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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, 2002 Commission file number 0-16093
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 French Road, Utica, New York 13502
(Address of principal executive offices) (Zip Code)
(315) 797-8375
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(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. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 126-2).
Yes |X| No |_|
The aggregate market value of the shares of the voting stock held by
non-affiliates of the Registrant was approximately $459,609,804 based upon the
closing price of the Company's common stock, which was $15.90 on March 17, 2003.
The number of shares of the Registrant's $0.01 par value common stock
outstanding as of March 17, 2003 was 28,906,277.
DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, scheduled to be mailed on or
about April 15, 2003 for the annual meeting of stockholders to be held May 20,
2003, 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 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 40
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
Part III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14 Controls and Procedures 42
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 43
Signatures 44
Certifications 45
Exhibit Index 47
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CONMED CORPORATION
Item 1. Business
Forward Looking Statements
This Annual Report on Form 10-K for the Fiscal Year Ended December 31,
2002 ("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 unless the context otherwise requires) that are based on the
beliefs of our management, as well as assumptions made by and information
currently available to our management.
When used in this Form 10-K, the words "estimate," "project," "believe,"
"anticipate," "intend," "expect" and similar expressions are intended to
identify forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors, including those identified under the
caption "Item 1: Business -- Risk Factors" and elsewhere in this Form 10-K that
may cause our actual results, performance or achievements, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
o general economic and business conditions;
o cyclical customer purchasing patterns due to budgetary and other
constraints;
o changes in customer preferences;
o competition;
o changes in technology;
o the introduction and acceptance of new products, including our
PowerPro(R) battery-powered instrument product line;
o the success of our distribution arrangement with DePuy Orthopaedics;
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 Corporation is a medical technology company specializing in
instruments, implants and video equipment for arthroscopic sports medicine and
powered surgical instruments, such as drills and saws, for orthopedic, ENT,
neuro-surgery and other surgical specialties. We are a leading developer,
manufacturer and supplier of RF electrosurgery systems used routinely to cut and
cauterize tissue in nearly all types of surgical procedures worldwide, endoscopy
products such as trocars, clip appliers, scissors and surgical staplers and a
full line of ECG electrodes for heart monitoring and other patient care
products. We also offer integrated operating room systems and intensive care
unit service managers. 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. Since 1998, we have completed nine strategic business
acquisitions. The completed acquisitions, together with internal growth, have
resulted in a compound annual growth rate in net sales of 7.5% between 1998 and
2002.
Industry
The growth in the markets for our products is primarily driven by:
o Favorable Demographics. The number of surgical procedures performed
is increasing. This growth in surgical procedures reflects
demographic trends, such as the aging of the population, and
technological advancements, which result in safer and less invasive
surgical procedures. Additionally, as people are living longer, more
active lives, they are engaging in contact sports and activities
such as running, skiing, rollerblading, golf and tennis which result
in injuries with greater frequency and at an earlier age than ever
before. Sales of our surgical products represented over 85% of our
total 2002 sales. See "--Our Products."
o Continued Pressure to Reduce Health Care Costs. In response to
rising health care costs, managed care companies and other
third-party payers have placed pressures on health care providers to
reduce costs. As a result, health care providers have focused on the
high cost areas such as surgery. To reduce costs, health care
providers use minimally invasive techniques, which generally reduce
patient trauma, recovery time and ultimately the length of
hospitalization. Many of our products are designed for use in
minimally invasive surgical procedures. See "--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 75% of our sales are derived from single-use
disposable products.
In the United States, the pressure on health care providers to
contain costs has altered their purchasing patterns for general
surgical
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instruments and disposable medical products. Many health care
providers have entered into comprehensive purchasing contracts with
fewer suppliers, which offer a broader array of products at lower
prices. In addition, many health care providers have aligned
themselves with Group Purchasing Organizations ("GPOs") or
Integrated Health Networks ("IHNs"), which aggregate the purchasing
volume of their members in order to negotiate competitive pricing
with suppliers, including manufacturers of surgical products. We
believe that these trends will favor entities that offer a broad
product portfolio. See "--Business Strategy" below.
o Increased Global Medical Spending. We believe that foreign markets
offer growth opportunities for our products. We currently distribute
our products through our own sales subsidiaries or through local
dealers in over 100 foreign countries. International sales
represented approximately 29% of total sales in 2002.
Competitive Strengths
We believe that we have a top two or three market share position in each
of our five key product areas and have established our position as a market
leader by capitalizing on the following competitive strengths:
o Strong Brand Recognition. We are a leading provider of arthroscopic
surgery devices, electrosurgical systems, powered surgical
instruments and ECG electrodes. Our products are sold under leading
brand names, including CONMED(R), Linvatec(R) and Hall Surgical(R).
These brand names are well recognized by physicians for quality and
service. We believe that brand recognition helps drive demand for
our products by enabling us to build upon the reputation for quality
and service associated with these brands and gain faster acceptance
when introducing new branded products.
o Breadth of Product Offering. The breadth of our product lines in our
key product areas enables us to meet a wide range of customer
requirements and preferences. In three of our five key product
areas, we are one of only two providers that offers a full line of
products. For example, we offer a complete set of the arthroscopy
products a surgeon requires for most arthroscopic procedures,
including instrument and repair sets, implants, shaver consoles and
handpieces, video systems and related disposables. This in turn has
enhanced our ability to market our products to surgeons, hospitals,
surgery centers, GPOs, IHNs and other customers, particularly as
institutions seek to reduce costs and to minimize the number of
suppliers.
o Successful Integration of Acquisitions. Since 1998, we have
completed nine acquisitions. These acquisitions have enabled us to
broaden our product categories, expand our sales and distribution
capabilities and increase our international presence. Our management
team, which averages more than 15 years of experience in the health
care industry, has demonstrated a historical ability to identify
complementary acquisitions and to integrate acquired companies into
our operations.
o Extensive Marketing and Distribution Infrastructure. We market our
products domestically through our sales force consisting of
approximately 210 employee sales representatives and an additional
90 sales professionals employed by eight non-stocking sales agent
groups,
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seven of which are exclusive. All of our sales professionals are
highly trained and educated in the applications or procedures for
the products they sell. They call directly on surgeons, hospital
departments, outpatient surgery centers and physician offices.
Additionally, we have an international presence through sales
subsidiaries and branches located in key international markets. We
sell direct to hospital customers in these markets with an
employee-based international sales force of approximately 40 sales
representatives. We also maintain distributor relationships
domestically and in numerous countries worldwide. See "--Marketing."
o Vertically Integrated Manufacturing. We manufacture most of our
products and components. Our vertically integrated manufacturing
process has allowed us to provide quality products, to react quickly
to changes in demand and to generate manufacturing efficiencies,
including purchasing raw materials used in a variety of disposable
products in bulk. We believe that these manufacturing capabilities
allow us to contain costs, control quality and maintain security of
proprietary processes. We continually evaluate our manufacturing
processes with the objective of increasing automation, streamlining
production and enhancing efficiency in order to achieve cost
savings, while seeking to improve quality.
o Research and Development Expertise. Our research and development
effort is focused on introducing new products, enhancing existing
products and developing new technologies. During the last two years,
we have introduced several new products and product enhancements.
Our reputation as an innovator is exemplified by our
"first-to-market" product introductions, which include the
Envision(TM) Autoclavable Three Chip Camera Head, Advantage(TM)
drive system, the Trident(TM) resection ablator, the SureCharge(TM)
battery sterilization system and the 2.9 millimeter arthroscopy
scope. Research and development expenditures were $16.1 million in
2002.
Business Strategy
Our business strategy is to continue to strengthen our position as a
market leader in our key product areas. The elements of our strategy include:
o Introduce New Products and Product Enhancements. We will continue to
pursue organic growth by developing new products and enhancing
existing products to respond to customer needs and preferences. We
are continually seeking to develop new technologies to improve
durability, performance and usability of existing products. In
addition to our research and development, we receive new ideas for
products and technologies, especially in procedure-specific areas,
from surgeons, inventors and operating room personnel.
o Pursue Strategic Acquisitions. We believe that strategic
acquisitions represent a cost-effective means of broadening our
product line. We have historically targeted companies with proven
technologies and established brand names that provide potential
sales, marketing and manufacturing synergies. Since 1998, we have
completed nine acquisitions, expanding our arthroscopy, powered
surgical instruments
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and endoscopy product lines and most recently expanding into
integrated operating room systems and equipment.
o Realize Manufacturing and Operating Efficiencies. We will continue
to review opportunities for consolidating product lines and
streamlining production. We believe our vertically integrated
manufacturing processes can produce further opportunities to reduce
overhead and to increase operating efficiencies and capacity
utilization.
o Maintain Strong International Sales Growth. We believe there are
significant sales opportunities for our surgical products outside
the United States. We intend to maintain our international sales
growth and increase our penetration into international markets by
utilizing our relationships with foreign surgeons, hospitals and
third-party payers, as well as foreign distributors. In 2002, our
sales outside the United States grew by 8% and represented 29% of
our 2002 sales.
Our Products
The following table sets forth the percentage of net sales for each
category of our products for 2000, 2001 and 2002:
Year Ended December 31,
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2000 2001 2002
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Arthroscopy ....................... 36% 36% 36%
Powered surgical instruments ...... 29 27 25
Electrosurgery .................... 16 16 15
Patient Care ...................... 17 16 16
Endoscopy ......................... 2 5 8
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Total ........................... 100% 100% 100%
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Net sales (in thousands) .......... $395,873 $428,722 $453,062
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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 arthroscopes 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 shoulders and
smaller joints, such as the wrist and ankle.
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 bioabsorbable
screws, ablators, "push-in" and "screw-in" suture anchors, resection shavers and
cartilage repair implants.
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The majority of arthroscopic procedures are performed to repair injuries
that have occurred in the joint areas of the body. Many of these injuries are
the result of sports related events or other traumas. This explains why
arthroscopy is sometimes referred to as "sports medicine."
Arthroscopy
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Product Description Brand Name
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Ablators and Shaver Electrosurgical ablators and Advantage(TM)
Ablators resection ablators to resect ESA(TM)
and remove soft tissue and Sterling(R)
bone; used in knee, shoulder UltrAblator(TM)
and small joint surgery. Lightwave(TM)
Trident(TM)
Knee Reconstructive Products used in cruciate Paramax(R)
Systems reconstructive surgery; Pinn-ACL(R)
includes instrumentation, GraFix(TM)
screws, pins and ligament
harvesting and preparation
devices.
Soft Tissue Repair Instrument systems designed to Spectrum(R)
Systems attach specific torn or Inteq(R)
damaged soft tissue to bone or Shuttle Relay(TM)
other soft tissue in the knee, Blitz(R)
shoulder and wrist; includes
instrumentation, guides, hooks
and suture devices.
Fluid Management Disposable tubing sets, Apex(R)
Systems disposable and reusable inflow Quick-Flow(R)
devices, pumps and Quick-Connect(R)
suction/waste management
systems for use in
arthroscopic and general
surgeries.
Imaging Surgical video systems for Apex(R)
endoscopic procedures; 8180 Series
includes autoclavable single Envision(TM)
and three-chip camera heads Autoclavable
and consoles, endoscopes, Three Chip
light sources, monitors, VCRs Camera Head
and printers.
Implants Products including BioScrew(R)
bioabsorbable and metal BioStinger(R)
interference screws and suture BioAnchor(R)
anchors for attaching soft BioTwist(R)
tissue to bone in the knee, Ultrafix(R)
shoulder and wrist as well as Revo(R)
miniscal repair. Super Revo(R)
Other Instruments Forceps, graspers, punches, Shutt(R)
and Accessories probes, sterilization cases Concept(R)
and other general instruments TractionTower(R)
for arthroscopic procedures.
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Powered Surgical Instruments
Powered surgical instruments are used to perform orthopedic, arthroscopic
and other surgical procedures, such as cutting, drilling or reaming and are
driven by electric, battery or pneumatic power. Each instrument consists of one
or more handpieces and related accessories as well as disposable and limited
reuse items (e.g., burs, saw blades, drills and reamers). Powered instruments
are generally categorized as either small bone, large bone or specialty powered
instruments. Specialty powered instruments include surgical applications such as
spine, neurosurgery, otolaryngology (ENT), oral/maxillofacial surgery, and
cardiothoracic surgery.
Our line of powered instruments is sold principally under the Hall(R)
Surgical brand name, for use in large and small bone orthopedic, arthroscopic,
oral/maxillofacial, podiatric, plastic, otolaryngologic, 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 large bone, small bone, arthroscopic, neurosurgical, spine and
otolaryngological instruments that can be easily adapted and modified for new
procedures.
Our powered instruments line also includes our recently introduced
PowerPro(R) Battery System, which is a full function orthopedic power system
specifically designed to meet the requirements of most orthopedic applications.
The PowerPro(R) Battery System has a SureCharge(TM) option that allows the user
to sterilize the battery before it is charged. This ensures that the battery
will be fully charged when delivered to the operating room, unlike other battery
systems currently available on the market. The PowerPro(R) uses a process we
invented for maintaining sterility during the charging process, thus avoiding
the loss of battery charge during sterilization, which frequently results in
competing battery systems during sterilization.
Powered Surgical Instruments
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Product Description Brand Name
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Large Bone Powered saws, drills and Hall(R) Surgical
related disposable accessories MaxiDriver(TM)
for use primarily in total VersiPower(R) Plus
knee and hip joint Series 4(R)
replacements and trauma PowerPro(R)
surgical procedures. Advantage(TM)
SureCharge(TM)
Small Bone Powered saws, drills and Hall(R)Surgical
related disposable accessories E9000(R)
for small bones and joint MiniDriver(TM)
surgical procedures. MicroChoice(R)
Micro 100(TM)
Advantage(TM)
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Powered Surgical Instruments
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Product Description Brand Name
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Otolaryngology Specialty powered saws, drills Hall(R)Surgical
Neurosurgery and related disposable E9000(R)
Spine accessories for use in UltraPower(R)
neurosurgery, spine, and Hall Osteon(R)
otolaryngologic procedures. Hall Ototome(R)
Cardiothoracic Powered sternum saws, drills, Hall(R) Surgical
Oral/maxillofacial and related disposable E9000(R)
accessories for use by UltraPower(R)
cardiothoracic and Micro 100(TM)
oral/maxillofacial surgeons. VersiPower(R) Plus
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. Radio frequency
("RF") is the form of high frequency electric current that is used in
electrosurgery. An electrosurgical system consists of a generator, an active
electrode in the form of a cautery pencil or other instrument which the surgeon
uses to apply the current from the generator to the target tissue and a ground
pad to safely return the current to the generator. Electrosurgery is routinely
used in most forms of surgery, including general, dermatologic, thoracic,
orthopedic, urologic, neurosurgical, gynecological, laparoscopic, arthroscopic
and other endoscopic procedures.
Our electrosurgical products include electrosurgical pencils and
blades, ground pads, generators, the argon-beam coagulation system (ABC(R)), and
related disposable products. ABC(R) technology is a special method of
electrosurgery, which allows a faster and more complete coagulation of many
tissues as compared to conventional electrosurgery. Unlike conventional
electrosurgery, the electrical current travels in a beam of ionized argon gas,
allowing the current to be dispersed onto the bleeding tissue without the
instrument touching the tissue. Clinicians have reported notable benefits of
ABC(R) over traditional electrosurgical coagulation in certain clinical
situations, including open-heart; liver, spleen and trauma surgery.
Electrosurgery
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Product Description Brand Name
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Pencils Disposable and reusable Hand-trol(R)
instruments designed to Gold Line(R)
deliver high-frequency Clear Vac(R)
electric current to cut and/or
coagulate tissue.
Ground Pads Disposable ground pads to Macrolyte(R)
safely return the current to Bio-gard(R)
the generator; available in SureFit(R)
adult, pediatric and infant
sizes.
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Electrosurgery
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Product Description Brand Name
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Blades Surgical blades and accessory Ultra Clean(TM)
electrodes that use a
proprietary coating to
eliminate tissue buildup on
the blade during surgery.
Generators Monopolar and bipolar EXCALIBUR Plus PC(R)
generators for surgical SABRE(R)
procedures performed in a System 5000(R)
hospital, physician's office System 2500(R)
or clinic setting. Hyfrecator(R) 2000
Argon Beam Specialized electrosurgical ABC(R)
Coagulation generators, disposable hand Beamer Plus(R)
Systems pieces and ground pads for System 7500(R)
enhanced non-contact ABC Flex(R)
coagulation of tissue.
Patient Care
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.
Our patient care product lines also include disposable surgical suction
instruments and connecting tubing. The majority of our sales in this category
are derived from the sale of ECG electrodes and surgical suction instruments and
tubing. Although wound management and intravenous therapy product sales are
comparatively small, the application of these products in the operating room
complements our surgical product offerings.
Patient Care Products
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Product Description Brand Name
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ECG Monitoring Line of disposable electrodes, CONMED(R)
monitoring cables, lead wire Ultratrace(R)
products and accessories Cleartrace(R)
designed to transmit ECG
signals from the heart to an
ECG monitor or recorder.
Wound Care Disposable transparent wound ClearSite(R)
dressings comprising Hydrogauze(R)
proprietary hydrogel; able to SportPatch(TM)
absorb 2 1/2 times its weight
in wound exudate.
Patient Positioners Products that properly and Airsoft(TM)
safely position patients while
in surgery.
Surgical Suction Disposable surgical suction CONMED(R)
Instruments and instruments and connecting
Tubing tubing, including Yankauer,
Poole, Frazier and
Sigmoidoscopic
instrumentation, for use by
physicians in the majority of
open surgical procedures.
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Patient Care Products
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Product Description Brand Name
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Intravenous Therapy Disposable IV drip rate VENI-GARD(R)
gravity controller and MasterFlow(R)
disposable catheter Stat 2(R)
stabilization dressing
designed to hold and secure an
IV needle or catheter for use
in IV therapy.
Defibrillator Pads Stimulation electrodes for use PadPro(TM)
and Accessories in emergency cardiac response
and for conduction studies of
the heart.
Endoscopy
Endoscopic surgery (also called Laparoscopic surgery) is surgery performed
without a major incision, which results in less trauma for the patient and
produces important cost savings as a result of reduced hospitalization and
therapy. Endoscopic surgery is performed on organs in the abdominal cavity such
as the gallbladder, appendix and female reproductive organs. During a 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. Some of our
endoscopic instruments are "reposable", which means that the instrument has a
disposable and a reusable component.
Our Endoscopy products include the Reflex(R) clip applier for vessel and
duct ligation, Universal S/I(TM) (suction/irrigation) and Universal PLUS(R)
laparoscopic instruments, and specialized, suction/irrigation electrosurgical
instrument systems for use in laparoscopic surgery and the Trogard Finesse(R)
which incorporates a blunt-tipped version of a trocar. The Trogard Finesse(R)
dilates access through the body wall rather than cutting with the sharp, pointed
tips of conventional trocars. This results in smaller wounds, and less bleeding.
We also market cutting trocars, suction/irrigation accessories, laparoscopic
scissors, active electrodes, insufflation needles, linear cutters and staplers,
and ABC(R) handpieces for use in laparoscopic surgery. Disposable skin staplers
are used to close large skin incisions with surgical staples eliminating the
time consuming suturing process.
Endoscopy
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Product Description Brand Name
- --------------------------------------------------------------------------------
Trocars Disposable and reposable Finesse(R)
devices used to puncture the Reflex(R)
abdominal wall to provide Detach a Port(R)
access to the abdominal cavity
for camera systems and
instruments.
Multi-functional Instruments for cutting and Universal(TM)
Electrosurgery and coagulating tissue by Universal Plus(TM)
Suction/Irrigation delivering high-frequency FloVac(R)
instruments current. Instruments that
deliver irrigating fluid to
the tissue and remove blood
and fluids from the internal
operating field.
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Endoscopy
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Product Description Brand Name
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Clip Appliers Disposable devices for Reflex(R)
ligating blood vessels and
ducts by placing a titanium
clip on the vessel
Laparoscopic Scissors, graspers Detach a Tip(R)
Instruments
Skin Staplers Disposable devices that place Reflex(R)
surgical staples to close a
surgical incision.
Microlaparoscopy Small laparoscopes and MicroLap(R)
scopes and instruments for doing surgery
instruments through very small incisions.
Marketing
In the United States, most of our products are marketed directly to more
than 6,000 hospitals, and to surgeons and other health care facilities.
A substantial portion of our sales are to customers affiliated with GPOs,
IHNs, other large national or regional accounts, the Veterans Administration and
other hospitals operated by the Federal government. For hospital inventory
management purposes, certain of our customers prefer to purchase our products
through independent third-party medical product distributors.
In order to provide a high level of expertise to the medical specialties
we serve, our domestic sales force consists of the following:
o 180 sales representatives selling arthroscopy and orthopedic powered
surgical instrument products, including 90 employee sales representatives
and 90 sales professionals employed by eight sales agent groups.
o 60 employee sales representatives selling electrosurgery products.
o 30 employee sales representatives selling endoscopy products.
o 30 employee sales representatives selling patient care products.
Each employee sales representative 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. Sales
agent groups are used in the eight largest metropolitan areas of the United
States to sell our orthopedic products in their geographic territories. All of
these sales agent groups, except one, sell CONMED products exclusively. None
stock product for resale to customers as we ship product directly to customers
and carry the receivable for that group. The sales agent groups are all paid a
commission for sales made to customers in their exclusive geographic areas. Home
office sales and marketing management provide the overall direction for the
sales of our products.
We also have a corporate sales department that is responsible for
interacting with GPOs and IHNs. We have contracts with many such organizations
and believe that the lack of any individual group purchasing contract will not
adversely impact our competitiveness in the marketplace. Our sales professionals
are required to
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work closely with distributors where applicable and to maintain close
relationships with end-users.
The sale of our products is accompanied by initial and ongoing in-service
training of the end user. Our sales professionals are trained in the technical
aspects of our products and their uses and the procedures in which they are
used. Our sales professionals, in turn, provide surgeons and medical personnel
with information relating to the technical features and benefits of our
products.
Our international sales accounted for approximately 29% of total revenues
in 2002. 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. In these countries, our sales are denominated in the local
currency. In the remaining countries where our products are sold through
independent distributors, sales are denominated in United States dollars.
We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit risk.
Manufacturing
We manufacture most of our products and assemble them primarily from
components we produce. We believe our vertically integrated manufacturing
process allows us to provide quality products and generate manufacturing
efficiencies by purchasing raw materials for our disposable products in bulk. We
also believe that our manufacturing capabilities allow us to contain costs,
control quality and maintain security of proprietary processes. We use various
manual and automated equipment for fabrication and assembly of our products and
are continuing to further automate our facilities.
We use a variety of raw materials in our manufacturing processes. We work
to maintain multiple suppliers for each of our raw materials and components.
None of our critical raw materials are sourced from a single supplier.
All of our products are classified as medical devices subject to
regulation by the Food and Drug Administration. As a manufacturer of medical
devices, our manufacturing processes and facilities are subject to on-site
inspection and continuing review by the FDA for compliance with its Quality
System Regulations. Manufacturing and sales of our products outside the United
States are also subject to foreign regulatory requirements that vary from
country to country. The time required to obtain approvals from foreign countries
may be longer or shorter than that required for FDA approval and requirements
for foreign approvals may differ from FDA requirements.
We believe our production and inventory practices are generally reflective
of conditions in the industry. Our products are not generally made to order or
to individual customer specifications. Accordingly, we schedule production and
stock inventory on the basis of experience and our knowledge of customer order
patterns, and our judgment as to anticipated demand. Since customer orders must
generally be filled promptly for immediate shipment, backlog of unfilled orders
is not significant to an understanding of our business.
