues for 180 consecutive days. Evidence of such disability shall be
certified by a physician acceptable to both the Company and you.
7. Non-competition.
---------------
It is agreed that during your term of employment under this Agreement
and for a period of two years thereafter you will not, without the prior written
approval of the Board of Directors of the Company, become an officer, employee,
agent, limited or general partner, director, member or shareholder of any
business enterprise in competition with the Company or any subsidiary of the
Company, as the business of the Company or any such subsidiary may be
constituted during such term of employment, or at the expiration of such term or
period. Notwithstanding the preceding sentence, you shall not be prohibited from
owning less than five (5%) percent of the outstanding equity of any publicly
traded business enterprise.
8. Non-disclosure.
--------------
You shall not, at any time during or following your term of employment
under this Agreement, disclose or use, except in the course of your employment
or consultation arrangements with the Company in the pursuit of the business or
interests of the Company or any of its subsidiaries or affiliates, any
confidential information or proprietary data of the Company or any of its
subsidiaries or affiliates, whether such information or proprietary data is in
your memory or memorialized in writing or other physical terms.
9. Conflicts.
---------
Any paragraph, sentence, phrase or other provision of this Agreement
which is in conflict with any applicable statute, rule or other law shall be
deemed, if possible, to be modified or altered to conform thereto or, if not
possible, to be omitted herefrom. The invalidity of any portion of this
Agreement shall not affect the force and effect of the remaining valid portions
hereof. Section and paragraph headings are included in this Agreement for
convenience only and are not intended to affect in any way the meaning or
interpretation of this Agreement.
-4-
10. Beneficiaries.
-------------
Wherever this Agreement provides for the written designation of a
beneficiary or beneficiaries by yourself, you shall have the right to revoke
such designation and to redesignate a beneficiary or beneficiaries by written
notice to the Company to such effect.
11. Governing Law.
-------------
This Agreement is governed by and is to be construed and enforced in
accordance with the laws of the State of New York.
12. Miscellaneous.
-------------
This Agreement constitutes the entire understanding between you and the
Company relating to your employment with the Company and supersedes and cancels
all prior written and oral understandings and agreements with respect to such
matters, other than with respect to the deferred compensation account under
Section 4(b). This Agreement shall be binding upon, and shall inure to the
benefit of you and the Company, your heirs, executors and administrators and the
Company's successors.
If the foregoing correctly sets forth the understanding between you and
the Company, please execute and return the enclosed copy of this letter.
CONMED CORPORATION
By: /s/Daniel S. Jonas, Esq.
------------------------
Daniel S. Jonas, Esq.
Vice President - Legal Affairs
General Counsel
Agreed and accepted as of the date first above written:
/s/Joseph J. Corasanti
- ---------------------
Joseph J. Corasanti
EXHIBIT 11
CONMED Corporation
Computation of Weighted Average Number of Shares of Common Stock
Year Ended December,
(in thousands)
1998 1999 2000
------ ------ ------
Shares outstanding at beginning of period
(net of 25,000 shares held in treasury) .......... 15,037 15,158 15,279
Weighted average shares issued ...................... 48 83 32
------ ------ ------
Shares used in the calculation of basic EPS
(weighted average shares outstanding) ........... 15,085 15,241 15,311
Effect of dilutive potential securities ............. 236 189 203
------ ------ ------
Shares used in the calculation of diluted EPS ....... 15,321 15,430 15,514
====== ====== ======
EXHIBIT 12
CONMED Corporation
Statement Showing Computations of Ratio of Earnings to Fixed Charges
1996 1997 1998 1999 2000
------- ------- -------- ------- -------
Income (loss) before income
taxes and extraordinary
item................................ $25,447 $(10,705) $ 30,276 $42,436 $30,178
Interest expense........................ 217 - 30,891 32,360 34,286
Portion of rentals
representative of interest
factor.............................. 108 147 875 978 1,114
------- ------- -------- ------- -------
Total earnings available for
fixed charges....................... $25,772 $(10,558) $ 62,042 $75,774 $65,578
======= ======== ======== ======= =======
Interest expense........................ $ 217 $ - $ 30,891 $32,360 $34,286
Portion of rentals
representative of interest
factor.............................. 108 147 875 978 1,114
------- ------- -------- ------- -------
Total fixed charges..................... $ 325 $ 147 $ 31,766 $33,338 $35,400
======= ======= ======== ======= =======
Ratio of earnings to
fixed charges....................... 79.30 (A) 1.95 2.27 1.85
======= ======= ======== ======= =======
(A) As a result of the loss incurred in 1997, the Company was unable to fully
cover the indicated fixed charges.
EXHIBIT 21
CONMED Corporation
Subsidiaries of the Registrant
Name State or Country of Incorporation
---- ---------------------------------
Aspen Laboratories, Inc. Colorado
CONMED Andover Medical, Inc. New York
Envision Medical Corporation California
Linvatec Corporation Florida
Linvatec Australia Pty. Ltd Australia
Linvatec Belgium S.A. Belgium
Linvatec Canada ULC Canada
Linvatec Deutschland GmbH Germany
Linvatec Europe SPRL Belgium
Linvatec France S.A.R.L. France
Linvatec Korea Ltd. Korea
Linvatec U.K. Ltd. United Kingdom
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-23514, 33-40455, 33-49422, 33-49526, 33-58119,
33-87746, 333-48693, 333-74497 and 333-78987) of CONMED Corporation of our
report dated February 7, 2001 relating to the financial statements and financial
statement schedule, which appears on page F-1 in this Form 10-K.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Syracuse, New York
March 29, 2001