-13-
Research and Development Activities
During the years ended December 31, 2000, 2001 and 2002, we spent
approximately $14.9 million, $14.8 million and $16.1 million for research and
development. Our research and development department has 117 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 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 market for our products is highly competitive and our customers have
numerous alternatives of supply. Many of our competitors offer a range of
products in areas other than those in which we compete, which may make such
competitors more attractive to surgeons, hospitals, group purchasing
organizations and others. In addition, many of our competitors are larger and
have greater financial resources than we do and offer a range of products
broader than our products. Because our customers are not bound by long-term
supply arrangements with us, we may not be able to shift our production to other
products following a loss of customers to our competitors.
The following chart identifies our principal competitors in each of our
key business areas:
Business Area Competitor
------------- ----------
Arthroscopy Smith & Nephew plc
Arthrex
Stryker Corporation
Arthrocare
Johnson & Johnson's Mitek division
Powered Surgical Stryker Corporation
Instruments Medtronic, Inc.'s Midas Rex and
Xomed divisions
Anspach
-14-
Electrosurgery Tyco International Ltd.'s Valleylab
division
3M Company
ERBE Elektromedizin GmbH
Patient Care Tyco International Ltd.'s Kendall
division
3M Company
Endoscopy Tyco International Ltd.'s U.S.
Surgical division
Johnson & Johnson's Ethicon
division
We believe 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. 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 ensure compliance with Quality System Regulations as specified in
Title 21, Code of Federal Regulation (CFR) part 820. Many of our products are
subject to industry-set standards. Industry standards relating to our products
are generally formulated by committees of the Association for the Advancement of
Medical Instrumentation. We believe that our products presently meet applicable
standards in all material respects. We market our products in a number of
foreign markets. Requirements pertaining to our products vary widely from
country to country, ranging from simple product registrations to detailed
submissions such as those
-15-
required by the FDA. We believe that our products currently meet applicable
standards for the countries in which they are marketed.
We are subject to product recall and have made product recalls in the
past. No recall has had a material effect on our financial condition, but there
can be no assurance regulatory issues may not have a material adverse effect in
the future.
Any change in existing federal, state or foreign laws or regulations, or
in the interpretation or enforcement thereof, or the promulgation or any
additional laws or regulations could have an adverse effect on our financial
condition or results of operations.
Employees
As of December 31, 2002, we had 2,541 full-time employees, of whom 1,703
were in manufacturing, 117 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
An investment in our common stock involves a high degree of risk.
Investors should carefully consider the specific factors set forth below as well
as the other information included or incorporated by reference in this Form
10-K. See "Item 1: Business -- Forward Looking Statements" relating to certain
forward-looking statements in this Form 10-K.
Our financial performance is subject to the risk of business acquisitions,
including the effects of increased borrowing and the integration of
businesses.
A key element of our business strategy has been to expand through
acquisitions and we may seek to pursue additional acquisitions in the
future. Our success is dependent in part upon our ability to integrate
acquired companies or product lines into our existing operations. We may
not have sufficient management and other resources to accomplish the
integration of our past and future acquisitions and implementing our
acquisition strategy may strain our relationship with customers,
suppliers, distributors, manufacturing personnel or others. There can be
no assurance that we will be able to identify and make acquisitions on
acceptable terms or that we will be able to obtain financing for such
acquisitions on acceptable terms. In addition, while we are generally
entitled to customary indemnification from sellers of businesses for any
difficulties that may have arisen prior to our acquisition of each
business, acquisitions may involve exposure to unknown liabilities and the
amount and time for claiming under these indemnification provisions is
often limited. As a result, our financial performance is now and will
continue to be subject to various risks associated with the acquisition of
businesses, including the financial effects associated with any increased
borrowing required to fund such acquisitions or with the integration of
such businesses.
Failure to comply with regulatory requirements could result in recalls,
fines or materially adverse implications.
-16-
All of our products are classified as medical devices subject to
regulation by the Food and Drug Administration. As a manufacturer of
medical devices, our manufacturing processes and facilities are subject to
on-site inspection and continuing review by the FDA for compliance with
the Quality System Regulations. Manufacturing and sales of our products
outside the United States are also subject to foreign regulatory
requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign approvals may
differ from FDA requirements. Failure to comply with applicable domestic
and/or foreign requirements can result in:
o fines or other enforcement actions;
o recall or seizure of products;
o total or partial suspension of production;
o withdrawal of existing product approvals or clearances;
o refusal to approve or clear new applications or notices;
o increased quality control costs; or
o criminal prosecution.
The failure to comply with Quality System Regulations and applicable
foreign regulations could have a material adverse effect on our business,
financial condition or results of operations.
If we are not able to manufacture products in compliance with regulatory
standards, we may decide to cease manufacture of those products and may be
subject to product recall.
In addition to the Quality System Regulations, many of our products are
also subject to industry-set standards. We may not be able to comply with
these regulations and standards due to deficiencies in component parts or
our manufacturing processes. If we are not able to comply with the Quality
System Regulations or industry-set standards, we may not be able to fill
customer orders and we may decide to cease production of non-compliant
products. Failure to produce products could affect our profit margins and
could lead to loss of customers.
Our products are subject to product recall and product recalls have been
made in the past. Although no recall has had a material adverse effect on
our business, financial condition or results of operations, we cannot
assure you that regulatory issues will not have a material adverse effect
in the future or that product recall will not harm our reputation and our
relationships with our customers.
The highly competitive market for our products may create adverse pricing
pressures.
The market for our products is highly competitive and our customers have
numerous alternatives of supply. Many of our competitors offer a range of
products in areas other than those in which we compete, which may make
such competitors more attractive to surgeons, hospitals, group purchasing
organizations and others. In addition, 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. Because our customers are not bound by long-term
supply
-17-
arrangements with us, we may not be able to shift our production to other
products following a loss of customers to our competitors, leading to an
accompanying adverse effect on our profitability. See "Business --
Competition" for a further discussion of these competitive forces.
Factors that could lead our customers to choose products offered by our
competitors include:
o changes in surgeon preferences;
o increases or decreases in health care spending related to medical
devices;
o our inability to furnish products to them, such as a result of
product recall or back-order;
o the introduction by competitors of new products or new features to
existing products;
o the introduction by competitors of alternative surgical technology;
and
o advances in surgical procedures and discoveries or developments in
the health care industry.
Cost reduction efforts in the health care industry could put pressures on
our prices and margins.
In recent years, the health care industry has undergone significant change
driven by various efforts to reduce costs, 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 GPOs, and IHNs. Demand and prices for our
products may be adversely affected by these trends.
We may not be able to keep pace with technological change or to
successfully develop new products with wide market acceptance, which could
cause us to lose business to competitors.
The market for our products is characterized by rapidly changing
technology. Our future financial performance will depend in part on our
ability to develop and manufacture new products on a cost-effective basis,
to introduce them to the market on a timely basis, and to have them
accepted by surgeons.
We may not be able to keep pace with technology or to develop viable new
products. Factors which could cause delay in releasing new products or
even cancellation of our plans to produce and market these new products
include:
o research and development delays;
o delays in securing regulatory approvals; or
o changes in the competitive landscape, including the emergence of
alternative products or solutions which reduce or eliminate the
markets for pending products.
Our new products may fail to achieve expected levels of market acceptance.
-18-
Any new products we launch may fail to achieve market acceptance. The
degree of market acceptance of any of our products will depend on a number
of factors, including:
o our ability to develop and introduce new products and product
enhancements in the time frames we currently estimate;
o our ability to successfully implement new technologies;
o the market's readiness to accept new products, such as our
PowerPro(R) Battery System;
o having adequate financial and technological resources for future
product development and promotion;
o the efficacy of our products; and
o the prices of our products compared to the prices of our
competitors' products.
If our new products do not achieve market acceptance, we may be unable to
recoup our investments and may lose business to competitors.
In addition, some of the companies with which we now compete or may
compete in the future have or may have more extensive research, marketing
and manufacturing capabilities and significantly greater technical and
personnel resources than we do, and may be better positioned to continue
to improve their technology in order to compete in an evolving industry.
See "Business--Competition" for a further discussion of these competitive
forces.
Our credit agreement contains covenants that may limit our flexibility or
prevent us from taking actions.
Our credit agreement contains, and future credit facilities are expected
to contain, certain restrictive covenants which will affect, and in many
respects significantly limit or prohibit, among other things, our ability
to:
o incur indebtedness;
o make prepayments of certain indebtedness;
o make investments;
o engage in transactions with affiliates;
o pay dividends;
o sell assets; and
o pursue acquisitions.
These covenants may prevent us from pursuing acquisitions, significantly
limit our operating and financial flexibility and limit our ability to
respond to changes in our business or competitive activities. Our ability
to comply with such provisions may be affected by events beyond our
control. In the event of any default under our credit agreement, the
credit agreement lenders could elect to declare all amounts borrowed under
our credit agreement, together with accrued interest, to be due and
payable. If we were unable to repay such borrowings, the credit agreement
lenders could proceed against the collateral securing the credit
agreement, which consists of substantially all of our property and assets,
except for our accounts receivable and related rights which are sold in
connection with the accounts receivable sales agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a discussion of the
accounts receivable sales agreement.
-19-
Our substantial leverage and debt service requirements may force us to
adopt alternative business strategies.
We have indebtedness that is substantial in relation to our shareholders'
equity, as well as interest and debt service requirements that are
significant compared to our cash flow from operations. As of December 31,
2002, we had $257.4 million of debt outstanding, representing 40% of total
capitalization and which does not include the $37 million of receivables
sold to a conduit purchaser under the accounts receivable sales agreement
described below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
The degree to which we are leveraged could have important consequences to
investors, including but not limited to the following:
o a substantial portion of our cash flow from operations must be
dedicated to debt service and will not be available for operations,
capital expenditures, acquisitions, dividends and other purposes;
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate
purposes may be limited or impaired, or may be at higher interest
rates;
o we may be at a competitive disadvantage when compared to competitors
that are less leveraged;
o we may be hindered in our ability to adjust rapidly to market
conditions;
o our degree of leverage could make us more vulnerable in the event of
a downturn in general economic conditions or other adverse
circumstances applicable to us; and
o our interest expense could increase if interest rates in general
increase because some of our borrowings, including our borrowings
under our credit agreement, are and will continue to be at variable
rates of interest.
We may not be able to generate sufficient cash to service our
indebtedness, which could require us to reduce our expenditures, sell
assets, restructure our indebtedness or seek additional equity capital.
Our ability to satisfy our obligations will depend upon our future
operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, many of which are
beyond our control. We may not have sufficient cash flow available to
enable us to meet our obligations. If we are unable to service our
indebtedness, we will be forced to adopt an alternative strategy that may
include actions such as foregoing acquisitions, reducing or delaying
capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital. We cannot assure you
that any of these strategies could be implemented on terms acceptable to
us, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for
a discussion of our indebtedness and its implications.
We may be unable to continue to sell our accounts receivable, which could
require us to seek alternative sources of financing.
-20-
Under our accounts receivable sales agreement, there are certain
statistical ratios which must be maintained relating to the pool of
receivables in order for us to continue selling to the conduit. These
ratios relate to sales dilution and losses on accounts receivable. If new
accounts receivable arising in the normal course of business do not
qualify for sale or the conduit purchaser otherwise ceases its purchase of
our receivables, we would need to access alternate sources of working
capital, which could be more expensive or difficult to obtain. Our
receivables agreement also requires us to enter into a liquidity agreement
with certain banks under which the banks agree to commit to fund the
conduit's purchase of our accounts receivable in the event that the
conduit is unable to fund such purchases through the sale of commercial
paper. These liquidity agreements are typically for a period of 364 days
which requires us to renew our liquidity agreements on an annual basis. In
the event we were unable to renew our liquidity agreement, we would need
to access alternate sources of working capital which could be more
expensive or difficult to obtain.
The loss or invalidity of our patents may reduce our competitive
advantage.
Much of the technology used in the markets in which we compete is covered
by patents. We have numerous U.S. patents and corresponding foreign
patents on products expiring at various dates from 2003 through 2020 and
have additional patent applications pending. See "Business -- Research and
Development Activities" for a further description of our patents. The loss
of our patents could reduce the value of the related products and any
related competitive advantage. Competitors may also be able to design
around our patents and to compete effectively with our products. Also, our
competitors may allege that our products infringe their patents, leading
to voluntary or involuntary loss of sales from those products. In
addition, the cost to prosecute infringements of our patents or the cost
to defend our products against patent infringement actions by others could
be substantial. We cannot assure you that:
o pending patent applications will result in issued patents,
o patents issued to or licensed by us will not be challenged by
competitors,
o our patents will be found to be valid or sufficiently broad to
protect our technology or provide us with a competitive advantage,
or
o we will be successful in defending against pending or future patent
infringement claims asserted against our products.
Ordering patterns of our customers may change resulting in reductions in
sales.
Our hospital and surgery center customers purchase our products in
quantities sufficient to meet their anticipated demand. Likewise, our
health care distributor customers purchase our products for ultimate
resale to health care providers in quantities sufficient to meet the
anticipated requirements of the distributors' customers. Should
inventories of our products owned by our hospital, surgery center and
distributor customers grow to levels higher than their requirements, our
customers may reduce the ordering of products from us. This could cause a
reduction in our sales in a financial accounting period.
-21-
Our significant international operations subject us to risks associated
with operating in foreign countries.
A portion of our operations are conducted outside the United States. About
29% of our 2002 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 reliance on third parties to distribute our products;
o hyperinflation in certain foreign countries; and
o imposition or increase of investment and other restrictions by
foreign governments.
We cannot assure you that such risks will not have a material adverse
effect on our business and results of operations.
We can be sued for producing defective products and our insurance coverage
may be insufficient to cover the nature and amount of any product
liability claims.
The nature of our products as medical devices and today's litigious
environment should be regarded as potential risks that could significantly
and adversely affect our financial condition and results of operations.
The insurance we maintain to protect against claims associated with the
use of our products may not adequately cover the amount or nature of any
claim asserted against us and we are exposed to the risk that our claims
may be excluded and that our insurers may become insolvent or that
premiums may increase substantially. See "Item 3: Legal Proceedings" for a
further discussion of the risk of product liability actions and our
insurance coverage.
-22-
Item 2. Properties
Facilities
The following table provides information regarding our primary
manufacturing and administrative 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 278,000 Own _
Rome, NY 120,000 Own _
Centennial, CO 65,000 Own _
El Paso, TX 29,000 Lease April 2004
Juarez, Mexico 25,000 Lease December 2004
Santa Barbara, CA 18,000 Lease December 2003
Anaheim, CA 14,000 Lease August 2012
Montreal, Quebec 7,200 Lease March 2009
Portland, OR 6,600 Lease September 2005
-23-
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 future claims, the costs
associated with claims, especially claims not covered by insurance, will not
have a material adverse effect on our future performance.
Manufacturers of medical products may face exposure to significant product
liability claims. To date, we have not experienced any material product
liability claims, but any such claims arising in the future could have a
material adverse effect on our business or results of operations. We currently
maintain commercial product liability insurance of $25 million per incident and
$25 million in the aggregate annually, which we, based on our experience,
believe is adequate. This coverage is on a claims-made basis. There can be no
assurance that claims will not exceed insurance coverage or that such insurance
will be available in the future at a reasonable cost to us.
Our operations are subject to a number of environmental laws and
regulations governing, among other things, air emissions, wastewater discharges,
the use, handling and disposal of hazardous substances and wastes, soil and
groundwater remediation and employee health and safety. In some jurisdictions
environmental requirements may be expected to become more stringent in the
future. In the United States certain environmental laws can impose liability for
the entire cost of site restoration upon each of the parties that may have
contributed to conditions at the site regardless of fault or the lawfulness of
the party's activities.
While we do not believe that the present costs of environmental compliance
and remediation are material, there can be no assurance that future compliance
or remedial obligations could not have a material adverse effect on our
financial condition or results of operations.
As discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources", on March
10, 2003 we settled a contractual dispute with Bristol-Myers Squibb Company and
Zimmer, Inc.; on March 11, 2003 we settled a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 2002.
-24-
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, 2002, there were 1,165 registered
holders of our common stock and approximately 6,000 accounts held in "street
name".
The following table shows the high-low last sales prices for the years
ended December 31, 2001 and 2002, as reported by the Nasdaq Stock Market. These
sales prices have been adjusted for a three-for-two split of our common stock
effected in the form of a common stock dividend and paid on September 7, 2001 to
shareholders of record on August 21, 2001.
2001
-------------------
Period High Low
------ ------
First Quarter $15.92 $10.83
Second Quarter 18.00 13.08
Third Quarter 21.21 15.73
Fourth Quarter 21.01 16.53
2002
-------------------
Period High Low
------ ------
First Quarter $25.00 $19.29
Second Quarter 27.00 22.25
Third Quarter 22.72 15.60
Fourth Quarter 21.52 18.10
We did not pay cash dividends on our common stock during 2001 and 2002.
Our Board of Directors presently intends to retain future earnings to finance
the development of our business and does not intend to declare cash dividends.
Should this policy change, the declaration of dividends will be determined by
the Board in light of conditions then existing, including our financial
requirements and condition and the limitation on the declaration and payment of
cash dividends contained in debt agreements.
Information relating to compensation plans under which equity securities
of CONMED Corporation are authorized for issuance is set forth in the section
captioned "Stock Option Plans" in CONMED Corporation's definitive Proxy
Statement for our 2003 Annual Meeting of Shareholders to be held on May 20, 2003
and all such information is incorporated herein by reference.
-25-
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December 31,
-----------------------------------------------------
1998 1999 2000 2001 2002
Statements of Operations Data (1):
Net sales $339,270 $376,226 $395,873 $428,722 $453,062
Cost of sales (2) 169,599 178,480 188,223 204,374 215,891
Selling and administrative
expense (3) 96,475 110,842 128,316 140,560 141,735
Research and development expense 12,029 12,108 14,870 14,830 16,087
-------- -------- -------- -------- --------
Income from operations 61,167 74,796 64,464 68,958 79,349
Interest expense, net 30,891 32,360 34,286 30,824 24,513
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary loss 30,276 42,436 30,178 38,134 54,836
Provision for income taxes 10,899 15,277 10,864 13,728 19,741
-------- -------- -------- -------- --------
Income before
extraordinary loss (4) 19,377 27,159 19,314 24,406 35,095
Extraordinary loss,
net of income taxes (5) (1,569) -- -- -- (944)
-------- -------- -------- -------- --------
Net income (4) $ 17,808 $ 27,159 $ 19,314 $ 24,406 $ 34,151
======== ======== ======== ======== ========
Earnings Per Share Before
Extraordinary Loss:
Basic $ 0.86 $ 1.19 $ 0.84 $ 1.02 $ 1.28
======== ======== ======== ======== ========
Basic adjusted for SFAS 142 $ 1.07 $ 1.41 $ 1.08 $ 1.25
======== ======== ======== ========
Diluted $ 0.84 $ 1.17 $ 0.83 $ 1.00 $ 1.26
======== ======== ======== ======== ========
Diluted adjusted for SFAS 142 $ 1.05 $ 1.39 $ 1.07 $ 1.23
======== ======== ======== ========
Earnings Per Share:
Basic $ 0.79 $ 1.19 $ 0.84 $ 1.02 $ 1.25
======== ======== ======== ======== ========
Basic adjusted for SFAS 142 $ 1.00 $ 1.41 $ 1.08 $ 1.25
======== ======== ======== ========
Diluted $ 0.77 $ 1.17 $ 0.83 $ 1.00 $ 1.23
======== ======== ======== ======== ========
Diluted adjusted for SFAS 142 $ 0.98 $ 1.39 $ 1.07 $ 1.23
======== ======== ======== ========
Weighted Average Number of Common
Shares In Calculating:
Basic earnings per share 22,628 22,862 22,967 24,045 27,337
======== ======== ======== ======== ========
Diluted earnings per share 22,982 23,145 23,271 24,401 27,827
======== ======== ======== ======== ========
Other Financial Data:
Depreciation and amortization $ 23,601 $ 26,291 $ 29,487 $ 30,148 $ 22,370
Capital expenditures 12,924 9,352 14,050 14,443 13,384
Ratio of earnings to
fixed charges (6) 1.95 2.27 1.85 2.20 3.18
December 31,
-----------------------------------------------------
1998 1999 2000 2001 2002
Balance Sheet Data:
Cash and cash equivalents $ 5,906 $ 3,747 $ 3,470 $ 1,402 $ 5,626
Total assets 628,784 662,161 679,571 701,608 742,140
Long-term debt (including
current portion) 384,872 394,669 378,748 335,929 257,387
Total shareholders' equity 182,168 211,261 230,603 283,634 386,939
-26-
(1) Includes, based on the purchase method of accounting, the results of (i)
the arthroscopy business line acquired from 3M Company from November 1998;
(ii) the powered instrument business acquired from 3M Company from
August 1999; (iii) the minimally invasive surgical businesses acquired
from Imagyn Medical Technologies, Inc. from November 2000 and July 2001;
(iv) the businesses acquired in March and July 2002 related to our
Patient Care and Endoscopy product lines; (v) the businesses acquired in
October and November 2002 engaged in the design, manufacture and
installation of integrated operating room systems and related equipment;
in each such case from the date of acquisition.
(2) Includes for 1998, $3.0 million 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, $1.6 million 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
business acquired from 3M; includes for 2001, $1.6 million of
transition expenses related to the July 2001 acquisition from Imagyn.
(3) Included in selling and administrative expense for 1999, a $1.3 million
benefit related to a previously recorded litigation accrual which was
settled on favorable terms. Included in selling and administrative expense
for 2000, a severance charge of $1.5 million related to the restructuring
of our arthroscopy sales force. Included in selling and administrative
expense for 2002, a $2.0 million charge related to the settlement of a
patent infringement case.
(4) Effective January 1, 2002, the provisions of SFAS 142 were adopted
relative to the cessation of amortization for goodwill and certain
intangibles. Had we accounted for goodwill and certain intangibles in
accordance with SFAS 142 for all periods presented, income before
extraordinary loss would have been $24,153 in 1998, $32,227 in 1999,
$24,889 in 2000 and $30,058 in 2001; net income would have been $22,584 in
1998, $32,227 in 1999, $24,889 in 2000 and $30,058 in 2001.
(5) In March 1998 and August 2002, we recorded extraordinary losses of $1.6
million and $.9 million, respectively, related to the write-off of
deferred financing fees on the early extinguishment of debt.
(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.
-27-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with Selected
Financial Data (Item 6) and our consolidated financial statements, which are
included elsewhere in this Form 10-K.
General
CONMED Corporation is a medical technology company specializing in
instruments, implants and video equipment for arthroscopic sports medicine and
powered surgical instruments, such as drills and saws, for orthopedic, ENT,
neuro-surgery and other surgical specialties. We are a leading developer,
manufacturer and supplier of RF electrosurgery systems used routinely to cut and
cauterize tissue in nearly all types of surgical procedures worldwide, endoscopy
products such as trocars, clip appliers, scissors and surgical staplers and a
full line of ECG electrodes for heart monitoring and other patient care
products. We also offer integrated operating room systems and intensive care
unit service managers. Our products are used in a variety of clinical settings,
such as operating rooms, surgery centers, physicians' offices and critical care
areas of hospitals.
Critical Accounting Estimates
Preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Note 1 to the consolidated financial statements describes the
significant accounting policies used in preparation of the consolidated
financial statements. The most significant areas involving management judgments
and estimates are described below and are considered by management to be
critical to understanding the financial condition and results of operations of
CONMED Corporation.
Revenue Recognition
We recognize revenue upon shipment of product and passage of title to our
customers. Factors considered in our revenue recognition policy are as follows:
o Sales to customers are evidenced by firm purchase orders. Title and
the risks and rewards of ownership are transferred to the customer
when product is shipped.
o Payment by the customer is due under fixed payment terms. Even when
the sale is to a distributor, payment to us is not contractually or
implicitly delayed until the product is resold by the distributor.
o We place certain of our capital equipment with customers in return
for commitments to purchase disposable products over time periods
generally ranging from one to three years. In these circumstances,
no revenue is recognized upon capital shipment and we recognize
revenue upon the disposable product shipment.
o Product returns are only accepted at the discretion of the Company
and in keeping with our "Returned Goods Policy". Product returns
have not been significant historically. We accrue for sales returns,
rebates and allowances based upon analysis of historical data.
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o The terms of the Company's sales to customers do not involve any
obligations for the Company to perform future services. Limited
warranties are generally provided for capital equipment sales and
provisions for warranty are provided at the time of product
shipment.
o Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs of $8.1 million,
$8.6 million and $7.5 million for the years ended 2000, 2001 and
2002, respectively are included in selling and administrative
expense.
o We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit
risk.
o We assess the risk of loss on accounts receivable and adjust the
allowance for doubtful accounts based on this risk assessment.
Historically, losses on accounts receivable have not been material.
Management believes the allowance for doubtful accounts of $.9
million at December 31, 2002 is adequate to provide for any probable
losses from accounts receivable.
Business Acquisitions
We completed acquisitions in 2002 with purchase prices totaling
approximately $17.4 million and have a history of growth through acquisitions.
The assets and liabilities of acquired businesses are recorded under the
purchase method at their estimated fair values at the dates of acquisition.
Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired businesses. Other intangible assets primarily represent
allocations of purchase price to identifiable intangible assets of acquired
businesses. We have accumulated goodwill of $262.4 million and other intangible
assets of $180.3 million at December 31, 2002.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"), goodwill and
intangible assets deemed to have indefinite lives are not amortized, but are
subject to annual impairment testing. The identification and measurement of
goodwill impairment involves the estimation of the fair value of our business.
The estimates of fair value are based on the best information available as of
the date of the assessment, which primarily incorporate management assumptions
about expected future cash flows and contemplate other valuation techniques.
Future cash flows can be affected by changes in industry or market conditions or
the rate and extent to which anticipated synergies or cost savings are realized
with newly acquired entities. Intangible assets with a finite life are amortized
over the estimated useful life of the asset. Intangible assets which continue to
be subject to amortization are also evaluated on an annual basis to determine
whether events and circumstances warrant a revision to the remaining period of
amortization. An intangible asset is determined to be impaired when estimated
future cash flows indicate the carrying amount of the asset may not be
recoverable. Although no goodwill or other intangible asset impairment has been
recorded to date, there can be no assurances that future impairment will not
occur. (See Note 2 and Note 5 to the consolidated financial statements).
-29-
Pension Plans
We sponsor defined benefit pension plans for the Company and its
subsidiaries. Major assumptions used in the accounting for these plans include
the discount rate, expected return on plan assets and rate of increase in
employee compensation levels. Assumptions are determined based on Company data
and appropriate market indicators, and are evaluated each year as of the plans'
measurement date. A change in any of these assumptions would have an effect on
net periodic pension costs reported in the consolidated financial statements.
Lower market interest rates and plan asset returns have resulted in
declines in pension plan asset performance and funded status. The discount rate
was lowered from 7.0% to 6.75% reflecting current economic conditions. Pension
expense in 2003 is expected to be negatively impacted by these changes. See Note
10 to the consolidated financial statements for further discussion.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is $11.0 million at December 31, 2002.
Management believes that our earnings during the periods when the temporary
differences become deductible will be sufficient to realize the related future
income tax benefits.
In assessing the need for a valuation allowance, we estimate future
taxable income, considering the feasibility of ongoing tax planning strategies
and the realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets can be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels. In the event we were to determine
that we would not be able to realize all or a portion of our deferred tax assets
in the future, we would reduce such amounts through a charge to income in the
period that such determination was made. See Note 7 to the consolidated
financial statements for further discussion.
Results of Operations
2002 Compared to 2001
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the periods
indicated:
Year Ended December 31,
-----------------------
2001 2002
----- -----
Net sales ............................................. 100.0% 100.0%
Cost of sales ......................................... 47.7 47.7
----- -----
Gross margin ....................................... 52.3 52.3
Selling and administrative expense .................... 32.8 31.3
Research and development expense ...................... 3.5 3.6
----- -----
Income from operations ............................. 16.0 17.4
Interest expense, net ................................. 7.2 5.4
----- -----
Income before income taxes
and extraordinary loss ........................... 8.8 12.0
Provision for income taxes ............................ 3.1 4.3
----- -----
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Income before extraordinary loss ................... 5.7% 7.7%
===== =====
Sales for 2002 were $453.1 million, an increase of 5.7% compared to sales
of $428.7 million in 2001. Excluding our acquisition of certain product lines
from Imagyn in July 2001 (the "second Imagyn acquisition") and adjusting for
constant foreign currency exchange rates, sales would have grown by
approximately 2.3%.
o Sales in our orthopedic businesses grew 2.3% to $276.2 million in
2002 from $269.9 million in 2001. Adjusted for constant foreign
currency exchange rates, orthopedic sales growth in 2002 would have
been approximately 1.6% compared with 2001, as the value of the Euro
strengthened in comparison with the dollar.
o Arthroscopy sales, which represented approximately 58.6% of total
2002 orthopedic revenues, grew 4.0% in 2002 to $161.9 million from
$155.6 million in 2001, on strength in sales of disposable products
and video equipment.
o Powered surgical instrument sales, which represented approximately
41.4% of total 2002 orthopedic revenues, remained flat at $114.3
million in 2002 and 2001. We believe the weakness in sales in the
powered surgical instrument product line was a result of our aging
battery-powered product offering which was replaced in March 2002
with our new PowerPro(R)battery-powered instrument product line. We
believe that once PowerPro(R)becomes established in the marketplace,
it will enable us to resume overall growth in powered surgical
instrument sales. Additionally, during 2002 we entered into a
distribution agreement with DePuy Orthopaedics, ("DePuy"), a Johnson
& Johnson Company, which will enable the DePuy sales force to also
sell PowerPro(R)which should aid sales growth in this product line.
o Patient care sales for 2002 were $69.7 million, a .9% increase from
$69.1 million in 2001 as modest increases in sales of our ECG and
other patient care product lines more than offset declines in sales
of our surgical suction product lines which continue to face
significant competition and pricing pressures.
o Electrosurgery sales for 2002 were $69.7 million, an increase of
4.2% from $66.9 million in 2001, driven by increases in disposable
product sales.
o Endoscopy sales for 2002 were $36.8 million, an increase of 61.4%
from $22.8 million in 2001. Excluding the impact of the second
Imagyn acquisition in July 2001, as described in Note 2 to our
consolidated financial statements, the increase in endoscopy sales
was approximately 7.0%.
o Integrated operating room systems sales for 2002 were $.7 million
as a result of two acquisitions discussed in Note 2 to our conso-
lidated financial statements.
Cost of sales increased to $215.9 million in 2002 compared to $204.4
million in 2001, primarily as a result of the increased sales volumes described
above. As discussed in Notes 2 and 12 to our consolidated financial statements,
during 2001, we incurred various non-recurring charges in connection with the
July 2001 Imagyn acquisition. These costs were primarily related to the
transition in manufacturing of the Imagyn product lines from Imagyn's Richland,
Michigan facility to our manufacturing plants in Utica, New York. Such costs
totaled approximately $1.6 million and are included in cost of sales. Excluding
the impact of these non-
-31-
recurring expenses, cost of sales for 2001 was $202.8 million. Gross margin
percentage for 2001, excluding the Imagyn-related charges, was 52.7%, slightly
better than the 52.3%, experienced in 2002. The decrease in gross margin
percentage in 2002 is a result of sales of sample PowerPro(R) product to the
DePuy sales force, pursuant to a distribution agreement as discussed above,
which were at gross margins lower than the margins realized for units sold to
end-user customers, as well as certain unfavorable production variances
experienced in 2002.
Selling and administrative expense increased to $141.7 million in 2002 as
compared to $140.6 million in 2001. As a percentage of sales, selling and
administrative expense totaled 31.3% in 2002 compared to 32.8% in 2001. During
2002, selling and administrative expense decreased by approximately $8.8
million, before income taxes, as a result of the adoption of SFAS 142. As
discussed in Note 12 to the consolidated financial statements, we settled a
patent infringement case which resulted in a fourth quarter 2002 charge to
selling and administrative expense of $2.0 million, before income taxes.
Excluding the impacts of the adoption of SFAS 142 and the patent litigation
charge, selling and administrative expense in 2002 would have been approximately
$148.5 million or 32.8% as a percentage of sales, the same as in 2001.
Research and development expense totaled $16.1 million in 2002 compared to
$14.8 million in 2001. This increase represents continued research and
development efforts primarily focused on product development in the
electrosurgery and orthopedic product lines. As a percentage of sales, research
and development was 3.6%, consistent with 3.5% in 2001.
Interest expense in 2002 was $24.5 million compared to $30.8 million in
2001. The decrease in interest expense is primarily a result of lower total
borrowings outstanding during 2002 as compared to the same period a year ago, as
borrowings have declined to $257.4 million at December 31, 2002 as compared to
$335.9 million at December 31, 2001. The weighted average interest rates on our
borrowings increased slightly to 6.93% at December 31, 2002 as compared to 6.31%
at December 31, 2001 as borrowings under our senior credit facility were reduced
while borrowings under our Senior Subordinated Notes remained at $130 million.
During 2002, we terminated our former senior credit agreement and entered
into a new senior credit agreement. Accordingly, we recorded an extraordinary
charge on the early extinguishment of debt, of approximately $.9 million, net of
income taxes, to write-off the remaining unamortized deferred financing costs
associated with the approximately three years remaining on the old senior credit
agreement.
2001 Compared to 2000
The following table presents, as a percentage of net sales, certain
categories included in our consolidated statements of income for the periods
indicated:
Year Ended December 31,
-----------------------
2000 2001
----- -----
Net sales ............................................. 100.0% 100.0%
Cost of sales ......................................... 47.5 47.7
----- -----
Gross margin ....................................... 52.5 52.3
Selling and administrative expense .................... 32.4 32.8
Research and development expense ...................... 3.8 3.5
----- -----
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Income from operations ............................. 16.3 16.0
Interest expense, net ................................. 8.7 7.2
----- -----
Income before income taxes ......................... 7.6 8.8
Provision for income taxes ............................ 2.7 3.1
----- -----
Net income ......................................... 4.9% 5.7%
===== =====
Sales for 2001 were $428.7 million, an increase of 8.3% compared to sales
of $395.9 million in 2000. Excluding our acquisition of certain product lines
from Imagyn in November 2000 (the "Imagyn acquisition") and July 2001, and
adjusting for constant foreign currency exchange rates, sales would have grown
by approximately 5.2%.
o Sales in our orthopedic businesses grew 4.3% to $269.9 million in 2001
from $258.8 million in 2000. Adjusted for constant foreign currency
exchange rates, orthopedic sales growth in 2001 would have been
approximately 5.5% compared with 2000, as the value of the Canadian
dollar and certain European currencies weakened in comparison with the
dollar.
o Arthroscopy sales, which represented approximately 57.7% of total 2001
orthopedic revenues, grew 7.3% in 2001 to $155.6 million from $145.0
million in 2000, on strength in sales of disposable products and video
equipment.
o Powered surgical instrument sales, which represented approximately
42.3% of total 2001 orthopedic revenues, grew 1.0% to $114.3 million
in 2001 from $113.7 million in 2000. We believe the weakness in sales
in the powered surgical instrument product line was a result of our
aging battery-powered product offering which has been replaced by our
new PowerPro(R) battery-powered instrument product line, as we
describe above.
o Patient care sales for 2001 were $69.1 million, a 1.3% increase from
$68.2 million in 2000, as modest increases in sales of our ECG and
other patient care product lines more than offset declines in sales of
surgical suction product lines which occurred as a result of
significant competition and pricing pressures.
o Electrosurgery sales for 2001 were $66.9 million, an increase of 7.0%
from $62.5 million in 2000, driven by increases in electrosurgical
pencil and other disposable product sales.
o Endoscopy sales for 2001 were $22.8 million, an increase of 256% from
$6.4 million in 2000. Excluding the impact of the Imagyn acquisitions
in November 2000 and July 2001, as described in Note 2 to our
consolidated financial statements, the increase in endoscopy sales was
approximately 13.0%.
Cost of sales increased to $204.4 million in 2001 compared to $188.2
million in 2000, primarily as a result of the increased sales volumes described
above. As discussed in Notes 2 and 12 to our consolidated financial statements,
during 2001, we incurred various non-recurring charges in connection with the
July 2001 Imagyn acquisition. These costs were primarily related to the
transition in manufacturing of the Imagyn product lines from Imagyn's Richland,
Michigan facility to our manufacturing plants in Utica, New York. Such costs
totaled approximately $1.6 million and are included in cost of sales. Excluding
the impact of these non-
-33-
recurring expenses, cost of sales for 2001 was $202.8 million. Gross margin
percentage for 2001, excluding the Imagyn-related charges, was 52.7%, a slight
improvement as a result of increased sales volumes, compared with 52.5% in 2000.
Including the Imagyn-related charges, gross margin percentage for 2001 was
52.3%.
Selling and administrative expenses increased to $140.6 million in 2001 as
compared to $128.3 million in 2000. As a percentage of sales, selling and
administrative expenses totaled 32.8% in 2001 compared to 32.4% in 2000.
Excluding a non-recurring severance charge of $1.5 million recorded in 2000
related to the restructuring of our orthopedic direct sales force, as described
in Note 12 to our consolidated financial statements, selling and administrative
expenses as a percentage of sales were 32.0% in 2000. This restructuring
involved replacing our orthopedic direct sales force with non-stocking exclusive
sales agent groups in certain geographic regions of the United States. This plan
resulted in greater sales force coverage in the affected geographic regions. The
increase in selling and administrative expense in 2001 as compared to 2000 is a
result of higher commission and other costs in 2001 as compared to 2000
associated with the change to exclusive sales agent groups as well as increased
spending on sales and marketing programs.
Research and development expense totaled $14.8 million in 2001, consistent
with $14.9 million in 2000. As a percentage of sales, research and development
expense decreased to 3.5% in 2001 compared to 3.8% in 2000, as a result of
higher sales levels. Our research and development efforts are focused primarily
on new product development in the orthopedic product lines.
Interest expense in 2001 was $30.8 million compared to $34.3 million in
2000. The decrease in interest expense is primarily a result of lower weighted
average interest rates on our borrowings outstanding which have declined to
6.31% at December 31, 2001 as compared to 8.84% at December 31, 2000.
Liquidity and Capital Resources
Cash generated from our operations and borrowings under our revolving
credit facility have traditionally provided the working capital for our
operations, debt service under our credit facility and the funding of our
capital expenditures. In addition, we have used term borrowings, including:
o borrowings under our senior credit agreement;
o Senior Subordinated Notes issued to refinance borrowings under our
senior credit agreement, in the case of the acquisition of Linvatec
Corporation in 1997;
o borrowings under separate loan facilities, in the case of real
property acquisitions, to finance our acquisitions.
On May 29, 2002, we completed a public offering of 3.0 million shares of
our common stock. Net proceeds to the Company related to the sale of the shares
approximated $66.1 million and were used to reduce indebtedness under our former
senior credit agreement. We expect to continue to use cash flow from our
operations and borrowings under our revolving credit facility to finance our
operations, our debt service under our new senior credit facility and term
borrowings and the funding of our capital expenditures.
-34-
During 2002, we entered into a new $200 million senior credit agreement
(the "new senior credit agreement"). The new senior credit agreement consists of
a $100 million revolving credit facility and a $100 million term loan. The
proceeds of the term loan portion of the new senior credit agreement were used
to eliminate the term loans and borrowings on the revolving credit facility
under the previously existing senior credit agreement (the "former senior credit
agreement"). The new senior credit agreement calls for both components to extend
for approximately five years, with the revolving credit facility terminating on
August 28, 2007 and the term loan expiring on December 15, 2007. The term loan
portion of the facility can be extended an additional two years, provided our
currently outstanding $130 million in 9% Senior Subordinated Notes are
refinanced or repaid by December 15, 2007. The scheduled principal payments on
the term loan portion of the new senior credit agreement are $1.0 million
annually with the remaining balance outstanding due and payable on December 15,
2007. We may also be required, under certain circumstances, to make additional
principal payments based on excess cash flow as defined in the new senior credit
agreement. We are not required to make an excess cash flow payment based on the
application of these tests to 2002. Interest rates on the term loan and
revolving credit facility components of the new senior credit agreement are
LIBOR plus 275 basis points and LIBOR plus 250 basis points, respectively, or an
alternative base interest rate. The weighted average interest rates at December
31, 2002 on the term loan and revolving credit facility were 4.18% and 5.75%,
respectively. In addition, we are obligated to pay a fee of .5% per annum on the
unused portion of the revolving credit facility ($95.0 million at December 31,
2002).
The new senior credit agreement is collateralized by substantially all of
our personal property and assets, except for our accounts receivable and related
rights which are pledged in connection with our accounts receivable sales
agreement. The new senior credit agreement contains covenants and restrictions
which, among other things, require maintenance of certain working capital levels
and financial ratios, prohibit dividend payments and restrict the incurrence of
certain indebtedness and other activities, including acquisitions and
dispositions. The new senior credit agreement contains a material adverse effect
clause that could limit our ability to access additional funding under our
senior credit agreement should a material adverse change in our business occur.
We are also required, under certain circumstances, to make mandatory prepayments
from net cash proceeds from any issue of equity and asset sales.
The Senior Subordinated Notes (the "Notes") are in aggregate principal
amount of $130.0 million, have a maturity date of March 15, 2008 and bear
interest at 9.0% per annum which is payable semi-annually. The Notes are
redeemable for cash at anytime on or after March 15, 2003, at our option, in
whole or in part, at the redemption prices set forth therein, plus accrued and
unpaid interest to the date of redemption. On March 12, 2003, we served notice
to the trustee for the Notes that we would redeem $15.0 million par value of the
Notes, on May 1, 2003, at the redemption price of 104.5%, for a total redemption
price of $15.7 million, plus accrued and unpaid interest. We intend to redeem
the Notes through borrowings under our revolving credit facility. The premium
paid on the Notes will be recorded as a charge to operating income in the second
quarter of 2003.
We used term loans to purchase the property in Largo, Florida utilized by
our Linvatec subsidiary. The term loans consist of a Class A note bearing
interest at 7.50% per annum with semiannual payments of principal and interest
through September 2009, a Class C note bearing interest at 8.25% per annum
compounded semiannually through June 2009, after which semiannual payments of
principal and interest will commence, continuing through June 2019 and a
seller-financed note bearing interest at 6.50% per annum with monthly payments
of principal and interest
-35-
through July 2013. The principal balances outstanding on the Class A note, Class
C note and seller-financed note aggregate $10.7 million, $6.9 million and $4.0
million, respectively, at December 31, 2002.
Our net working capital position was $135.7 million at December 31, 2002
as compared to $44.7 million at December 31, 2001. Included in net working
capital at December 31, 2001 was $56.0 million owed on our revolving credit
facility which was due to expire on December 31, 2002. As discussed above,
during 2002, we entered into a new $200 million senior credit agreement. The
proceeds of the new senior credit agreement were used to eliminate the existing
term loans and borrowings on the revolving credit facility under the former
senior credit agreement. Accordingly, balances outstanding on the former
revolving credit facility have been reclassified from current to long-term
obligations.
We have a five-year accounts receivable sales agreement pursuant to which
we and certain of our subsidiaries sell on an ongoing basis certain accounts
receivable to CONMED Receivables Corporation, ("CRC"), a consolidated
wholly-owned special-purpose subsidiary of CONMED Corporation. CRC may in turn
sell up to an aggregate $50.0 million undivided percentage ownership interest in
such receivables (the "asset interest") to a commercial paper conduit (the
"conduit purchaser"). The conduit purchaser's share of collections on accounts
receivable are calculated as defined in the accounts receivable sales agreement.
Effectively, collections on the pool of receivables flow first to the conduit
purchaser and then to CRC. To the extent that the conduit purchaser's share of
collections were less than the amount of the conduit purchaser's asset interest,
there is no recourse to CONMED or CRC for such shortfall. For receivables that
have been sold, CONMED Corporation and its subsidiaries retain collection and
administrative responsibilities as agent for the conduit purchaser. As of
December 31, 2001 and 2002, the undivided percentage ownership interest in
receivables sold by CRC to the conduit purchaser aggregated $40.0 million and
$37.0 million, respectively, which has been accounted for as a sale and
reflected in the balance sheet as a reduction in accounts receivable.
There are certain statistical ratios, primarily related to sales dilution
and losses on accounts receivable, which must be calculated and maintained on
the pool of receivables in order to continue selling to the conduit purchaser.
The pool of receivables is in full compliance with these ratios. Management
believes that additional accounts receivable arising in the normal course of
business will be of sufficient quality and quantity to qualify for sale under
the accounts receivable sales agreement. In the event that new accounts
receivable arising in the normal course of business do not qualify for sale,
then collections on sold receivables will flow to the conduit purchaser rather
than being used to fund new receivable purchases. If this were to occur, we
would need to access an alternate source of working capital, such as our $100
million revolving credit facility. Our accounts receivable sales agreement also
requires us to enter into a liquidity agreement with certain banks under which
the banks agree to commit to fund the conduit's purchase of our accounts
receivable in the event that the conduit is unable to fund such purchases
through the sale of commercial paper. These liquidity agreements are typically
for a period of 364 days which requires us to renew our liquidity agreement on
an annual basis. In the event we were unable to renew our liquidity agreement,
we would need to access an alternate source of working capital, such as our $100
million revolving credit facility.
Net cash provided by operations, which we also refer to as "operating cash
flow," was $44.9 million in 2002 compared to $77.1 million in 2001. Excluding
the effects of the sale of accounts receivable, operating cash flow increased to
$47.9 million in 2002 compared to $37.1 million in 2001.
-36-
In reconciling net income to operating cash flow, operating cash flow in
2002 was positively impacted by depreciation, amortization and increases in
accounts payable, income taxes payable and deferred income taxes and negatively
impacted primarily by increases in accounts receivable and inventory and
decreases in accrued compensation and accrued interest. The increases in
accounts receivable and inventory are primarily related to an increase in sales.
The increases in accounts payable, income taxes payable and deferred income
taxes and decreases in accrued compensation and interest are primarily related
to the timing of the payment of these liabilities.
Capital expenditures in 2002 were $13.4 million. These capital expenditures
represent the ongoing capital investment requirements of our business and are
expected to continue at approximately this same rate annually. Net cash used by
investing activities in 2002 also included $17.4 million related to the purchase
of several businesses as discussed in Note 2 to the consolidated financial
statements.
Financing activities in 2002 consist primarily of the completion of a
public offering of 3.0 million shares of our common stock and the completion of
a new $200 million senior credit facility as discussed above. The $66.1 million
in proceeds from the stock offering were used to repay term loans under our
former senior credit agreement. Net repayments on our debt as a result of the
stock offering and cash generated from operations totaled $78.5 million in 2002.
Concurrent with the stock offering, we repurchased for $2.0 million from
Bristol-Myers Squibb Company a warrant exercisable for 1.5 million shares of our
common stock. Proceeds from the exercise of stock options totaled $5.0 million
in 2002.
On January 13, 2003, we entered into an agreement to acquire Bionx
Implants, Inc. (the "Bionx acquisition") in a cash transaction valuing Bionx at
$4.35 per share. We completed the acquisition on March 10, 2003, paying $46.9
million in cash which we financed through borrowings under our revolving credit
facility.
On March 10, 2003, we entered into an agreement with Bristol-Myers Squibb
Company ("BMS") and Zimmer, Inc., ("Zimmer") to settle a contractual dispute
related to the 1997 sale by BMS and its then subsidiary, Zimmer, of Linvatec
Corporation to CONMED Corporation. As a result of the agreement, BMS has paid us
$9.5 million in cash, which will be recorded as a gain to operating income in
the first quarter of 2003 net of legal costs.
On March 11, 2003, we agreed to settle a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd. In return for a
one-time $1.5 million payment, CONMED has been granted a nonexclusive license to
the disputed patents used to manufacture the gels used in certain of our ECG
product lines. Accordingly, we recorded a charge to income in the fourth quarter
of 2002 for the $1.5 million plus legal costs of approximately $.5 million.
Management believes that cash generated from operations, our current cash
resources and funds available under our new senior credit agreement will provide
sufficient liquidity to ensure continued working capital for operations, debt
service and funding of capital expenditures in the foreseeable future.
Contractual Obligations
There were no capital lease obligations or unconditional purchase
obligations as of December 31, 2002. The following table summarizes our
contractual obligations related to operating leases and long-term debt as of
December 31, 2002:
-37-
(Amounts in thousands)
2003 2004 2005 2006 2007 Thereafter
------ ------ ------ ------ -------- ----------
Long-term debt ........... $2,631 $2,554 $2,741 $2,943 $102,914 $143,604
Operating lease
obligations ............ 1,698 1,499 1,235 1,213 1,233 3,138
------ ------ ------ ------ -------- ----------
Total contractual
cash obligations ....... $4,329 $4,053 $3,976 $4,156 $104,147 $146,742
====== ====== ====== ====== ======== ==========
Stock-based Compensation
We have reserved shares of common stock issuance to employees and
directors under four shareholder-approved stock option plans. The exercise price
on all outstanding options is equal to the quoted fair market value of the stock
at the date of grant. Stock options are non-transferable other than on death and
generally become exercisable over a five year period from date of grant and
expire ten years from date of grant.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets to be held and
used and for long-lived assets to be disposed of. This Statement supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 retains the fundamental provisions of
Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used, and (b) measurement of long-lived assets
to be disposed of by sale. Effectively January 1, 2002, we adopted this
pronouncement, which had no impact on the financial condition or results of
operations for the year ended December 31, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which updates, clarifies, and simplifies certain existing
accounting pronouncements beginning at various dates in 2002 and 2003. This
Statement rescinds SFAS 4 and SFAS 64, which required net gains or losses from
the extinguishment of debt to be classified as an extraordinary item in the
income statement. These gains and losses will now be classified as extraordinary
only if they meet the criteria for such classification as outlined in Accounting
Principles Board ("APB") Opinion 30, which allows for extraordinary treatment if
the item is material and both unusual and infrequent in nature. We will adopt
this pronouncement during 2003. As a result we expect to reclassify the
extraordinary loss recognized in the third quarter of 2002 related to the
refinancing of debt to ordinary income in the 2003 annual and interim financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This Statement supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. This
pronouncement did not
-38-
have an impact on our financial condition or results of operations for the year
ended December 31, 2002.
In October 2002 the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 02-17("EITF 02-17"), "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination" which addresses certain customer -related
intangible assets acquired in a business combination in accordance with SFAS
No.141, "Business Combinations". SFAS 141 requires that an identifiable
intangible asset acquired in a business combination be recorded apart from
goodwill. EITF 02-17 requires a customer related intangible asset acquired in a
business combination to be recorded apart from goodwill and amortized over its
estimated useful life. This EITF is to be applied to all business combinations
consummated after October 25, 2002. We are reviewing the effect of EITF 02-17 on
the accounting for our acquisitions during the fourth quarter of 2002. The
existing customer relationship intangible asset recorded by the Company will
continue to be accounted for as a separate indentifiable intangible asset
subject to amortization.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. We have
adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that we record a liability for the fair value of
such guarantees in the balance sheet. We are reviewing FIN 45 to determine its
impact, if any, on future reporting periods, and do not currently anticipate any
material accounting impact on our financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123, "Accounting for
Stock-Based Compensation" to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
will continue to account for stock-based compensation using the intrinsic value
method and will continue to provide pro forma disclosures of the net income and
earnings per share effect of stock options using the "fair value method" in our
annual and interim financial statements.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued. The interpretation provides guidance on consolidating variable
interest entities and applies immediately to variable interests created after
January 31, 2003. The guidelines of the interpretation will become applicable
for us in our third quarter 2003 financial statements for variable interest
entities created before February 1, 2003. The interpretation requires variable
interest entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics. We
are reviewing FIN No. 46 to determine its impact, if any, on future reporting
periods, and do not currently anticipate any material accounting or disclosure
requirement under the provisions of the interpretation.
-39-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal market risks involve foreign currency exchange rates,
interest rates and credit risk.
Foreign currency risk
We manufacture our products primarily in the United States and distribute
our products throughout the world. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. As of December 31, 2002,
we have not entered into any forward foreign currency exchange contracts to
hedge the effect of foreign currency exchange fluctuations. We have mitigated
and will continue to mitigate our foreign currency exposure by transacting the
majority of our foreign sales in United States dollars. During 2002, changes in
foreign currency exchange rates increased our sales and income before income
taxes by approximately $2.0 million. We will continue to monitor and evaluate
our foreign currency exposure and the need to enter into a forward foreign
currency exchange contract or other hedging arrangement.
Interest rate risk
Our exposure to market risk for changes in interest rates relates to our
borrowings. Interest rate swaps, a form of derivative, are used to manage
interest rate risk. As of December 31, 2002 we had entered into an interest rate
swap with a $50.0 million notional amount expiring in June 2003 which converted
$50.0 million of the approximate $105.0 million of floating rate borrowings
under our credit facility into fixed rate borrowings with a base interest rate
of 7.01%. We amended this swap effective February 11, 2003 to lower the base
rate on the $50.0 million in floating rate borrowings to 3.63% and extend the
expiration date to June 2004. If market interest rates for similar borrowings
average 1% more in 2003 than they did in 2002, our interest expense, after
considering the effects of our interest rate swap, would increase, and income
before income taxes would decrease by $1.0 million. Comparatively, if market
interest rates averaged 1% less in 2003 than they did during 2002, our interest
expense, after considering the effects of our interest rate swap, would
decrease, and income before income taxes would increase by $1.0 million. These
amounts are determined by considering the impact of hypothetical interest rates
on our borrowing cost and interest rate swap agreement and does not consider any
actions by management to mitigate our exposure to such a change.
Credit Risk
A substantial portion of our accounts receivable are due from hospitals
and other healthcare providers. We generally do not receive collateral for these
receivables. Although the concentration of these receivables with customers in a
similar industry poses a risk of non-collection, we believe this risk is
mitigated somewhat by the large number and geographic dispersion of these
customers and by frequent monitoring of the creditworthiness of the customers to
whom credit is granted in the normal course of business.
Exposure to credit risk is controlled through credit approvals, credit
limits and monitoring procedures, and we believe that reserves for losses are
adequate. There is no significant net exposure due to any individual customer or
other major concentration of credit risk.
-40-
Item 8. Financial Statements and Supplementary Data
Our 2002 Financial Statements, together with the report thereon of
PricewaterhouseCoopers LLP dated March 28, 2003, 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.
-41-
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 15, 2003 for the annual meeting of shareholders to be held on May 20,
2003.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated herein
by reference to the sections captioned "Compensation of Executive Officers",
"Stock Option Plans", "Pension Plans" and "Board of Directors Interlocks and
Insider Participation; Certain Relationships and Related Transactions" in CONMED
Corporation's definitive Proxy Statement to be mailed on or about April 15, 2003
for the annual meeting of shareholders to be held on May 20, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain Beneficial
Owners and Management is incorporated herein by reference to the section
captioned "Security Ownership of Certain Beneficial Owners and Management" in
CONMED Corporation's definitive Proxy Statement to be mailed on or about April
15, 2003 for the annual meeting of shareholders to be held on May 20, 2003.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
incorporated herein by reference to the section captioned "Board of Directors
Interlocks and Insider Participation; Certain Relationships and Related
Transactions" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 15, 2003 for the annual meeting of shareholders to be held on May
20, 2003.
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
-42-
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements
(a)(1) List of Financial Statements Form 10-K Page
--------------
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 2001
and 2002 F-2
Consolidated Statements of Income for the Years
Ended December 31, 2000, 2001 and 2002 F-3
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 2000, 2001 and
2002 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 2001 and 2002 F-6
Notes to Consolidated Financial Statements F-8
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule VIII) F-35
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 47 below are filed as part of
this Form 10-K.
(b) Reports on Form 8-K
None
-43-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the date indicated
below.
CONMED CORPORATION
March 28, 2003
By: /s/ Eugene R. Corasanti
--------------------------------------------
Eugene R. Corasanti
(Chairman of the Board, Chief Executive Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrants and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ EUGENE R. CORASANTI Chairman of the Board
- ----------------------------- Chief Executive Officer
Eugene R. Corasanti And Director March 28, 2003
/s/ JOSEPH J. CORASANTI President, Chief Operating
- ----------------------------- Officer and Director March 28, 2003
Joseph J. Corasanti
/s/ ROBERT D. SHALLISH JR. Vice President-Finance
- ----------------------------- And Chief Financial Officer March 28, 2003
Robert D. Shallish, Jr. (Principal Financial Officer)
/s/ LUKE A. POMILIO Vice President - Corporate
- ----------------------------- Controller (Principal March 28, 2003
Luke A. Pomilio Accounting Officer)
/s/ BRUCE F. DANIELS
- -----------------------------
Bruce F. Daniels Director March 28, 2003
/s/ STEPHEN M. MANDIA
- -----------------------------
Stephen M. Mandia Director March 28, 2003
/s/ WILLIAM D. MATTHEWS
- -----------------------------
William D. Matthews Director March 28, 2003
/s/ ROBERT E. REMMELL
- -----------------------------
Robert E. Remmell Director March 28, 2003
/s/ STUART J. SCHWARTZ
- -----------------------------
Stuart J. Schwartz Director March 28, 2003
-44-
CERTIFICATION
I, Eugene R. Corasanti, certify that:
1. I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
March 28, 2003
/s/ Eugene R. Corasanti
----------------------------------------
Eugene R. Corasanti
Chairman of the Board and
Chief Executive Officer
-45-
CERTIFICATION
I, Robert D. Shallish, certify that:
1. I have reviewed this annual report on Form 10-K of CONMED Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
March 28, 2003
/s/ Robert D. Shallish Jr.
----------------------------------------
Robert D. Shallish, Jr.
Vice President - Finance and
Chief Financial Officer
-46-
Exhibit Index
Exhibit No. Description of Instrument
- ----------- -------------------------
2.1 - The Asset Purchase Agreement, dated as of June 11, 2001
by and between CONMED Corporation and Imagyn Medical,
Inc. et al - incorporated herein by reference to Exhibit
10.1 of our report on Form 10-Q filed on August 13,
2001.
2.2 - The Agreement of Purchase and Sale, dated as of February
5, 2001 by and between Linvatec Corporation and Largo
Lakes, I, II and IV, Inc., et al - incorporated herein
by reference to Exhibit 10.2 of our report on Form 10-Q
filed on August 13, 2001.
2.3 - The Purchase and Sale Agreement dated November 1, 2001
among CONMED Corporation, et al and CONMED Receivables
Corporation - incorporated herein by reference to
Exhibit 10.2 of our report on Form 10-Q filed on
November 14, 2001.
2.4 - The Receivables Purchase Agreement dated November 1,
2001 among CONMED Receivables Corporation, Blue Keel
Funding, LLC and Fleet National Bank - incorporated
herein by reference to Exhibit 10.2 of our report on
Form 10-Q filed on November 14, 2001.
2.5 - The Agreement and Plan of Merger dated January 13, 2003
by and among CONMED Corporation, Arrow Merger
Corporation and Bionx Implants, Inc.
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 - Credit Agreement dated August 28, 2002 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
10.1 of our report on Form 10-Q filed on October 31,
2002.
4.4 - Guarantee and Collateral Agreement, dated August 28,
2002, made by CONMED Corporation and certain of its
subsidiaries
-47-
Exhibit No. Description of Instrument
- ----------- -------------------------
in favor of JPMorgan Chase Bank - incorporated herein by
reference to Exhibit 10.2 of our report on Form 10-Q
filed on October 31, 2002.
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).
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.
10.2 - Amendment to December 16, 1996 Employment Agreement
between the Company and Eugene R. Corasanti, dated March
7, 2002.
10.3 - Employment Agreement between the Company and Joseph J.
Corasanti, dated May 2, 2000 - incorporated herein by
reference to the exhibit in our Annual Report on Form
10-K for the year ended December 31, 2000.
10.4 (a) Eugene R. Corasanti disability income plans with
Northwestern Mutual Life Insurance Company, dated
January 14, 1980 and March 7, 1981-- policy
specification sheets-- incorporated herein by reference
to Exhibit 10.0(a) of our Registration Statement on Form
S-2 (File No. 33-40455).
(b) William W. Abraham disability income plan with
Northwestern Mutual Life Insurance Company, dated March
24, 1981 -- policy specification sheet -- incorporated
herein by reference to Exhibit 10.0(b) of our
Registration Statement on Form S-2 (File No. 33-40455).
(c) Eugene R. Corasanti life insurance plan with
Northwestern Mutual Life Insurance Company, dated
October 6, 1979 -- policy specification sheet --
incorporated herein by reference to Exhibit 10.0(c) of
our Registration Statement on Form S-2 (File No.
33-40455).
10.5 - Eugene R. Corasanti life insurance plans with
Northwestern Mutual Life Insurance Company dated August
25, 1991-- Statements of Policy Cost and Benefit
Information, Benefits and Premiums, Assignment of Life
Insurance Policy as Collateral -- incorporated herein by
reference to our Annual Report on Form 10-K for the year
ended December 27, 1991.
10.6 - 1992 Stock Option Plan (including form of Stock Option
Agreement)-- incorporated herein by reference to the
exhibit in our Annual Report on Form 10-K for the year
ended December 25, 1992.
-48-
Exhibit No. Description of Instrument
- ----------- -------------------------
10.7 - 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
31, 1996.
10.8 - 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.
10.9 - Amendment to Stock Option Plan for Non-employee
Directors of CONMED Corporation - incorporated by
reference to the Definitive Proxy Statement for the 2002
annual meeting as filed on April 17, 2002.
10.10 - 1999 Long-term Incentive Plan - incorporated by
reference to the Definitive Proxy Statement for the 1999
annual meeting as filed on April 16, 1999.
10.11 - Amendment to 1999 Long-term Incentive Plan -
incorporated by reference to the Definitive Proxy
Statement for the 2002 annual meeting as filed on April
17, 2002.
10.12 - 2002 Employee Stock Purchase Plan - incorporated by
reference to the Definitive Proxy Statement for the 2002
annual meeting as filed on April 17, 2002.
12 - Statement re: Computation of Ratios of Earnings to Fixed
Charges.
21 - Subsidiaries of the Registrant.
23 - Consent, dated March 28, 2003, of PricewaterhouseCoopers
LLP, independent accountants for CONMED Corporation.
-49-
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 15 (a)(1) on Page 43 present fairly, in all material
respects, the financial position of CONMED Corporation and its subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15 (a)(2) on Page 43 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".
PricewaterhouseCoopers LLP
Syracuse, New York
March 28, 2003
F-1
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(In thousands except share amounts)
2001 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 1,402 $ 5,626
Accounts receivable, less allowance for doubtful
accounts of $1,553 in 2001 and $922 in 2002 ........ 51,188 58,093
Inventories ............................................ 107,390 120,443
Deferred income taxes .................................. 1,105 6,304
Prepaid expenses and other current assets .............. 3,464 3,200
-------- --------
Total current assets ........................... 164,549 193,666
-------- --------
Property, plant and equipment, net ....................... 91,026 95,608
Goodwill, net ............................................ 251,140 262,394
Other intangible assets, net ............................. 184,383 180,271
Other assets ............................................. 10,510 10,201
-------- --------
Total assets ................................... $701,608 $742,140
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...................... $ 73,429 $ 2,631
Accounts payable ....................................... 19,877 22,074
Accrued compensation ................................... 11,863 10,463
Income taxes payable ................................... 2,507 5,885
Accrued interest ....................................... 4,954 3,794
Other current liabilities .............................. 7,207 13,127
-------- --------
Total current liabilities ...................... 119,837 57,974
-------- --------
Long-term debt ........................................... 262,500 254,756
Deferred income taxes .................................... 18,655 28,446
Other long-term liabilities .............................. 16,982 14,025
-------- --------
Total liabilities .............................. 417,974 355,201
-------- --------
Shareholders' equity:
Preferred stock, par value $.01 per share; authorized
500,000 shares, none outstanding ................... -- --
Common stock, par value $.01 per share; 100,000,000
authorized; 25,261,590 and 28,808,105, issued and
outstanding in 2001 and 2002, respectively ......... 253 288
Paid-in capital ........................................ 160,757 231,832
Retained earnings ...................................... 128,240 162,391
Accumulated other comprehensive loss ................... (5,197) (7,153)
Less 37,500 shares of common stock in treasury, at cost (419) (419)
-------- --------
Total shareholders' equity ..................... 283,634 386,939
-------- --------
Total liabilities and shareholders' equity ..... $701,608 $742,140
======== ========
See notes to consolidated financial statements.
F-2
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 2001 and 2002
(In thousands except per share amounts)
2000 2001 2002
-------- -------- --------
Net sales .................................. $395,873 $428,722 $453,062
-------- -------- --------
Cost of sales .............................. 188,223 204,374 215,891
Selling and administrative expense ......... 128,316 140,560 141,735
Research and development expense ........... 14,870 14,830 16,087
-------- -------- --------
331,409 359,764 373,713
-------- -------- --------
Income from operations ..................... 64,464 68,958 79,349
Interest expense ........................... 34,286 30,824 24,513
-------- -------- --------
Income before income taxes and
extraordinary loss ...................... 30,178 38,134 54,836
Provision for income taxes ................. 10,864 13,728 19,741
-------- -------- --------
Income before extraordinary loss ........... 19,314 24,406 35,095
Extraordinary loss, net of income taxes .... -- -- 944
-------- -------- --------
Net income ................................. $ 19,314 $ 24,406 $ 34,151
======== ======== ========
Per share data:
Income before extraordinary loss
Basic .............................. $ .84 $ 1.02 $ 1.28
Diluted ............................ .83 1.00 1.26
Extraordinary loss
Basic .............................. -- -- .03
Diluted ............................ -- -- .03
Net income
Basic .............................. $ .84 $ 1.02 $ 1.25
Diluted ............................ .83 1.00 1.23
See notes to consolidated financial statements.
F-3
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 2001 and 2002
(In thousands)
Accumulated
Common Stock Other
--------------- Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ ------ -------- -------- ------------- -------- -------------
Balance at December 31, 1999 ......... 22,957 $230 $127,317 $84,520 (387) $(419) $211,261
------ ------ -------- -------- ------------- -------- -------------
Exercise of stock options ........ 72 449 449
Tax benefit arising from
exercise of stock
options ...................... 219 219
Comprehensive income:
Foreign currency
translation adjustments ...... (640)
Net income ................... 19,314
Total comprehensive income ....... 18,674
------ ------ -------- -------- ------------- -------- -------------
Balance at December 31, 2000 ......... 23,029 230 127,985 103,834 (1,027) (419) 230,603
Exercise of stock options ........ 259 3 1,827 1,830
Tax benefit arising from
exercise of stock
options ...................... 604 604
Stock issued in connection
with business acquisitions ....... 1,974 20 30,341 30,361
Comprehensive income:
Foreign currency
translation adjustments ...... (1,142)
Cash flow hedging
(net of income tax
benefit of $1,106) ........... (1,966)
Minimum pension liability
(net of income tax
benefit of $597) ............. (1,062)
Net income ................... 24,406
Total comprehensive income ......... 20,236
------ ------ -------- -------- ------------- -------- -------------
Balance at December 31, 2001 ......... 25,262 253 160,757 128,240 (5,197) (419) 283,634
(continued)
F-4
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 2001 and 2002
(In thousands)
Accumulated
Common Stock Other
--------------- Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
------ ------ -------- -------- ------------- -------- -------------
Exercise of stock options........... 546 5 5,012 5,017
Tax benefit arising
from exercise of
stock options................... 1,970 1,970
Stock issuance...................... 3,000 30 66,093 66,123
Repurchase of stock warrant......... (2,000) (2,000)
Comprehensive income:
Foreign currency
translation adjustments........... 1,010
Cash flow hedging
(net of income tax
benefit of $596)............... 1,058
Minimum pension liability
(net of income tax
benefit of $2,264)............. (4,024)
Net income......................... 34,151
Total comprehensive income.......... 32,195
------ ------ -------- -------- ------------- -------- -------------
Balance at December 31, 2002............ 28,808 $ 288 $231,832 $162,391 $(7,153) $ (419) $386,939
====== ====== ======== ======== ============= ======== =============
See notes to consolidated financial statements.
F-5
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
-------- -------- ---------
Cash flows from operating activities:
Net income ................................... $ 19,314 $ 24,406 $ 34,151
-------- -------- ---------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................. 9,434 9,055 9,203
Amortization ............................. 20,053 21,093 13,167
Deferred income taxes .................... 7,974 8,562 10,664
Extraordinary loss, net of income taxes .. -- -- 944
Increase (decrease) in cash flows from
changes in assets and liabilities, net
of effects from acquisitions:
Sale of accounts receivable .......... -- 40,000 (3,000)
Accounts receivable .................. (2,166) (12,508) (2,151)
Inventories .......................... (18,035) (4,235) (15,213)
Accounts payable ..................... 3,824 (516) 1,157
Income taxes payable ................. 2,295 (281) 4,748
Income tax benefit of stock
option exercises ................... 219 604 1,970
Accrued compensation ................. 255 1,950 (1,584)
Accrued interest ..................... 542 (290) (1,160)
Other assets/liabilities, net ........ (7,759) (10,691) (7,973)
-------- -------- ---------
16,636 52,743 10,772
-------- -------- ---------
Net cash provided by operations ...... 35,950 77,149 44,923
-------- -------- ---------
Cash flows from investing activities:
Payments related to business acquisitions,
net of cash acquired ........................ (6,042) -- (17,375)
Purchases of property, plant and
equipment, net ........................... (14,050) (14,443) (13,384)
-------- -------- ---------
Net cash used by investing activities (20,092) (14,443) (30,759)
-------- -------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock ... -- -- 66,123
Net proceeds from exercise of stock options .. 449 1,830 5,017
Repurchase of warrant on common stock ........ -- -- (2,000)
Payments on debt ............................. (32,921) (76,423) (183,680)
Proceeds of debt ............................. 17,000 11,000 105,138
Payments related to issuance of debt ......... -- -- (1,513)
-------- -------- ---------
Net cash used by financing
activities ..................... (15,472) (63,593) (10,915)
-------- -------- ---------
(continued)
See notes to consolidated financial statements.
F-6
2000 2001 2002
-------- -------- ---------
Effect of exchange rate changes
on cash and cash equivalents ................... (663) (1,181) 975
-------- -------- ---------
Net increase (decrease) in
cash and cash equivalents ...................... (277) (2,068) 4,224
Cash and cash equivalents at beginning
of year ...................................... 3,747 3,470 1,402
-------- -------- ---------
Cash and cash equivalents at end of year ......... $ 3,470 $ 1,402 $ 5,626
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................. $ 33,788 $ 31,135 $ 24,453
Income taxes ......................... 4,141 2,098 5,478
Supplemental disclosures of non-cash investing and financing activities:
As more fully described in Note 2, we acquired a business in 2001 through the
exchange of approximately 2.0 million shares of our common stock valued at $29.9
million.
As more fully described in Note 2, we acquired certain property in 2001 through
the assumption of approximately $22.7 million of debt and accrued interest.
As more fully described in Note 2, we have agreed to issue approximately 100,000
shares of our common stock valued at approximately $1.8 million as part of the
consideration for the purchase of several businesses.
See notes to consolidated financial statements.
F-7
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands per except per share amounts)
Note 1 -- Operations and Significant Accounting Policies
Organization and operations
The consolidated financial statements include the accounts of CONMED
Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). All
intercompany accounts and transactions have been eliminated. CONMED Corporation
is a medical technology company specializing in instruments, implants and video
equipment for arthroscopic sports medicine and powered surgical instruments,
such as drills and saws, for orthopedic, ENT, neuro-surgery and other surgical
specialties. We are a leading developer, manufacturer and supplier of RF
electrosurgery systems used routinely to cut and cauterize tissue in nearly all
types of surgical procedures worldwide, endoscopy products such as trocars, clip
appliers, scissors and surgical staplers, and a full line of ECG electrodes for
heart monitoring and other patient care products. We also offer integrated
operating room systems and intensive care unit service managers. Our 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 accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash equivalents
We consider all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts receivable sale
On November 1, 2001, we entered into a five-year accounts receivable sales
agreement pursuant to which we and certain of our subsidiaries sell on an
ongoing basis certain accounts receivable to CONMED Receivables Corporation
("CRC"), a wholly-owned special-purpose subsidiary of CONMED Corporation. CRC
may in turn sell up to an aggregate $50.0 million undivided percentage ownership
interest in such receivables (the "asset interest") to a commercial paper
conduit (the "conduit purchaser"). The conduit purchaser's share of collections
on accounts receivable are calculated as defined in the accounts receivable
sales agreement. Effectively, collections on the pool of receivables flow first
to the conduit purchaser and then to CRC, but to the extent that the conduit
purchaser's share of collections were less than the amount of the conduit
purchaser's asset interest, there is no recourse to CONMED or CRC for such
shortfall. For receivables that have been sold, CONMED Corporation and its
subsidiaries retain collection and administrative responsibilities as agent for
the conduit purchaser. As of December 31, 2001 and 2002, the undivided
percentage ownership interest in receivables sold by CRC to the
F-8
conduit purchaser aggregated $40.0 million and $37.0 million, respectively,
which has been accounted for as a sale and reflected in the balance sheet as a
reduction in accounts receivable. Expenses associated with the sale of accounts
receivable, including the conduit purchaser's financing cost of issuing
commercial paper, were $.2 million and $1.2 million, in 2001 and 2002,
respectively.
There are certain statistical ratios, primarily related to sales dilution
and losses on accounts receivable, which must be calculated and maintained on
the pool of receivables in order to continue selling to the conduit purchaser.
The pool of receivables is in full compliance with these ratios. Management
believes that additional accounts receivable arising in the normal course of
business will be of sufficient quality and quantity to qualify for sale under
the accounts receivable sales agreement. In the event that new accounts
receivable arising in the normal course of business do not qualify for sale,
then collections on sold receivables will flow to the conduit purchaser rather
than being used to fund new receivable purchases. To the extent that such
collections would not be available to CONMED in the form of new receivables
purchases, we would need to access an alternate source of working capital, such
as our $100 million revolving credit facility. Our accounts receivable sales
agreement also requires us to enter into a liquidity agreement with certain
banks under which the banks agree to commit to fund the conduit's purchase of
our accounts receivable in the event that the conduit is unable to fund such
purchases through the sale of commercial paper. These liquidity agreements are
typically for a period of 364 days which requires us to renew our liquidity
agreement on an annual basis. In the event we were unable to renew our liquidity
agreement, we would need to access an alternate source of working capital, such
as our $100 million revolving credit facility.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out basis.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the following estimated useful lives:
Building and improvements 40 years
Leasehold improvements Remaining life of lease
Machinery and equipment 2 to 15 years
Goodwill and other intangible assets
Goodwill represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses. Other intangible assets
primarily represent allocations of purchase price to identifiable intangible
assets of acquired businesses. Goodwill and other intangible assets have been
amortized over periods ranging from 5 to 40 years through December 31, 2001.
Because of our history of growth through acquisitions, goodwill and other
intangible assets comprise a substantial portion (59.6% at December 31, 2002) of
our total assets.
In June 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"). We adopted SFAS 142 effective January 1, 2002. As a result of the
adoption of this standard, amortization of goodwill and certain intangibles has
been discontinued.
F-9
During 2002, we performed tests of goodwill and indefinite-lived
intangible assets. We tested for impairment using the two-step process
prescribed in SFAS 142. The first step is identification for potential
impairment. The second step, which has been determined not to be necessary,
measures the amount of any impairment. No impairment losses have been recognized
as a result of these tests.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," ("SFAS 144") was adopted by us on January 1, 2002. Our long-lived
assets accounted for in accordance with SFAS 144 primarily consist of intangible
assets subject to amortization and property, plant and equipment. In accordance
with SFAS 144, we review for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, an impairment loss is recognized by
reducing the recorded value to fair value.
Derivative financial instruments
We use an interest rate swap to manage the interest risk associated with
our variable rate debt under our credit facility. Effective January 1, 2001, we
adopted Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities, ("SFAS 133"). SFAS 133 requires
that derivatives be recorded on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from the changes in the values
of the derivatives are accounted for depending on whether the derivative
qualifies for hedge accounting. Upon adoption of SFAS 133, we recorded a
net-of-tax cumulative-effect-type loss adjustment of approximately $1.0 million
in accumulated other comprehensive income to recognize at fair value an interest
rate swap which we have designated as a cash-flow hedge and which effectively
converts $50.0 million of LIBOR-based floating rate debt under our credit
facility into fixed rate debt with a base interest rate of 7.01%. Gross holding
losses during 2001 and 2002 related to the interest rate swap aggregated $4.4
million and $.8 million, respectively, before income taxes. Approximately $1.3
million and $2.5 million, before income taxes, of gross holding losses were
reclassified and included in net income in 2001 and 2002, respectively.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable,
accounts payable, and interest rate swaps approximates their carrying amount.
The estimated fair values and carrying amounts of long-term debt are as follows
(in thousands):
2001 2002
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Long-term debt (including
current maturities) .... $ 335,929 $ 338,529 $ 257,387 $ 262,587
Fair values were determined from quoted market prices or discounted cash flow
analysis.
F-10
Translation of foreign currency financial statements
Assets and liabilities of foreign subsidiaries have been translated into
United States dollars at the applicable rates of exchange in effect at the end
of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected in accumulated other
comprehensive income (loss). Transaction gains and losses are included in
net income.
Income Taxes
We provide for income taxes in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability method
specified by SFAS 109, deferred tax assets and liabilities are based on the
difference between the financial statement and tax basis of assets and
liabilities as measured by the tax rates that are anticipated to be in effect
when these differences reverse. The deferred tax provision generally represents
the net change in the assets and liabilities for deferred tax. A valuation
allowance is established when it is necessary to reduce deferred tax assets to
amounts for which realization is more likely than not.
Revenue recognition
We recognize revenue upon shipment of product and passage of title to our
customers. Factors considered in our revenue recognition policy are as follows:
o Sales to customers are evidenced by firm purchase orders. Title and
the risks and rewards of ownership are transferred to the customer
when product is shipped.
o Payment by the customer is due under fixed payment terms. Even when
the sale is to a distributor, payment to us is not contractually or
implicitly delayed until the product is resold by the distributor.
o We place certain of our capital equipment with customers in return
for commitments to purchase disposable products over time periods
generally ranging from one to three years. In these circumstances,
no revenue is recognized upon capital shipment and we recognize
revenue upon the disposable product shipment.
o Product returns are only accepted at the discretion of the Company
and in keeping with our "Returned Goods Policy". Product returns
have not been significant historically. We accrue for sales returns,
rebates and allowances based upon analysis of historical data.
o The terms of the Company's sales to customers do not involve any
obligations for the Company to perform future services. Limited
warranties are generally provided for capital equipment sales and
provisions for warranty are provided at the time of product
shipment.
o Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs of $8.1 million,
$8.6 million and $7.5 million for the years ended 2000, 2001 and
2002, respectively, are included in selling and administrative
expense.
F-11
o We sell to a diversified base of customers around the world and,
therefore, believe there is no material concentration of credit
risk.
o We assess the risk of loss on accounts receivable and adjust the
allowance for doubtful accounts based on this risk assessment.
Historically, losses on accounts receivable have not been material.
Management believes the allowance for doubtful accounts of $.9
million at December 31, 2002 is adequate to provide for any probable
losses from accounts receivable.
Earnings per share
Basic earnings per share ("EPS") is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS gives effect to
all dilutive potential shares outstanding (i.e., options and warrants) during
the period. The following is a reconciliation of the weighted average shares
used in the calculation of basic and diluted EPS (in thousands):
2000 2001 2002
------ ------ ------
Shares used in the calculation of basic EPS
(weighted average shares outstanding) ........ 22,967 24,045 27,337
Effect of dilutive potential securities .......... 304 356 490
------ ------ ------
Shares used in the calculation of diluted EPS .... 23,271 24,401 27,827
====== ====== ======
The shares used in the calculation of diluted EPS exclude warrants and
options to purchase shares where the exercise price was greater than the average
market price of common shares for the year. Such shares aggregated 3,396, 2,842
and 683 at December 31, 2000, 2001 and 2002, respectively.
Stock-based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") defines a fair value based method of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the fair value of the award and is recognized over the
service period. A company may elect to adopt SFAS 123 or elect to continue
accounting for its stock option or similar equity awards using the method of
accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", where compensation cost is measured
at the date of grant based on the excess of the market value of the underlying
stock over the exercise price. We have elected to continue to account for our
stock-based compensation plans under the provisions of APB No. 25. No
compensation expense has been recognized in the accompanying financial
statements relative to our stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if we had accounted for our
employee stock options under the fair value method of that statement. The
weighted average fair value of options granted in 2000, 2001 and 2002 was $8.55,
$7.39 and $9.32, respectively. The fair value of these options was estimated at
the date of grant using a Black-Scholes options pricing model with the following
weighted-average
F-12
assumptions for options granted in 2000, 2001 and 2002, respectively: Risk-free
interest rates of 5.06%, 4.38% and 2.70%; volatility factors of the expected
market price of the Company's common stock of 68.01%, 48.04% and 41.10%; 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:
2000 2001 2002
------- ------- -------
Income before extraordinary loss - as reported $19,314 $24,406 $35,095
------- ------- -------
Pro forma stock-based employee
compensation expense, net of related
income tax effect ........................... (3,147) (2,845) (2,156)
------- ------- -------
Income before extraordinary loss - pro forma .. $16,167 $21,561 $32,939
======= ======= =======
EPS before extraordinary loss - as reported:
Basic ..................................... $ 0.84 $ 1.02 $ 1.28
Diluted ................................... $ 0.83 $ 1.00 $ 1.26
EPS before extraordinary loss - pro forma:
Basic ..................................... $ .70 $ .90 $ 1.20
Diluted ................................... $ .69 $ .88 $ 1.18
Reclassifications
Certain prior year amounts have been reclassified to conform with the
presentation used in 2002.
Note 2 -- Business Acquisitions
On November 20, 2000 we acquired certain assets of the disposable
minimally invasive surgical business of Imagyn Medical Technologies, Inc. (the
"Imagyn acquisition") for a purchase price of $6.0 million. The acquired
products, with annual revenues of approximately $5.0 million, complement our
existing minimally invasive surgical products business. Goodwill associated with
the Imagyn acquisition aggregated approximately $4.8 million.
On June 11, 2001, we reached a definitive agreement to acquire the
remaining assets of the minimally invasive surgical business of Imagyn Medical
Technologies, Inc. that we did not acquire in November 2000 (the "second Imagyn
acquisition"). The new products, with annual revenues of approximately $20.0
million, complement our existing minimally invasive surgical products business.
Under the terms of the acquisition agreement, we issued Imagyn approximate1y 2.0
million shares of CONMED common stock, valuing the transaction at $29.9 million
based on the average market price of our common stock over the 2-day period
before and after the terms of the acquisition were agreed to and announced.
Goodwill associated with the second Imagyn acquisition aggregated approximately
$26.7 million. As discussed in Note 12, during the third and fourth quarters of
2001 we incurred certain nonrecurring costs aggregating approximately
F-13
$1.5 million in connection with the second Imagyn acquisition which are included
in cost of sales.
On August 3, 2001, we purchased the real estate partnerships which own the
Largo, Florida property leased by our Linvatec subsidiary for an aggregate
purchase price of $22.7 million (the "Largo acquisition"). In connection with
the acquisition, we assumed the existing debt on the property and financed the
remainder with the seller (Note 6).
On March 20 and July 23, 2002, respectively, we acquired businesses
related to our Patient Care and Endoscopy product lines for approximately $2.0
million in cash. Goodwill associated with these acquisitions aggregated
approximately $1.9 million with annual revenues of approximately $1.2 million.
Under the terms of the agreements, we also agreed to pay additional
consideration dependent upon future product sales.
On October 29 and November 25, 2002, respectively, we acquired two
businesses engaged in the design, manufacture and installation of integrated
operating room systems and related equipment for a total of approximately $6.0
million in cash and stock plus the assumption of liabilities. Goodwill
associated with these acquisitions aggregated approximately $6.4 million with
annual revenues of approximately $5.0 million. Under the terms of one of the
agreements, we also agreed to pay additional consideration dependent upon future
operating income.
On December 31, 2002, we acquired certain of the assets and liabilities of
CORE Dynamics, Inc., a developer and manufacturer of minimally invasive surgical
products (the "CORE acquisition"). The acquired products, with annual revenues
of approximately $7.5 million, complement our existing Endoscopy product lines.
Under the terms of the acquisition agreement, we agreed to pay $9.0 million in
cash. Goodwill associated with the CORE acquisition aggregated approximately
$7.8 million.
The cost of acquisitions completed in 2002 may require adjustment based
upon information which is not currently available, principally related to the
valuation of intangibles and inventory.
Note 3 -- Inventories
The components of inventory at December 31, 2001 and 2002 are as follows:
2001 2002
-------- --------
Raw materials .......................... $ 38,101 $ 44,701
Work in process ........................ 11,921 12,869
Finished goods ......................... 57,368 62,873
-------- --------
$107,390 $120,443
======== ========
Note 4 -- Property, Plant and Equipment
Details of property, plant and equipment are as follows:
2001 2002
-------- --------
Land ................................................. $ 4,004 $ 4,196
Building and improvements ............................ 67,951 70,100
F-14
Machinery and equipment .............................. 68,284 74,838
Construction in progress ............................. 1,955 5,038
-------- --------
142,194 154,172
Less: Accumulated depreciation ............. (51,168) (58,564)
-------- --------
$ 91,026 $ 95,608
======== ========
We lease various manufacturing and office facilities and equipment under
operating leases. Rental expense on these operating leases was approximately
$3,376, $2,756 and $2,064 for the years ended December 31, 2000, 2001 and 2002,
respectively. The aggregate future minimum lease commitments for operating
leases at December 31, 2002 are as follows:
Years ending December 31,:
2003 ......................................... $1,698
2004 ......................................... 1,499
2054 ......................................... 1,235
2008 ......................................... 1,213
2007 ......................................... 1,233
Thereafter ................................... 3,138
Note 5 - Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
Balance as of January 1, 2002 ...................................... $251,140
Goodwill acquired during 2002 ...................................... 16,194
Adjustments to goodwill resulting from business
acquisitions finalized in 2002 ................................... (4,940)
--------
Balance as of December 31, 2002 .................................... $262,394
========
Other intangible assets consist of the following:
December 31, 2001 December 31, 2002
------------------------ ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Amortized intangible assets:
Customer relationships ............... $ 96,712 $(10,180) $ 96,712 $(12,725)
Patents and other intangible assets... 22,148 (10,441) 23,674 (13,534)
Unamortized intangible assets:
Trademarks and tradenames ............ 95,715 (9,571) 95,715 (9,571)
-------- ------------ -------- ------------
$214,575 $(30,192) $216,101 $(35,830)
======== ============ ======== ============
F-15
Other intangible assets primarily represent allocations of purchase price
to identifiable intangible assets of acquired businesses. The weighted average
amortization period for intangible assets which are amortized is 21 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 7 years.
Our customer relationship asset was acquired in connection with the 1997
acquisition of Linvatec Corporation. This intangible asset represents the value
associated with business expected to be generated from existing customers as of
the acquisition date. In connection with the Linvatec acquisition the value of
this asset was determined by measuring the present value of the projected future
earnings attributable to this asset. Additionally, while the useful life of this
customer relationship asset is not limited by contract or any other economic,
regulatory or other known factors, the useful life of 38 years was determined at
the acquisition date by historical customer attrition. In accordance with SFAS
142 and as clarified by EITF (Emerging Issues Task Force) Issue 02-17,
"Recognition of Customer Relationship Intangible Assets Acquired in a Business
Combination" which was issued on January 6, 2003, this customer relationship
which is evidenced by customer purchase orders is contractual in nature and
therefore continues to be recognized separate from goodwill and amortized over
the 38 year life.
The trademarks and tradenames intangible asset was recognized in
conjunction with the 1997 acquisition of Linvatec Corporation. We continue to
market products under the acquired trademarks and tradenames of "Linvatec",
"Hall", "Shutt" and "Envision". From the date of the Linvatec acquisition, we
have continued to release new product and product extensions under the above
trademarks and tradenames and continue to maintain and promote these trademarks
and tradenames in the market through legal registration and such methods as
advertising, medical education and trade shows. It is our belief that the
trademarks and tradenames intangible asset will generate cash flow for an
indefinite period of time. Accordingly, upon adoption of SFAS 142, effective
January 1, 2002, amortization of the trademarks and tradenames intangible asset
was discontinued.
The amortization expense related to intangible assets for the year ending
December 31, 2002 and the estimated amortization expense for each of the five
succeeding years is as follows:
2002 $5,634
2003 5,371
2004 5,005
2005 4,099
2006 3,605
2007 3,605
The following is a reconciliation assuming goodwill and other intangible
assets had been accounted for in accordance with SFAS 142 in the year ended
December 31, 2000, 2001 and 2002:
F-16
2000 2001 2002
------- ------- -------
Income before extraordinary
loss - as reported .......................... $19,314 $24,406 $35,095
------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization ............ 4,043 4,120 --
Add back: Trademarks and trade
names amortization ............. 1,532 1,532 --
------- ------- -------
Adjusted income before
extraordinary loss .......................... $24,889 $30,058 $35,095
======= ======= =======
Basic EPS
Income before extraordinary
loss - as reported .......................... $ .84 $ 1.02 $ 1.28
------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization ............ .17 .17 --
Add back: Trademarks and trade
names amortization ............. .07 .06 --
------- ------- -------
Adjusted income before
extraordinary loss .......................... $ 1.08 $ 1.25 $ 1.28
======= ======= =======
Diluted EPS
Income before extraordinary
loss - as reported .......................... $ .83 $ 1.00 $ 1.26
------- ------- -------
Adjustments (net of income taxes)
Add back: Goodwill amortization ............ .17 .17 --
Add back: Trademarks and trade
names amortization ............. .07 .06 --
------- ------- -------
Adjusted income before
extraordinary loss .......................... $ 1.07 $ 1.23 $ 1.26
======= ======= =======
Note 6 -- Long Term Debt
We entered into a new $200 million senior credit agreement (the "new
senior credit agreement") during the year-ending December 31, 2002. The new
senior credit agreement consists of a $100 million revolving credit facility and
a $100 million term loan. As of December 31, 2002, we had $100 million
outstanding on the term loan and $5 million outstanding on the revolving credit
facility.
The proceeds of the term loan portion of the new senior credit agreement
were used to eliminate the term loans and borrowings on the revolving credit
facility under the previously existing senior credit agreement (the "former
senior credit agreement"). Deferred financing fees related to the approximately
three years remaining on the former senior credit agreement were written off as
an extraordinary charge of $.9 million, net of $.6 million of income tax
benefit, or $.04 per diluted share, on the early extinguishment of debt. The new
senior credit agreement calls for both components to extend for approximately
five years, with
F-17
the revolving credit facility terminating on August 28, 2007 and the term loan
expiring on December 15, 2007. The term loan portion of the facility can be
extended an additional two years, provided our currently outstanding $130
million in 9% Senior Subordinated Notes are refinanced or repaid by December 15,
2007.
The scheduled principal payments on the term loan portion of the new senior
credit agreement are $1.0 million annually with the remaining balance
outstanding due and payable on December 15, 2007. We may also be required, under
certain circumstances, to make additional principal payments based on excess
cash flow as defined in the new senior credit agreement. Interest rates on the
term loan and revolving credit facility components of the new senior credit
agreement are LIBOR plus 275 basis points and LIBOR plus 250 basis points,
respectively, or an alternative base interest rate. The weighted average
interest rates at December 31, 2002 on the term loan and revolving credit
facility were 4.18% and 5.75%, respectively. In addition, we are obligated to
pay a fee of .5% per annum on the unused portion of the revolving credit
facility ($95.0 million at December 31, 2002).
The new senior credit agreement is collateralized by substantially all of
our personal property and assets, except for our accounts receivable and related
rights which are pledged in connection with our accounts receivable sales
agreement. The new senior credit agreement contains covenants and restrictions
which, among other things, require maintenance of certain working capital levels
and financial ratios, prohibit dividend payments and restrict the incurrence of
certain indebtedness and other activities, including acquisitions and
dispositions. The new senior credit agreement contains a material adverse effect
clause that could limit our ability to access additional funding under our
senior credit agreement should a material adverse change in our business occur.
We are also required, under certain circumstances, to make mandatory prepayments
from net cash proceeds from any issue of equity and asset sales.
The debt assumed in connection with the Largo acquisition (Note 2),
consists of a note bearing interest at 7.50% per annum with semiannual payments
of principal and interest through June 2009 (the "Class A note"); and a note
bearing interest at 8.25% per annum compounded semiannually through June 2009,
after which semiannual payments of principal and interest will commence,
continuing through June 2019 (the "Class C note"). Additionally, there is a
seller-financed note which bears interest at 6.50% per annum with monthly
payments of principal and interest through July 2013 (the "Seller note"). The
principal balances assumed on the Class A note, Class C note and Seller note
aggregate $12.2 million $6.2 million and $4.2 million, respectively, at the date
of acquisition. The principal balances outstanding related to the Largo
acquisition, aggregated $10.7 million, $6.9 million and $4.0 million, at
December 31, 2002 on the Class A note, Class C note and Seller note
respectively. The Largo acquisition related debt is collateralized by, among
other things, recorded and unrecorded mortgage liens on the Largo property.
We have $130 million of 9% Senior Subordinated Notes (the "Notes")
outstanding at December 31, 2002. The Notes mature on March 15, 2008, unless
previously redeemed by us. Interest on the Notes is payable semi-annually on
March 15 and September 15 of each year. The Notes are redeemable for cash at
anytime on or after March 15, 2003, at our option, in whole or in part, at the
redemption prices set forth therein, plus accrued and unpaid interest to the
date of redemption. On March 12, 2003, we served notice to the trustee for the
Notes that we would redeem $15.0 million par value of the Notes, on May 1, 2003,
at the redemption price of 104.5%, for a total redemption price of $15.7
million, plus accrued and unpaid interest. We intend to redeem the Notes through
borrowings
F-18
under our revolving credit facility. The premium paid on the Notes will be
recorded as a charge to operating income in the second quarter of 2003.
As discussed in Note 1, we use an interest rate swap, a form of derivative
financial instrument, to manage interest rate risk. We have designated as a
cash-flow hedge, an interest rate swap which effectively converts $50 million of
LIBOR-based floating rate debt under our senior credit agreement into fixed rate
debt with a base interest rate of 7.01%. The interest rate swap expires in June
2003 and is included in liabilities on the balance sheet with a fair value
approximating $1.4 million at December 31, 2002. We amended this swap effective
February 11, 2003 to lower the base rate on the $50.0 million in floating rate
borrowings to 3.63% and extend the expiration date to June 2004.
The scheduled maturities of long-term debt outstanding at December 31,
2002 are as follows:
Year ended December 31,:
2003 .............................................................. $ 2,631
2004 .............................................................. 2,554
2005 .............................................................. 2,741
2006 .............................................................. 2,943
2007 .............................................................. 102,914
Thereafter ........................................................ 143,604
Note 7 -- Income Taxes
The provision for income taxes for the years ended December 31, 2000, 2001
and 2002 consists of the following:
2000 2001 2002
------- ------- -------
Current tax expense:
Federal ............................. $ 1,634 $ 3,565 $ 7,782
State ............................... 300 400 540
Foreign ............................. 956 1,201 755
------- ------- -------
2,890 5,166 9,077
Deferred income tax expense ............. 7,974 8,562 10,664
------- ------- -------
Provision for income taxes .......... $10,864 $13,728 $19,741
======= ======= =======
A reconciliation between income taxes computed at the statutory federal
rate and the provision for income taxes follows:
2000 2001 2002
------- ------- -------
Tax provision at statutory rate based
on income before income taxes and
extraordinary loss ........................ $10,562 $13,347 $19,193
Foreign sales corporation/
Extraterritorial income exclusion ......... (725) (894) (949)
State taxes ................................... 180 270 351
F-19
Nondeductible intangible amortization ......... 321 320 90
Other nondeductible permanent differences ..... 200 220 215
Other, net .................................... 326 465 841
------- ------- -------
$10,864 $13,728 $19,741
======= ======= =======
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities at December 31, 2001 and 2002 are as
follows:
2001 2002
-------- --------
Assets:
Receivables ...................................... $ 225 $ 94
Inventory ........................................ 870 2,106
Deferred compensation ............................ 943 1,142
Employee benefits ................................ 428 491
Additional minimum pension liability ............. 597 2,861
Interest rate swap ............................... 1,106 510
Other ............................................ 164 859
Net operating losses of acquired subsidiary ...... 3,410 2,986
Valuation allowance for deferred tax assets ...... (3,410) --
-------- --------
4,333 11,049
-------- --------
Liabilities:
Goodwill and intangible assets ................... 17,757 28,633
Depreciation ..................................... 4,126 4,558
-------- --------
21,883 33,191
-------- --------
Net liability .......................................... $(17,550) $(22,142)
======== ========
Management had established a valuation allowance in prior years to reflect
the uncertainty of realizing the benefit of certain net operating loss
carryforwards related to an acquisition. During the year-ended December 31,
2002, management determined that a valuation allowance was no longer required,
resulting in a reduction in goodwill related to the acquisition.
Note 8 -- Shareholders' Equity
The shareholders have authorized 500 thousand shares of preferred stock,
par value $.01 per share, which may be issued in one or more series by the Board
of Directors without further action by the shareholders. As of December 31, 2001
and 2002, no preferred stock had been issued.
On August 8, 2001, our Board of Directors declared a three-for-two split
of our common stock to be effected in the form of a common stock dividend. This
dividend was payable on September 7, 2001 to shareholders of record on August
21, 2001. Accordingly, common stock, the number of shares outstanding, earnings
per share, incentive stock option activity and the number of shares used in the
calculation of earnings per share have all been restated to retroactively
reflect the split.
F-20
In connection with the 1997 acquisition of Linvatec Corporation, we issued
to Bristol-Myers Squibb Company a warrant exercisable in whole or in part for up
to 1.5 million shares of our common stock at a price of $22.82 per share. On May
6, 2002, we purchased the warrant for $2.0 million in cash and subsequently
cancelled it. The purchase resulted in a $2.0 million reduction to paid-in
capital.
On May 29, 2002, we completed a public offering of 3.0 million shares of
our common stock. Net proceeds to the Company related to the sale of the shares
approximated $66.1 million and were used to reduce indebtedness under our credit
facility.
We have reserved 2.7 million shares of common stock for issuance to
employees and directors under four stock option plans (the "Plans") of which
approximately 1.3 million shares remain available for grant at December 31,
2002. The exercise price on all outstanding options is equal to the quoted fair
market value of the stock at the date of grant. Stock options are
non-transferable other than on death and generally become exercisable over a
five year period from date of grant and expire ten years from date of grant.
The following is a summary of incentive stock option activity under the
Plans:
Weighted-
Number Average
of Exercise
Options Price
------- ---------
Outstanding at December 31, 1999 ........................ 2,656 $13.96
Granted ......................................... 684 14.05
Forfeited ....................................... (209) 17.20
Exercised ....................................... (72) 6.23
------- ---------
Outstanding at December 31, 2000 ........................ 3,059 13.91
Granted ......................................... 709 15.59
Forfeited ....................................... (75) 18.86
Exercised ....................................... (259) 7.07
------- ---------
Outstanding at December 31, 2001 ........................ 3,434 14.69
Granted ......................................... 742 23.42
Forfeited ....................................... (40) 15.27
Exercised ....................................... (546) 8.88
------- ---------
Outstanding at December 31, 2002 ........................ 3,590 $ 17.27
======= =========
Exercisable:
December 31, 2000 ............................... 1,674 $ 12.31
December 31, 2001 ............................... 1,954 13.59
December 31, 2002 ............................... 1,875 15.55
Stock
Weighted Options Weighted
Stock Options Weighted Average Exercisable Average
Range of Outstanding at Average Remaining Exercise at December 31, Exercise
Exercise Prices December 31, 2002 Life (Years) Price 2002 Price
- ---------------- ----------------- ----------------- -------- --------------- --------
Less than $10.00 307 6.0 $ 8.30 260 $ 8.14
$10.00 to $15.00 869 7.0 13.85 428 13.56
$15.00 to $17.50 908 5.7 16.38 689 16.36
$17.50 to $20.00 515 7.1 19.02 278 19.22
F-21
$20.00 to $22.50 643 7.8 21.39 220 20.96
$22.50 to $26.00 348 9.4 25.90 -- --
During 2002 we adopted a shareholder-approved Employee Stock Purchase Plan
(the "Employee Plan"), under which we have reserved 1.0 million shares of common
stock for issuance to our employees. The Employee Plan provides to employees the
opportunity to invest from 1% to 10% of their annual salary to purchase shares
of CONMED common stock through the exercise of stock options granted by the
Company at a purchase price equal to the lesser of (1)85% of the fair market
value of the common stock at the beginning of a semi-annual period and (2) 85%
of the fair market value of the common stock at the end of such semi-annual
period. During 2003, we issued approximately 28 thousand shares of common stock
under the Employee Plan related to 2002. No stock-based compensation expense has
been recognized in the accompanying consolidated financial statements as a
result of common stock issuances under the Employee Plan.
Note 9 -- Business Segments and Geographic Areas
CONMED'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. We believe our product lines have similar economic,
operating and other related characteristics.
The following is net sales information by product line:
2000 2001 2002
-------- -------- --------
Arthroscopy ................................... $145,044 $155,650 $161,876
Powered surgical instruments .................. 113,738 114,375 114,302
Patient care .................................. 68,261 69,067 69,753
Electrosurgery ................................ 62,459 66,875 69,674
Endoscopy ..................................... 6,371 22,755 36,801
Integrated operating room systems ............. -- -- 656
-------- -------- --------
Total ......................................... $395,873 $428,722 $453,062
======== ======== ========
The following is net sales information for geographic areas:
2000 2001 2002
-------- -------- --------
United States ................................. $288,514 $306,306 $320,312
Japan ......................................... 18,885 18,234 18,820
Canada ........................................ 14,624 16,662 15,980
United Kingdom ................................ 11,904 15,382 18,625
All other countries ........................... 61,946 72,138 79,325
-------- -------- --------
Total ......................................... $395,873 $428,722 $453,062
======== ======== ========
Sales are attributed to countries based on the location of the customer. There
were no significant investments in long-lived assets located outside the United
States at December 31, 2001 and 2002.
Note 10 -- Employee Benefit Plans
We maintain an employee savings plan and several defined benefit pension
plans covering substantially all employees. Total employer contributions to the
employee savings plan were $2.4 million, $1.7 million and $2.0 million in 2000,
2001 and 2002, respectively.
F-22
We make annual contributions to the defined benefit pension plans equal to
the maximum deduction allowed for federal income tax purposes.
Net pension cost for 2000, 2001 and 2002 included the following
components:
2000 2001 2002
------- ------- -------
Service cost-- benefits earned during
the period .................................. $ 2,658 $ 3,622 $ 3,988
Interest cost on projected benefit obligation . 1,608 1,785 2,002
Expected return on plan assets ................ (1,121) (1,211) (1,595)
Net amortization and deferral ................. 21 166 350
------- ------- -------
Net pension cost .............................. $ 3,166 $ 4,362 $ 4,745
======= ======= =======
The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheets at December 31, 2001 and 2002:
2001 2002
-------- --------
Change in benefit obligation
Projected benefit obligation at beginning of year .... $ 22,949 $ 29,748
Service cost ......................................... 3,622 3,988
Interest cost ........................................ 1,785 2,002
Actuarial loss (gain) ................................ 4,597 1,178
Benefits paid ........................................ (3,205) (3,277)
-------- --------
Projected benefit obligation at end of year .......... $ 29,748 $ 33,639
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year ....... $ 13,077 $ 16,963
Actual return on plan assets ......................... 432 (2,261)
Employer contribution ................................ 6,659 6,744
Benefits paid ........................................ (3,205) (3,277)
-------- --------
Fair value of plan assets at end of year ............. $ 16,963 $ 18,169
-------- --------
Change in funded status
Funded status ........................................ $ 12,785 $ 15,470
Unrecognized net actuarial loss ...................... (9,062) (13,760)
Unrecognized transition liability .................... (56) (52)
Unrecognized prior service cost ...................... (140) (129)
Additional minimum pension liability ................. 1,659 7,947
-------- --------
Accrued pension cost ................................. $ 5,186 $ 9,476
======== ========
For 2000, 2001 and 2002 actuarial calculation purposes, the weighted
average discount rate was 7.5%, 7.0% and 6.75%, respectively, the expected long
term rate of return was 8.0% and the rate of increase in future compensation
levels was 4.5%, 4.5% and 3.0%, respectively.
Note 11 -- Legal Matters
From time to time, we have been named as a defendant in certain lawsuits
alleging product liability, patent infringement, or other claims incurred in the
ordinary course of business. We accrue for contingent losses when the loss is
probable and reasonably estimable. Contingent gains are recognized when
realized. Certain of these claims are covered by various insurance policies,
subject to deductible amounts and maximum policy limits.
F-23
Ultimate liability with respect to these contingencies, if any, is not
considered to be material to the consolidated financial statements of the
Company.
Note 12 -- Non-recurring Items
During the quarter ended June 2000, we announced we would replace our
arthroscopy direct sales force with non-stocking, exclusive sales agent groups
in certain geographic regions of the United States. As a result, we incurred a
severance charge of $1.5 million, before income taxes, in the second quarter of
2000. This nonrecurring charge is included in selling and administrative
expense.
As discussed in Note 2, during the third and fourth quarters of 2001, we
incurred certain charges related to the second Imagyn acquisition. These costs
were primarily related to the transition in manufacturing of the Imagyn product
lines from Imagyn's Richland, Michigan facility to our manufacturing plants in
Utica, New York. Such costs totaled $.9 million and $.7 million, respectively,
before income taxes, in each of the third and fourth quarters of 2001. These
non-recurring charges are included in cost of sales.
During the quarter ended September 30, 2002, we entered into a new $200
million senior credit agreement. Deferred financing fees related to the
approximately three years remaining on the former senior credit agreement have
been written off as an extraordinary charge of $.9 million, net of income taxes,
or $.04 per diluted share, on the early extinguishment of debt.
On March 11, 2003, we agreed to settle a patent infringement case filed by
Ludlow Corporation, a subsidiary of Tyco International Ltd. In return for a
one-time $1.5 million payment, CONMED has been granted a nonexclusive license to
the disputed patents used to manufacture the gels used in certain of our ECG
product lines. Accordingly, we recorded a charge to income in the fourth quarter
of 2002 for the $1.5 million plus legal costs of approximately $.5 million.
Note 13 -- Guarantees
We provide service and warranty policies on certain of our products at the
time of sale. Liability under service and warranty policies is based upon a
review of historical warranty and service claim experience. Adjustments are made
to accruals as claim data and historical experience warrant.
The changes in the carrying amount of service and product warranties for
the year ended December 31, 2002, are as follows:
Balance as of January 1, 2002 .............................. $ 2,909
Provision for warranties ................................... 4,287
Claims made ................................................ (3,983)
-------
Balance as of December 31, 2002 ............................ $ 3,213
=======
Note 14-- Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 2001 and 2002 are as follows:
F-24
Three Months Ended
------------------------------------------
March June September December
-------- -------- --------- --------
2001
Net sales ......................... $105,909 $104,171 $ 105,318 $113,324
Gross profit ...................... 56,235 54,206 53,986 59,921
Net income ........................ 6,003 5,734 5,015 7,654
Net income adjusted for SFAS 142 .. 7,416 7,147 6,428 9,067
EPS:
Basic ......................... .26 .25 .20 .30
Basic adjusted for SFAS 142 ... .32 .31 .26 .36
Diluted ....................... .26 .25 .20 .30
Diluted adjusted for SFAS 142 . .32 .31 .25 .35
Three Months Ended
------------------------------------------
March June September December
-------- -------- --------- --------
2002
Net sales ......................... $113,205 $111,269 $ 113,332 $115,256
Gross profit ...................... 59,101 59,558 58,903 59,609
Income before extraordinary loss .. 9,076 8,950 9,167 7,902
Net Income........................ 9,076 8,950 8,223 7,902
EPS - before extraordinary loss:
Basic ......................... .36 .34 .32 .28
Diluted ....................... .35 .33 .32 .27
EPS-Net income
Basic ......................... .36 .34 .29 .28
Diluted ....................... .35 .33 .28 .27
As discussed in Notes 2 and 12, during the third and fourth quarters of
2001, we incurred certain transition charges related to the second Imagyn
acquisition. Such costs totaled $.9 million and $.7 million, respectively,
before income taxes, in each of the third and fourth quarters of 2001. These
nonrecurring charges are included in cost of sales. As discussed in Note 12,
during the fourth quarter of 2002, we incurred a $2.0 million charge, before
income taxes, to selling and administrative expense, related to the settlement
of a patent infringement case.
Note 15 - Subsequent Events
On January 13, 2003, we entered into an agreement to acquire the common
stock of Bionx Implants, Inc. (the "Bionx acquisition") in a cash transaction
valuing Bionx at $4.35 per share. We completed the acquisition on March 10,
2003, paying $46.9 million in cash which we financed through borrowings under
our revolving credit facility (Note 6). Bionx develops and manufactures
self-reinforced resorbable polymer implants including screws, pins and meniscal
implants for use in a variety of orthopedic applications, including sports
medicine and fracture fixation. In 2002, Bionx recorded revenues of
approximately $18.0 million. The acquired product lines are expected to
complement CONMED's existing orthopedic product lines. The purchase price
allocation of the Bionx acquisition is still being finalized.
On March 10, 2003, we entered into an agreement with Bristol-Myers Squibb
Company ("BMS") and Zimmer, Inc., ("Zimmer") to settle a contractual dispute
related to the 1997 sale by BMS and its then subsidiary, Zimmer, of Linvatec
Corporation to CONMED Corporation. As a result of the agreement, BMS has paid us
$9.5 million in cash, which will be recorded as a gain to ordinary income in the
first quarter of 2003 net of legal costs.
F-25
Note 16 - Guarantor Financial Statements
Our credit facility and subordinated notes (the "Notes") are guaranteed
(the "Subsidiary Guarantees") by each of our subsidiaries (the "Subsidiary
Guarantors") except CRC (the "Non-Guarantor Subsidiary"). The Subsidiary
Guarantees provide that each Subsidiary Guarantor will fully and unconditionally
guarantee our obligations under the credit facility and the Notes on a joint and
several basis. Each Subsidiary Guarantor and Non-Guarantor Subsidiary is
wholly-owned by CONMED Corporation. The following supplemental financial
information sets forth on a condensed consolidating basis, consolidating balance
sheet, statement of income and statement of cash flows for the Parent Company
Only, Subsidiary Guarantors and Non-Guarantor Subsidiary and for the Company as
of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001
and 2002.
F-26
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
-------- ---------- ---------- ------------ --------
ASSETS
Current assets:
Cash and cash equivalents ............... $ -- $ 1,181 $ 221 $ -- $ 1,402
Accounts receivable, net ................ -- 7,198 43,990 -- 51,188
Inventories ............................. 23,045 84,345 -- -- 107,390
Deferred income taxes ................... 1,105 -- -- -- 1,105
Prepaid expenses and other current assets 831 2,633 -- -- 3,464
-------- ---------- ---------- ------------ --------
Total current assets .............. 24,981 95,357 44,211 -- 164,549
-------- ---------- ---------- ------------ --------
Property, plant and equipment, net .......... 45,856 45,170 -- -- 91,026
Goodwill, net ............................... 86,412 164,728 -- -- 251,140
Other intangible assets, net ................ 2,808 181,575 -- -- 184,383
Other assets ................................ 483,167 2,376 -- (475,033) 10,510
-------- ---------- ---------- ------------ --------
Total assets ............................ $643,224 $ 489,206 $ 44,211 $ (475,033) $701,608
======== ========== ========== ============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ....... $ 72,241 $ 1,188 $ -- $ -- $ 73,429
Accounts payable ........................ 5,078 14,799 -- -- 19,877
Accrued compensation .................... 3,979 7,884 -- -- 11,863
Income taxes payable .................... 2,372 135 -- -- 2,507
Accrued interest ........................ 4,760 37 157 -- 4,954
Other current liabilities ............... 4,634 2,573 -- -- 7,207
-------- ---------- ---------- ------------ --------
Total current liabilities ........... 93,064 26,616 157 -- 119,837
-------- ---------- ---------- ------------ --------
Long-term debt .............................. 241,404 21,096 -- 262,500
Deferred income taxes ....................... 18,655 -- -- 18,655
Other long-term liabilities ................. 6,467 285,330 41,947 (316,762) 16,982
-------- ---------- ---------- ------------ --------
Total liabilities ....................... 359,590 333,042 42,104 (316,762) 417,974
-------- ---------- ---------- ------------ --------
Shareholders' equity:
Preferred stock ......................... -- -- -- -- --
Common stock ............................ 253 -- -- -- 253
Paid-in capital ......................... 160,757 -- 2,000 (2,000) 160,757
Retained earnings ....................... 128,240 158,333 107 (158,440) 128,240
Accumulated other comprehensive loss .... (5,197) (2,169) -- 2,169 (5,197)
Less common stock in treasury, at cost .. (419) -- -- -- (419)
-------- ---------- ---------- ------------ --------
Total shareholders' equity .......... 283,634 156,164 2,107 (158,271) 283,634
-------- ---------- ---------- ------------ --------
Total liabilities and shareholders' equity $643,224 $ 489,206 $ 44,211 $ (475,033) $701,608
======== ========== ========== ============ ========
F-27
CONMED CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2002
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
-------- ---------- ---------- ------------ --------
ASSETS
Current assets:
Cash and cash equivalents ............... $ 3,824 $ 1,516 $ 286 $ -- $ 5,626
Accounts receivable, net ................ 746 13,397 43,950 -- 58,093
Inventories ............................. 25,829 94,614 -- -- 120,443
Deferred income taxes ................... 6,210 -- 94 -- 6,304
Prepaid expenses and other current assets 823 2,377 -- -- 3,200
-------- ---------- ---------- ------------ --------
Total current assets .............. 37,432 111,904 44,330 -- 193,666
-------- ---------- ---------- ------------ --------
Property, plant and equipment, net .......... 47,327 48,281 -- -- 95,608
Goodwill, net ............................... 96,393 166,001 -- -- 262,394
Other intangible assets, net ................ 3,565 176,706 -- -- 180,271
Other assets ................................ 498,111 2,406 -- (490,316) 10,201
-------- ---------- ---------- ------------ --------
Total assets ............................ $682,828 $ 505,298 $ 44,330 $ (490,316) $742,140
======== ========== ========== ============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ....... $ 1,284 $ 1,347 $ -- $ -- $ 2,631
Accounts payable ........................ 4,907 17,167 -- -- 22,074
Accrued compensation .................... 4,052 6,411 -- -- 10,463
Income taxes payable .................... 5,885 -- -- -- 5,885
Accrued interest ........................ 3,733 36 25 -- 3,794
Other current liabilities ............... 5,781 7,346 -- -- 13,127
-------- ---------- ---------- ------------ --------
Total current liabilities ........... 25,642 32,307 25 -- 57,974
-------- ---------- ---------- ------------ --------
Long-term debt .............................. 234,468 20,288 -- 254,756
Deferred income taxes ....................... 28,446 -- -- 28,446
Other long-term liabilities ................. 7,333 269,259 41,956 (304,523) 14,025
-------- ---------- ---------- ------------ --------
Total liabilities ....................... 295,889 321,854 41,981 (304,523) 355,201
-------- ---------- ---------- ------------ --------
Shareholders' equity:
Preferred stock ......................... -- -- -- -- --
Common stock ............................ 289 -- -- -- 289
Paid-in capital ......................... 231,831 -- 2,000 (2,000) 231,831
Retained earnings ....................... 162,391 184,603 349 (184,952) 162,391
Accumulated other comprehensive loss .... (7,153) (1,159) -- 1,159 (7,153)
Less common stock in treasury, at cost .. (419) -- -- -- (419)
-------- ---------- ---------- ------------ --------
Total shareholders' equity .......... 386,939 183,444 2,349 (185,793) 386,939
-------- ---------- ---------- ------------ --------
Total liabilities and shareholders' equity $682,828 $ 505,298 $ 44,330 $ (490,316) $742,140
======== ========== ========== ============ ========
F-28
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 31, 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
------- ---------- ------------ --------
Net sales .......................... $73,632 $ 322,241 $ -- $395,873
------- ---------- ------------ --------
Cost of sales ...................... 42,461 145,762 -- 188,223
Selling and administrative expense . 20,015 108,301 -- 128,316
Research and development expense ... 1,907 12,963 -- 14,870
------- ---------- ------------ --------
64,383 267,026 -- 331,409
------- ---------- ------------ --------
Income from operations ............. 9,249 55,215 -- 64,464
Interest expense, net .............. -- 34,286 -- 34,286
------- ---------- ------------ --------
Income before income taxes ......... 9,249 20,929 -- 30,178
Provision for income taxes ......... 3,330 7,534 -- 10,864
------- ---------- ------------ --------
Income before equity in earnings
of unconsolidated subsidiaries ... 5,919 13,395 -- 19,314
Equity in earnings of unconsolidated
subsidiaries ..................... 13,395 -- (13,395) --
------- ---------- ------------ --------
Net income ......................... $19,314 $ 13,395 $ (13,395) $ 19,314
======= ========== ============ ========
F-29
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 31, 2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
------- ---------- ---------- ------------ --------
Net sales ............................. $91,609 $ 337,113 $ -- $ -- $428,722
------- ---------- ---------- ------------ --------
Cost of sales ......................... 53,534 150,840 -- -- 204,374
Selling and administrative expense .... 27,620 113,302 (362) -- 140,560
Research and development expense ...... 1,511 13,319 -- -- 14,830
------- ---------- ---------- ------------ --------
82,665 277,461 (362) -- 359,764
------- ---------- ---------- ------------ --------
Income from operations ................ 8,944 59,652 362 -- 68,958
Interest expense, net ................. -- 30,629 195 -- 30,824
------- ---------- ---------- ------------ --------
Income before income taxes ............ 8,944 29,023 167 -- 38,134
Provision for income taxes ............ 3,220 10,448 60 -- 13,728
------- ---------- ---------- ------------ --------
Income before equity in earnings of
unconsolidated subsidiaries ......... 5,724 18,575 107 -- 24,406
Equity in earnings of
unconsolidated subsidiaries ....... 18,682 -- -- (18,682) --
------- ---------- ---------- ------------ --------
Net income ............................ $24,406 $ 18,575 $ 107 $ (18,682) $ 24,406
======= ========== ========== ============ ========
F-30
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Year Ended December 31, 2002
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
------- ---------- ---------- ------------ --------
Net sales ............................. $105,527 $ 347,535 $ -- $ -- $453,062
-------- ---------- ---------- ------------ --------
Cost of sales ......................... 57,207 158,684 -- -- 215,891
Selling and administrative expense .... 33,156 110,097 (1,518) -- 141,735
Research and development expense ...... 1,752 14,335 -- -- 16,087
-------- ---------- ---------- ------------ --------
92,115 283,116 (1,518) -- 373,713
-------- ---------- ---------- ------------ --------
Income from operations ................ 13,412 64,419 1,518 -- 79,349
Interest expense, net ................. -- 23,373 1,140 -- 24,513
-------- ---------- ---------- ------------ --------
Income before income taxes
and extraordinary loss .............. 13,412 41,046 378 -- 54,836
Provision for income taxes ............ 4,829 14,776 136 -- 19,741
-------- ---------- ---------- ------------ --------
Income before equity in earnings of
unconsolidated subsidiaries and
extraordinary loss .................. 8,583 26,270 242 -- 35,095
Equity in earnings of
unconsolidated subsidiaries ....... 26,512 -- -- (26,512) --
-------- ---------- ---------- ------------ --------
Income before extraordinary loss ...... 35,095 26,270 242 (26,512) 35,095
Extraordinary loss, net of income taxes 944 -- -- -- 944
-------- ---------- ---------- ------------ --------
Net income ............................ $ 34,151 $ 26,270 $ 242 $ (26,512) $ 34,151
======== ========== ========== ============ ========
F-31
CONMED CORPORATION
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 2000
(in thousands)
Parent
Company Subsidiary Company
Only Guarantors Eliminations Total
-------- ---------- ------------ --------
Net cash flows from operating
activities ........................... $ 18,238 $ 17,712 $ -- $ 35,950
-------- ---------- ------------ --------
Cash flows from investing activities:
Distributions from subsidiaries ..... 13,618 -- (13,618) --
Payments related to business
acquisitions .................... (6,042) -- -- (6,042)
Purchases of property, plant and
equipment ..................... (10,940) (3,110) -- (14,050)
-------- ---------- ------------ --------
Net cash provided (used)
by investing activities .. (3,364) (3,110) (13,618) (20,092)
-------- ---------- ------------ --------
Cash flows from financing:
Distributions to parent ........... -- (13,618) 13,618 --
Borrowings under revolving
credit facility ............... 17,000 -- -- 17,000
Proceeds from issuance of
common stock .................. 449 -- -- 449
Payments on long-term debt ........ (32,921) -- -- (32,921)
-------- ---------- ------------ --------
Net cash provided (used) by
financing activities ....... (15,472) (13,618) 13,618 (15,472)
-------- ---------- ------------ --------
Effect of exchange rate changes on cash
and cash equivalents ................ -- (663) -- (663)
-------- ---------- ------------ --------
Net increase (decrease) in cash and
cash equivalents ..................... (598) 321 -- (277)
Cash and cash equivalents at
beginning of period .................. 598 3,149 -- 3,747
-------- ---------- ------------ --------
Cash and cash equivalents at
end of period ........................ $ -- $ 3,470 $ -- $ 3,470
======== ========== ============ ========
F-32
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2001
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
--------- ---------- ---------- ------------ ---------
Net cash flows from operating
activities ............................... $ 44,301 $ 74,574 $ 40,264 $ (81,990) $ 77,149
--------- ---------- ---------- ------------ ---------
Cash flows from investing activities:
Distributions from subsidiaries .......... 71,629 -- -- (71,629) --
Note payable from subsidiary ............. (41,947) -- -- 41,947 --
Net purchases of
accounts receivable .................. -- -- (81,990) 81,990 --
Purchases of property, plant and
equipment ............................ (10,390) (4,053) -- -- (14,443)
--------- ---------- ---------- ------------ ---------
Net cash provided (used)
by investing activities .......... 19,292 (4,053) (81,990) 52,308 (14,443)
--------- ---------- ---------- ------------ ---------
Cash flows from financing:
Distributions to parent .................. -- (71,629) -- 71,629 --
Note payable to parent company ........... -- -- 41,947 (41,947) --
Borrowings under revolving
credit facility ........................ 11,000 -- -- -- 11,000
Proceeds from issuance of
common stock ........................... 1,830 -- -- -- 1,830
Payments on long-term debt ............... (76,423) -- -- -- (76,423)
--------- ---------- ---------- ------------ ---------
Net cash provided (used) by
financing activities ............ (63,593) (71,629) 41,947 29,682 $ (63,593)
--------- ---------- ---------- ------------ ---------
Effect of exchange rate changes on cash
and cash equivalents ..................... -- (1,181) -- -- $ (1,181)
--------- ---------- ---------- ------------ ---------
Net increase (decrease) in cash and
cash equivalents ......................... -- (2,289) 221 -- (2,068)
Cash and cash equivalents at
beginning of period ...................... -- 3,470 -- -- 3,470
--------- ---------- ---------- ------------ ---------
Cash and cash equivalents at
end of period ............................ $ -- $ 1,181 $ 221 $ -- $ 1,402
========= ========== ========== ============ =========
F-33
CONMED CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2002
(in thousands)
Parent Non-
Company Subsidiary Guarantor Company
Only Guarantors Subsidiary Eliminations Total
--------- ---------- ---------- ------------ ---------
Net cash flows from operating
activities ............................... $ 19,417 $ 25,240 $ 266 $ -- $ 44,923
--------- ---------- ---------- ------------ ---------
Cash flows from investing activities:
Distributions from subsidiaries .......... 17,214 -- -- (17,214) --
Payments related to business acquisitions (17,375) -- -- -- (17,375)
Purchases of property, plant and
equipment ............................ (4,517) (8,867) -- -- (13,384)
--------- ---------- ---------- ------------ ---------
Net cash provided (used)
by investing activities .......... (4,678) (8,867) -- (17,214) (30,759)
--------- ---------- ---------- ------------ ---------
Cash flows from financing:
Distributions to parent .................. -- (17,013) -- 17,013 --
Payments on note payable to parent company -- -- (201) 201 --
Net proceeds from issuance of
common stock ........................... 66,123 -- -- -- 66,123
Net proceeds from exercise of
stock options .......................... 5,017 -- -- -- 5,017
Repurchase of warrant on common stock .... (2,000) -- -- -- (2,000)
Payments on debt ......................... (183,680) -- -- -- (183,680)
Proceeds of debt ......................... 105,138 -- -- -- 105,138
Payments related to issuance
of debt ................................ (1,513) -- -- -- (1,513)
--------- ---------- ---------- ------------ ---------
Net cash provided (used) by
financing activities ............ (10,915) (17,013) (201) 17,214 (10,915)
--------- ---------- ---------- ------------ ---------
Effect of exchange rate changes on cash
and cash equivalents ..................... -- 975 -- -- 975
--------- ---------- ---------- ------------ ---------
Net increase in cash and
cash equivalents ......................... 3,824 335 65 -- 4,224
Cash and cash equivalents at
beginning of period ...................... -- 1,181 221 -- 1,402
--------- ---------- ---------- ------------ ---------
Cash and cash equivalents at
end of period ............................ $ 3,824 $ 1,516 $ 286 $ -- $ 5,626
========= ========== ========== ============ =========
F-34
SCHEDULE VIII--Valuation and Qualifying Accounts
(in thousands)
Column C
------------------------
Additions
Column B ------------------------
------------ (1) (2) Column E
Column A Balance at Charged to Charged to Column D --------------
- ------------------------------ Beginning of Costs and Other ---------- Balance at End
Description Period Expenses Accounts Deductions of Period
- ------------------------------ ------------ ---------- ---------- ---------- --------------
2002
Allowance for bad debts .. $ 1,553 $ (144) $ (487) $ 922
Inventory reserves ....... $ 8,692 $ 776 $ (2,872) $ 6,596
Deferred tax asset
valuation allowance .... $ 3,410 $ (3,410) $ -- $ --
2001
Allowance for bad debts .. $ 1,479 $ 514 $ (440) $ 1,553
Inventory reserves ....... $ 5,221 $ 620 $ 4,373 $ (1,522) $ 8,692
Deferred tax asset
valuation allowance .... $ 3,834 $ (424) $ 3,410
2000
Allowance for bad debts .. $ 1,434 $ 246 $ (201) $ 1,479
Inventory reserves ....... $ 7,175 $ 520 $ 100 $ (2,574) $ 5,221
Deferred tax asset
valuation allowance .... $ 4,258 $ (424) $ 3,834
F-35
EXHIBIT 2.5
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement"), dated as of
January 13, 2003, is by and among CONMED Corporation, a New York corporation
(the "Purchaser"), Arrow Merger Corporation, a Delaware corporation and wholly
owned subsidiary of the Purchaser ("Merger Sub"), and Bionx Implants, Inc., a
Pennsylvania corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Purchaser and the Board of
Directors of the Company have each determined that it is advisable to merge the
Merger Sub with and into the Company (the "Merger") pursuant to this Merger
Agreement, with the result that the holders of the outstanding shares (the
"Shares") of Common Stock of the Company, par value $.0019 per share (the
"Company Common Stock"), shall receive a payment in cash for each Share as
provided in this Merger Agreement and the Company shall become a wholly owned
subsidiary of the Purchaser;
WHEREAS, the respective Boards of Directors of the Purchaser and the
Company have determined that the Merger is in furtherance of and consistent with
their respective business strategies and is in the best interest of their
respective shareholders, and the Purchaser has approved this Merger Agreement
and the Merger as the sole shareholder of Merger Sub; and
WHEREAS, as a condition to and inducement to the Purchaser's and Merger
Sub's willingness to enter into this Merger Agreement, simultaneously with the
execution of this Merger Agreement, certain shareholders of the Company are
entering into voting agreements with the Purchaser and Merger Sub (the "Voting
Agreements").
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Purchaser, Merger Sub and the Company hereby agree as
follows:
1. THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth
herein, at the Effective Time (as defined in Section 1.4 hereof), in accordance
with this Merger Agreement and the Pennsylvania Business Corporation Law of
1988, as amended (the "Pennsylvania Law"), Merger Sub shall be merged with and
into the Company, the separate existence of Merger Sub (except as may be
continued by operation of law) shall cease, and the Company shall continue as
the surviving corporation. The Company hereinafter sometimes is referred to as
the "Surviving Corporation".
1.2 Effect of the Merger. The Merger shall have the effects set forth in
Section 1929 of the Pennsylvania Law.
1.3 Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Sullivan & Cromwell LLP, 125 Broad Street, New York, New
York at 9:00 A.M. on
the first business day after the date on which the last to be fulfilled or
waived of the conditions set forth in Article 7 (other than those conditions
that by their nature are to be satisfied at the Closing, but subject to the
fulfillment or waiver of those conditions) shall be satisfied or waived in
accordance with this Merger Agreement or (ii) at such other place and time
and/or on such other date as the Company and Purchase may agree in writing (the
"Closing Date").
1.4 Consummation of the Merger. As soon as is practicable after the
Closing, the parties hereto will cause the Merger to be consummated by filing
Articles of Merger with the Department of State of the Commonwealth of
Pennsylvania, in such form as required by, and executed in accordance with, the
relevant provisions of applicable law. The time of the filing of the Articles of
Merger with the Department of State of the Commonwealth of Pennsylvania is
referred to herein as the "Effective Time".
1.5 Articles of Incorporation; By Laws. The Articles of Incorporation and
By-Laws of the Company, as in effect immediately prior to the Effective Time,
shall be the Articles of Incorporation and By-Laws of the Surviving Corporation,
and thereafter shall continue to be its Articles of Incorporation and By-Laws
until amended as provided therein and under Pennsylvania Law.
1.6 Directors and Officers of Surviving Corporation.
(a) The directors of Merger Sub shall be the initial directors of
the Surviving Corporation and shall hold office from the Effective Time until
their respective successors are duly elected or appointed and qualify in the
manner provided in the Articles of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
(b) The officers of Merger Sub at the Effective Time shall be the
initial officers of the Surviving Corporation and shall hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualify in the manner provided in the Articles of Incorporation and By-Laws
of the Surviving Corporation, or as otherwise provided by law.
1.7 Dissenters Rights. In accordance with Section 1571 of the Pennsylvania
Law, no appraisal rights shall be available to holders of Shares in connection
with the Merger.
2. CONVERSION AND PAYMENT
2.1 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, the Company or the
holder of any of the securities of the Company or Merger Sub:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than Shares to be canceled pursuant to Section 2.1(b)
hereof) shall be canceled and extinguished and be converted into and represent
the right to receive from the Surviving Corporation $4.35 in cash, without
interest (the "Merger Consideration"). All such Shares, by virtue of the Merger
and without any action on the part of the holders of the Shares, shall no longer
be outstanding and shall be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such Shares shall thereafter cease
to have any rights with respect
-2-
to such Shares, except the right to receive the Merger Consideration for such
Shares upon the surrender of such certificate in accordance with Section 2.3.
(b) Each Share issued and outstanding immediately prior to the
Effective Time that is (i) held in the treasury of the Company or (ii) owned by
the Purchaser or any direct or indirect subsidiary of the Purchaser (including
the Merger Sub) shall, by virtue of the Merger and without any action on the
part of the holder thereof, cease to be outstanding, shall be canceled and
retired and no payment shall be made with respect thereto.
(c) Each share of common stock, par value $.0019 per share, of the
Surviving Corporation issued and outstanding immediately prior to the Effective
Time shall be converted into and become one validly issued, fully paid and
non-assessable share of common stock, no par value, of the Surviving
Corporation.
2.2 Payment Fund. Immediately prior to the Effective Time, the Purchaser
shall deposit or shall cause to be deposited with the Disbursing Agent (as
defined in Section 2.3 hereof) in a separate fund established for the benefit of
the holders of Shares, for payment in accordance with this Article 2 through the
Disbursing Agent (the "Payment Fund"), immediately available funds in amounts
necessary to make the payments pursuant to this Article 2 to holders of Shares
(other than the Company, the Purchaser, Merger Sub or any other subsidiary of
the Purchaser). The Disbursing Agent shall, pursuant to irrevocable instructions
delivered prior to the Effective Time, pay the Merger Consideration out of the
Payment Fund.
The Disbursing Agent shall invest portions of the Payment Fund as the
Purchaser directs in obligations of or guaranteed by the United States of
America, in commercial paper obligations receiving the highest investment grade
rating from both Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services, a Division of The McGraw-Hill Companies, or in certificates of
deposit, bank repurchase agreements or banker's acceptances of commercial banks
with capital exceeding $1,000,000,000 (collectively, "Permitted Investments");
provided, however, that the maturities of Permitted Investments shall be such as
to permit the Disbursing Agent to make prompt payment to former holders of
Shares entitled thereto as contemplated by this Article 2. The Purchaser shall
cause the Payment Fund to be promptly replenished to the extent of any losses
incurred as a result of Permitted Investments. All earnings of Permitted
Investments shall be paid to the Purchaser. If, for any reason (including losses
incurred as a result of Permitted Investments), the Payment Fund is inadequate
to pay the amounts to which holders of Shares shall be entitled under this
Article 2, the Purchaser shall in any event be liable for payment thereof. The
Payment Fund shall not be used for any purpose except as expressly provided in
this Merger Agreement.
2.3 Payment of Cash for Shares. Each holder of a certificate or
certificates representing Shares canceled upon consummation of the Merger
pursuant to Section 2.1(a) hereof may thereafter surrender such certificate to a
disbursing agent to be designated by the Purchaser and reasonably satisfactory
to the Company (the "Disbursing Agent"), as agent for such holders of Shares, to
effect the surrender of such certificates on their behalf for a period ending
twelve months after the Effective Time. The Purchaser agrees that promptly after
the Effective Time it will distribute to such holders a form of letter of
transmittal and instructions (in the form and substance of a letter of
transmittal and instructions to be approved by the Company
-3-
prior to the Effective Time, such approval not to be unreasonably withheld) for
use in effecting the surrender of the certificates which, immediately prior to
the Effective Time, represented Shares in exchange for payment therefor. Each
such holder shall be entitled upon surrender of one or more certificates
formerly representing Shares, together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, to receive
in exchange therefor a check representing the amount to which such holder is
entitled in respect of the canceled Shares represented by such certificates
after giving effect to any required federal, state or local withholding,
transfer, stamp, sales or similar Taxes. Until so surrendered and exchanged,
each such certificate shall, after the Effective Time, be deemed to represent
only the right to receive such amount. If payment is to be made to a person
other than the person in whose name a surrendered certificate is registered, it
shall be a condition to such payment that the certificate so surrendered shall
be endorsed or shall be otherwise in proper form for transfer, with the
registered owner's signature guaranteed by a firm which is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or by a commercial bank or trust company having an
office or correspondent in the United States, and that the person requesting
such payment shall have paid any transfer and other Taxes required by reason of
such payment in a name other than that of the registered holder of the
certificate surrendered or shall have established to the satisfaction of the
Purchaser or the Disbursing Agent that such Tax either has been paid or is not
payable. If any of the cash deposited with the Disbursing Agent pursuant to
Section 2.2 hereof for purposes of payment in exchange for such Shares remains
unclaimed following the expiration of 180 days after the Effective Time, such
cash shall be delivered to the Purchaser by the Disbursing Agent, and thereafter
the Disbursing Agent shall not be liable to any persons claiming any amount of
such cash and the surrender and exchange shall be effected directly with the
Purchaser. None of Purchaser, the Surviving Corporation, the Disbursing Agent or
any other Person shall be liable to any former holder of Shares for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws. No interest shall accrue or be payable with
respect to any amounts which any holder shall be entitled to receive. The
Purchaser or the Disbursing Agent shall be authorized to pay the cash
attributable to any certificate theretofore issued which has been lost or
destroyed, but only upon receipt of satisfactory evidence of ownership of the
Shares represented thereby and of appropriate indemnification. From and after
the Effective Time, the holders of certificates evidencing ownership of Shares
outstanding immediately prior to the Merger shall cease to have any rights with
respect to such Shares except as otherwise provided herein or by law.
2.4 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Merger Agreement and to vest the Surviving Corporation with
full rights, title and possession to all assets, properties, rights, privileges,
immunities and franchises of either the Company or Merger Sub, the officers and
directors of each such corporation are fully authorized in the name of such
corporation or otherwise to take, and shall take, all such lawful and necessary
action.
2.5 Transfer of Shares After Effective Time. No transfers of Shares shall
be made on the stock transfer books of the Surviving Corporation at or after the
Effective Time.
2.6 Exercise and Cancellation of Company Options. Prior to the Effective
Time, the Board of Directors of the Company or, if appropriate, a committee
thereof shall adopt appropriate resolutions and take all other actions necessary
and appropriate to provide that,
-4-
immediately prior to the Effective Time, each unexpired and unexercised option
or similar right to purchase Company Common Stock (the "Company Options or the
"Stock Options") under the Company's Stock Option Plan (as defined in Section
4.4 hereof) or Investment Plan (as defined in Section 4.4 hereof) or any stock
option plan, agreement or arrangement of the Company (collectively, the "Company
Stock Option Plans") shall become exercisable and vested with respect to all of
the shares of Company Common Stock subject thereto, and, immediately prior to
the Effective Time shall be cancelled (except to the extent that such
cancellation is not permitted under the terms of the Company's Investment Plan)
and, in exchange therefore, each former holder of any such cancelled Company
Option shall be entitled to receive, in consideration of the cancellation of
such Company Option and in settlement therefore, a payment in cash (subject to
any applicable Taxes required by applicable law to be withheld) in an amount
equal to the product of (A) the total number of shares of Company Common Stock
previously subject to such Company Option and (B) the excess, if any, of the
Merger Consideration over the exercise price per share of Company Common Stock
previously subject to such Company Option (such amounts payable hereunder with
respect to all Company Options being referred to as the "Option Payments"). From
and after the Effective Time, any such cancelled Company Option shall no longer
be exercisable by the former holder thereof, but shall only entitle such holder
to the payment of the Option Payment. The Company shall use its best efforts to
ensure that former holders of Company Options will have no rights other than the
right to receive their respective portion of the Option Payments, including
obtaining consents from holders of Company Options under the Company's
Investment Plan. The Company has delivered to the Purchaser consents signed by
holders of Company Options covering all but 18,624 of the shares issuable upon
exercise of Company Options granted pursuant to the Company's Investment Plan
and shall use its best efforts to obtain similar consents from all other holders
of such Company Options as soon as practicable. The Purchaser shall cause the
Surviving Corporation to pay any Option Payment not paid prior to the Effective
Time.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company as follows:
3.1 Organization and Qualification. Each of the Purchaser and Merger Sub
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has the requisite corporate power
to carry on its respective business as now conducted. The Purchaser is duly
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction where the character of its properties owned or leased or the
nature of its activities makes such qualification necessary, except where the
failure to be so qualified is not reasonably likely to have a material adverse
effect on the Purchaser and its subsidiaries taken as a whole.
3.2 Authority Relative to this Merger Agreement. Each of the Purchaser and
Merger Sub has the requisite corporate power and authority to enter into this
Merger Agreement and to carry out its respective obligations hereunder. The
execution and delivery of this Merger Agreement by the Purchaser and Merger Sub
and the consummation by the Purchaser and Merger Sub of the transactions
contemplated hereby have been duly authorized by the respective
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Boards of Directors of the Purchaser and Merger Sub and by the Purchaser as the
sole shareholder of Merger Sub, and no other corporate proceedings on the part
of the Purchaser or Merger Sub are necessary to authorize this Merger Agreement
and the transactions contemplated hereby. This Merger Agreement has been duly
executed and delivered by the Purchaser and Merger Sub and constitutes a valid
and binding obligation of each such entity. Neither the Purchaser nor Merger Sub
is subject to or obligated under any provision of (i) its respective Certificate
or Articles of Incorporation or By-Laws, (ii) any contract, agreement, mortgage,
indenture or other document, (iii) any license, franchise or permit or (iv) any
law, regulation, order, judgment or decree, which would be breached or violated
or in respect of which a right of termination or acceleration or any encumbrance
on any of its assets would be created by its execution and performance of this
Merger Agreement, except (as to (ii), (iii) or (iv) above) where such breach,
violation or right would not individually, or in the aggregate, prevent or
materially delay the Purchaser or Merger Sub from performing its obligations
under this Merger Agreement. The consummation of Merger by the Purchaser and
Merger Sub will not require the consent or approval of any party other than (i)
satisfaction of applicable requirements, if any, of the Securities Exchange Act
of 1934 (the "Exchange Act"), state "blue sky" or takeover laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) filing and recordation of appropriate merger documents as required
by the Pennsylvania Law and (iii) where failure to obtain such consents or
approvals would not prevent or materially delay the Purchaser or Merger Sub from
performing its obligations under this Merger Agreement.
3.3 Financing. The Purchaser has cash, marketable securities or credit
available for use in connection with the acquisition of the Company in an
aggregate amount sufficient to consummate the transactions contemplated hereby.
3.4 Merger Sub Formation. Merger Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Merger Agreement. Since the
date of its incorporation, Merger Sub has not carried on any business or
conducted any operations other than execution of this Merger Agreement, the
performance of its obligations hereunder and related ancillary matters.
3.5 Ownership of Company Common Stock. As of the date of this Merger
Agreement, the Purchaser does not own any shares of Company Common Stock.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the corresponding sections or subsections of the
disclosure letter delivered to the Purchaser by the Company prior to entering
into this Merger Agreement (the "Disclosure Letter" or "Company Disclosure
Schedule"), the Company hereby represents and warrants to the Purchaser and
Merger Sub that:
4.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has the requisite corporate power to carry on
its business as it is now being conducted. The Company is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its
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activities makes such qualification necessary, except where the failure to be so
qualified would not have a "Material Adverse Effect". As used in this Merger
Agreement, the term "Material Adverse Effect" shall mean any development, effect
or change that, individually, or in the aggregate with such other developments,
effects or changes, has had, or could reasonably be expected to have, a material
adverse effect on the financial condition, business, revenues, results of
operations, properties, assets or liabilities of the Company and its
Subsidiaries (as defined in Section 9.4 hereof), taken as a whole, other than
any such development, effect or change resulting from (i) the loss of revenues
from the Company's sales agents, distributors or dealers ("Distributors")
resulting from the announcement of this Merger Agreement or any payments made by
the Company to Distributors as described in Section 6.10 of the Disclosure
Letter, (ii) changes in general economic conditions in the United States or
abroad (including, without limitation, any effect that acts of terrorism or
outbreak of war have on such general economic conditions), or (iii) legal,
governmental or regulatory factors (including, without limitation, any effect
that acts or terrorism or outbreak of war have on such legal, governmental or
regulatory factors) generally affecting companies in the Company's industry;
provided, in each case of clauses (ii) and (iii), that the Company is not
materially disproportionately affected, as compared to other companies in the
Company's industry, by such developments, effects, changes or factors.
4.2 Articles of Incorporation and By-Laws. The Articles of Incorporation
and By-Laws in the form attached to Section 4.2 of the Disclosure Letter are the
Articles of Incorporation and By-Laws of the Company as in effect on the date of
this Merger Agreement.
4.3 Subsidiaries. Each of the Company's Subsidiaries is a corporation or
other entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has the requisite power (corporate
or otherwise) to carry on its business as it is now being conducted. Each such
Subsidiary is duly qualified as a foreign corporation or other entity to do
business, and is in good standing, in each jurisdiction where the character of
its properties, owned or leased, or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified is not
reasonably likely to have a Material Adverse Effect. All of the outstanding
shares of capital stock or ownership interests of each of the Company's
Subsidiaries are validly issued, fully paid and nonassessable and are owned by
the Company or by a wholly owned Subsidiary of the Company, free and clear of
all liens, claims, pledges or encumbrances, and there are no proxies outstanding
with respect to such shares or interests. Section 4.3 of the Disclosure Letter
sets forth a true and complete list of the ownership interests of the Company or
its Subsidiaries in the Subsidiaries and in any other corporation, partnership,
joint venture or other business association or entity.
4.4 Capitalization. The authorized capital stock of the Company consists
of 8,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"), and 31,600,000 shares of Company Common Stock. As of the
date hereof, (i) no shares of Preferred Stock were outstanding, (ii) 10,773,397
shares of Company Common Stock were outstanding, all of which were validly
issued, fully paid and nonassessable, (iii) 99,716 shares of Company Common
Stock were held in the treasury of the Company, (iv) 2,181,313 shares of Company
Common Stock were reserved for issuance pursuant to the Company's 1996 Stock
Option Plan (the "Stock Option Plan"), a copy of which has been furnished
previously to the Purchaser, (v) 394,536 shares of Company Common Stock were
reserved for issuance pursuant to the
-7-
Company's Investment Plan (the "Investment Plan"), a copy of which has been
furnished previously to the Purchaser, (vi) options to purchase 1,095,479 shares
of Company Common Stock were outstanding under the Stock Option Plan, and (vii)
options to purchase 149,639 shares were outstanding under the Investment Plan.
Section 4.4 of the Disclosure Letter sets forth a true and complete listing of
all Stock Options outstanding on the date hereof, showing, as of the date
hereof, the names of the holders of such Stock Options, the number of Stock
Options so held and the exercise prices of such Stock Options. Except as set
forth above and except as set forth in Section 4.4 of the Disclosure Letter,
there are not now, and at the Effective Time there will not be, any shares of
capital stock or other securities of the Company or its Subsidiaries issued or
outstanding, any preemptive or other outstanding rights, options, warrants,
conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements, calls, commitments or rights of any kind that
obligate the Company or any of its Subsidiaries to issue or sell any shares of
capital stock or other securities of the Company or any of its Subsidiaries or
any securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire, any securities of
the Company or any of its Subsidiaries, and no securities or obligations
evidencing such rights are or will be at the Effective Time authorized, issued
or outstanding. The Company does not have outstanding any bonds, debentures,
notes or other obligations the holders of which have the right to vote (or
convertible into or exercisable for securities having the right to vote) with
the stockholders of the Company on any matter. After the Effective Time, the
Surviving Corporation will have no obligation to issue, transfer or sell any
Shares or common stock of the Surviving Corporation pursuant to any Benefit Plan
(as defined in Section 4.9(a), other than with respect to Company Options
granted under the Investment Plan that have not been cancelled).
4.5 Authority Relative to this Merger Agreement; Approval; Fairness. The
Company has all requisite corporate power and authority to enter into this
Merger Agreement and to perform its obligations hereunder. The execution and
delivery of this Merger Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly authorized by the
Board of Directors of the Company and no other corporate proceedings on the part
of the Company are necessary to authorize this Merger Agreement and the
transactions contemplated hereby, except for any required approval of the Merger
by holders of a majority of the votes cast at the Company Shareholders' Meeting
by holders of the Company Common Stock (assuming a quorum is present) as set
forth in Section 6.2 of this Merger Agreement (the "Company Requisite Vote").
This Merger Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms. The Board of Directors of the Company (A) has
unanimously approved this Merger Agreement and the Merger and other transactions
contemplated hereby and (B) has received the opinion of its financial advisors,
U.S. Bancorp Piper Jaffray, to the effect that the consideration to be received
by the holders of the Shares in the Merger is fair to such holders from a
financial point of view, a copy of which opinion shall be delivered to the
Purchaser within one (1) business day after the date hereof. The execution,
delivery and performance of this Merger Agreement by the Company do not, and the
consummation by the Company of the Merger and the other transactions
contemplated hereby will not, constitute or result in (A) a breach or violation
of, or a default under, the articles of incorporation or by-laws of the Company
or the comparable governing instruments of any of its Subsidiaries, (B) a breach
or violation of, a default under, the acceleration of any obligations under or
the creation of a lien, pledge, security interest or other encumbrance on the
assets of the
-8-
Company or any of its Subsidiaries (with or without notice, lapse of time or
both) pursuant to, any agreement, lease, license, contract, note, mortgage,
indenture, arrangement or other obligation ("Contracts") binding upon the
Company or any of its Subsidiaries or any Law (as defined in Section 4.13
hereof) or permit, franchise or license to which the Company or any of its
Subsidiaries is subject or (C) any change in the rights or obligations of any
party under any of the Contracts, except, in the case of clause (B) or (C)
above, for any breach, violation, default, acceleration, creation or change
that, individually or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect or prevent, materially delay or materially impair the
ability of the Company to consummate the transactions contemplated by this
Merger Agreement. Section 4.5 of the Disclosure Letter sets forth a correct and
complete list of Contracts of the Company and its Subsidiaries pursuant to which
consents or waivers are or may be required prior to consummation of the
transactions contemplated by this Merger Agreement (whether or not subject to
the exception set forth with respect to clauses (B) and (C) above). Except as
set forth in Section 4.5 of the Disclosure Letter, the consummation of the
Merger by the Company and the other transactions contemplated hereby will not
require the consent or approval of or registration or filing with any Federal,
state or local government or any court, administrative or regulatory agency or
commission or other governmental authority or agency, domestic or foreign, other
than (i) approval of the Company's shareholders, (ii) applicable requirements,
if any, of the Exchange Act, state "blue sky" or takeover laws and the HSR Act
and (iii) filing and recordation of appropriate merger documents as required by
the Pennsylvania Law. To the knowledge of the Company, no state takeover statute
or similar statute or regulation (each, a "Takeover Statute") applies or
purports to apply to the Merger, this Merger Agreement or any of the
transactions contemplated hereby. To the full extent possible, the Company has
opted out of Sections 1715, 2538, 25E, 25F, 25G and 25H of the Pennsylvania Law.
By virtue of resolutions approved by the Company's Board of Directors, the
Merger, this Merger Agreement and the transactions contemplated hereby will not
be subject to the provisions set forth in Article 11 of the Company's articles
of incorporation. Pursuant to Pennsylvania Law, no shareholder of the Company
shall have any dissenters or appraisal rights with respect to the Merger.
4.6 Commission Filings. The Company has previously delivered to the
Purchaser (i) its Annual Report on Form 10-K for the year ended December 31,
2001, and any amendments thereto, as filed with the Securities and Exchange
Commission (the "SEC") (as amended through the date hereof, the "10-K"), (ii)
its proxy statement relating to the Company's meetings of shareholders (whether
annual or special) during 2002, as filed with the SEC, and (iii) all other
reports filed by the Company with the SEC under the Exchange Act since January
1, 2000 (collectively, the "SEC Documents"). As of their respective dates, the
SEC Documents complied as to form in all material respects with the requirements
of the Exchange Act and the rules and regulations of the SEC promulgated
thereunder and applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
consolidated financial statements of the Company and its Subsidiaries included
in the SEC Documents previously provided to the Purchaser comply as to form in
all material respects with applicable accounting requirements and published
rules of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto and
except, in the case of unaudited statements, as permitted by Form 10-Q and
Regulation S-X of
-9-
the SEC) and fairly present the consolidated financial position of the Company
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations, changes in shareholders' equity (to the extent
applicable) and statements of cash flow for the periods then ended, subject, in
the case of the unaudited consolidated interim financial statements, to normal
year-end adjustments and any other adjustments described therein. The
consolidated unaudited financial statements of the Company and its Subsidiaries
for the period ended September 30, 2002 (the "Unaudited Third Quarter Financial
Statements") previously provided to the Purchaser have been prepared using the
same accounting principles and policies and in a manner consistent with the
consolidated financial statements of the Company and its Subsidiaries for the
year ended December 31, 2001 included in the 10-K and fairly present the
consolidated financial position of the Company and its consolidated Subsidiaries
as of September 30, 2002 and the consolidated results of their operations and
statement of cash flows for the nine months ended September 30, 2002. As of the
date hereof, the Company has not filed any definitive reports or statements with
the SEC since November 22, 2002. The Company will provide the Purchaser with
each draft version of the Company's Annual Report on Form 10-K, including
documents incorporated therein by reference, for the year ended December 31,
2002, promptly after preparation of such draft.
4.7 Absence of Certain Changes or Events. Since December 31, 2001, except
as set forth in Section 4.7 of the Disclosure Letter or SEC Documents, neither
the Company nor any of its Subsidiaries has: (a) suffered any Material Adverse
Effect or any development, event, change or condition that could reasonably be
expected to have a Material Adverse Effect; (b) conducted its business and
operations, or engaged in any material transaction, other than in the ordinary
course of business and consistent with past practices except, subsequent to the
date hereof, as permitted by Section 5.1 hereof, (c) suffered any material
damage, destruction or other casualty loss with respect to any material asset or
property owned, leased or otherwise used by the Company or any of its
Subsidiaries, whether or not covered by insurance, (d) made any declaration,
setting aside or payment of any dividend or other distribution in cash, stock or
property in respect of the capital stock of the Company or (e) made any change
in accounting principles, practices or methods other than as required by
generally accepted accounting principles. Since December 31, 2001, except as
provided for herein or as disclosed in the SEC Documents and other than in the
ordinary course, there has not been any increase in the compensation payable or
which could become payable by the Company and its Subsidiaries to their officers
or key employees, or any amendment of any Benefit Plans.
4.8 Litigation and Liabilities. Except as disclosed in Section 4.8 of the
Disclosure Letter or SEC Documents, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of the executive officers of the Company,
threatened against the Company or any of its affiliates or (ii) material
obligations or liabilities, whether or not accrued, contingent, unasserted or
otherwise and whether or not required to be disclosed, or any other facts or
circumstances of which the executive officers of the Company have knowledge that
could result in any claims against, or obligations or liabilities of, the
Company or any of its affiliates except for, in the case of clause (ii),
obligations or liabilities arising in the ordinary course of business consistent
with past practices. Section 4.8 of the Disclosure Letter identifies and sets
forth the amount of the obligations or liabilities, whether or not accrued,
contingent, unasserted or otherwise and whether or not required to be disclosed,
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of the Company or any of its affiliates resulting from the execution of this
Merger Agreement or the consummation of the transactions contemplated hereby.
4.9 Employee Benefits.
(a) True and complete copies of all documents comprising Benefit
Plans have been provided to the Purchaser. For purposes of this Merger
Agreement, the term "Benefit Plan" includes any plan, contract or arrangement
(regardless of whether funded or unfunded, or foreign or domestic) which is
sponsored by the Company or any of its Subsidiaries, or to which the Company or
any of its Subsidiaries makes contributions or which covers any employee of the
Company or any Subsidiary of the Company in his or her capacity as an employee
or to which the Company or any Subsidiary of the Company has any obligation with
respect to any current or former employee, and which is (i) an "Employee Benefit
Plan" within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (ii) a severance contract with (an)
employee(s) or any severance plan applicable to employees, or (iii) a stock
option plan or any other plan of deferred compensation.
(b) All Benefit Plans are valid and binding and in full force and
effect and there are no material defaults thereunder. Each Benefit Plan complies
currently, and has complied in the past, in all material respects in form and
operation, with all applicable provisions of ERISA, the Internal Revenue Code of
1986, as amended (the "Code"), and other applicable law, except for failures to
comply which is not reasonably likely to have a Material Adverse Effect. Except
as set forth in Section 4.9 of the Disclosure Letter, the Company does not
sponsor any "employee pension benefit plan" within the meaning of Section 3(2)
of ERISA ("Pension Plan") which is intended to be qualified under Section 401(a)
of the Code or provide any retiree health and life benefits under any Benefit
Plan (excluding (i) continuation coverage required under the Consolidated
Omnibus Budget Reconciliation Act of 1985 and (ii) as set forth in Section 4.9
of the Disclosure Letter, to the extent not material, any written arrangements
for post-termination of employment medical or life coverage between the Company
and any individual). There is no pending or, to the knowledge of senior
management of the Company, threatened litigation relating to the Benefit Plans,
except for pending or threatened litigation that is not, individually or in the
aggregate, reasonably likely to have a Material Adverse Effect. Neither the
Company nor any of its Subsidiaries has engaged in, or failed to engage in, a
transaction with respect to any Benefit Plan that is reasonably likely to
subject the Company or any of its Subsidiaries to a Tax or penalty imposed by
either Section 4975 or 4980B of the Code or Section 502(i), 502(c), 502(1) and
601 through 608 of ERISA in an amount which would have a Material Adverse
Effect.
(c) No Benefit Plan subject to Title IV of ERISA (including any
"multiemployer plan" as defined in ERISA) has been sponsored or contributed to
by the Company or any Subsidiary during the six-year period immediately
preceding the date of this Merger Agreement.
(d) All contributions required to be made, and claims to be paid,
under the terms of any Benefit Plan have been timely made or reserves therefor
on the balance sheet of the Company have been established, which reserves are
adequate in all material respects.
-11-
4.10 Taxes. For the purposes of this Section 4.10, the term "Tax" shall
include all Taxes, charges, withholdings (including, without limitation, any
income, social security and employment Tax withholding for all types of
compensation), fees, levies, penalties, additions, interest or other assessments
imposed by any United States federal, state or local authority or any other
Taxing authority on the Company or any of its Tax Affiliates (as defined below)
as to their respective income, profit, franchise, gross receipts, payroll,
sales, employment, worker's compensation, use, property, withholding, excise,
occupancy, environmental and other Taxes, duties or assessments of any nature
whatsoever. The Company has filed or caused to be filed timely (taking into
account all extensions validly applied by the Company) all material federal,
state, local and foreign Tax returns including all informational returns
required to be filed by each of it and any member of its consolidated, combined,
unitary or similar group (each such member, a "Tax Affiliate"). Such returns,
reports and other information are accurate and complete in all material
respects. The Company has made available to Purchaser true and correct copies of
the United States federal income Tax returns and Pennsylvania corporate income
Tax and capital stock and franchise Tax returns for each of the three most
recent years ending on or before December 31, 2002. The Company has timely paid
or caused to be paid or has made adequate provision or set up an adequate
accrual or reserve on its balance sheet (in accordance with generally accepted
accounting principles) for the payment of, all Taxes due or payable (without
regard to whether such Taxes have been assessed) in respect of the periods for
which returns are due, and has established (or will establish at least
quarterly) an adequate accrual or reserve for the payment of all Taxes due or
payable (without regard to whether such Taxes have been assessed) in respect of
the first period following the last period for which returns are due. Neither
the Company nor any of its Tax Affiliates has any material liability for Taxes
in excess of the amount so paid or accruals or reserves so established. No
deficiencies for any Tax in excess of the amount reserved or provided therefor
has, to the knowledge of the senior management of the Company, been threatened,
claimed, proposed or assessed. No waiver or extension of time to assess any
Taxes has been given or requested and remains in effect on the date hereof. As
of the date hereof and except as disclosed in its SEC Documents or in Section
4.10 of the Disclosure Letter, there is no outstanding audit examination,
deficiency, refund litigation or outstanding waivers or agreements extending the
applicable statute of limitations for the assessment of collection of any Taxes
for any period with respect to any Taxes of the Company or any of its Tax
Affiliates. Neither the Company nor any of its Tax Affiliates is a party to any
Tax sharing, indemnification or similar agreement or any agreement pursuant to
which the Company or any of its Tax Affiliates has any obligation to any party
(other than Company or one of its Tax Affiliates) with respect to any Taxes or
is or was a member of any affiliated group filing combined, consolidated or
unitary Tax returns other than a group of which the Company is or was the common
parent. Neither the Company nor any of its Tax Affiliates has been a party to
any distribution occurring during the last two (2) years in which the parties to
such distribution treated such distribution as one to which Section 355 of the
Code applied. No liens with respect to Taxes exist with respect to Company or
any of its Tax Affiliates other than statutory liens for Taxes not yet due and
payable or that are being contested in good faith and reserved for (in
accordance with generally accepted accounting principles) on the Company's
balance sheet.
4.11 Information Supplied. Any proxy statement mailed by the Company to
the holders of Shares after the date hereof and all amendments and supplements
thereto will comply as to form in all material respects with the applicable
requirements of the Exchange Act and the
-12-
rules and regulations thereunder and will not, at the time of (a) the first
mailing thereof or (b) the meeting called pursuant to Section 6.2, if any,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by the Company with respect to
information supplied by the Purchaser or Merger Sub expressly for inclusion in
such proxy statement.
4.12 Licenses and Permits; Governmental Notices.
(a) The Company and its Subsidiaries have obtained all material
licenses and permits necessary to conduct their respective businesses and to own
and operate their respective assets and such licenses and permits are valid and
in full force and effect. No material defaults or violations exist or have been
recorded in respect of any such license or permit. No proceeding is pending or,
to the knowledge of the Company, threatened looking toward the revocation,
limitation or non-renewal of any such license or permit.
(b) Since December 31, 2001, except as set forth in the SEC
Documents and Section 4.12 of the Disclosure Letter, the Company has not
received any written notice regarding, and has not been made a party to, any
proceeding alleging that (a) the Company is, or may be in, violation of any law,
governmental regulation or order, (b) the Company must change any of its
business practices to remain in compliance with any law, governmental regulation
or order, (c) the Company has failed to obtain any license or permit required
for the conduct of its business, or (d) the Company is in default under or
violation of any license or permit.
4.13 Compliance with Laws. Except as set forth in the SEC Reports filed
prior to the date hereof and Section 4.13 of the Disclosure Letter, the
businesses of each of the Company and its Subsidiaries have not been, and are
not being, conducted in violation in any material respect of any federal, state,
local or foreign law, statute, ordinance, rule, regulation, judgment, order,
injunction, decree, arbitration award, agency requirement, license or permit of
any governmental authority (collectively, "Laws"). Except as set forth in the
SEC Reports filed prior to the date hereof, no investigation or review by any
governmental authority with respect to the Company or any of its Subsidiaries is
pending or, to the knowledge of the Company, threatened, nor has any
governmental authority indicated an intention to conduct the same. To the
knowledge of the Company, no material change is required in the Company's or any
of its Subsidiaries' processes, properties or procedures in connection with any
such Laws, and the Company has not received any notice or communication of any
material noncompliance with any such Laws that has not been cured as of the date
hereof.
4.14 Insurance. As of the date hereof, the Company and each of its
Subsidiaries are covered under insurance policies and programs which provide
coverage to the Company and its Subsidiaries by insurers, reasonably believed by
the Company to be of recognized financial responsibility and solvency, against
such losses and risks and in such amounts as are customary in the businesses in
which they are engaged. All material policies of insurance and fidelity or
surety bonds insuring the Company or any of its Subsidiaries or their respective
businesses, assets, employees, officers and directors of which the Company has
copies have previously been made available for inspection by the Purchaser and
are in full force and effect. Except as otherwise set forth in Section 4.14 of
the Disclosure Letter or SEC Documents, as of the date
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hereof, there are no material claims by the Company or any Subsidiary under any
such policy or instrument as to which any insurance company is denying liability
or defending under a reservation of rights clause other than a customary
reservation of rights clause. All necessary notifications of claims have been
made to insurance carriers other than those where the failure to so notify is
not reasonably expected to have a Material Adverse Effect.
4.15 Contracts. Section 4.15 of the Disclosure Letter sets forth a true
and complete list of the following contracts to which the Company or its
Subsidiaries is a party (the "Material Contracts"):
(a) any contract with respect to which revenues of $50,000 or more
were generated in 2002 or any contract committing the Company to expenses of
$50,000 or more in the United States, or $100,000 or more outside the United
States, in 2003;
(b) any lease of real property or any lease of personal property
with an annual rental of more than $20,000;
(c) any contract or agreement for capital expenditures in excess of
$20,000;
(d) any employee collective bargaining agreement or other contract
with any labor union;
(e) any covenant not to compete or contract or agreement that
purports to limit in any material respect either the type of business in which
the Company or its Subsidiaries (or, after giving effect to the Merger,
Purchaser or its Subsidiaries) may engage or the manner or locations in which
any of them may so engage in any business;
(f) any agreement, contract or other arrangement under which the
Company or any Subsidiary has borrowed any money from, or issued any note, bond,
debenture or other evidence of indebtedness to, any third-party, other than with
respect to indebtedness that has been repaid in full;
(g) any agreement, contract or other arrangement providing for (A)
the acquisition, directly or indirectly, whether by merger, consolidation or
otherwise, of assets (whether tangible or intangible) or the capital stock or
other equity interests of another entity (other than the acquisition of
inventory in the ordinary course) or (B) the disposition, directly or
indirectly, whether by merger, consolidation or otherwise, of assets (whether
tangible or intangible) or the capital stock of the Company or its Subsidiaries,
other than sales or dispositions of assets in the ordinary course of business or
in connection with the disposition of obsolete inventory;
(h) any agreement, contract or other arrangement to which the
Company or any Subsidiary is a party or by or to which it or any of its assets
or business is bound or subject which has an aggregate future liability to any
entity in excess of $125,000 and is not terminable by the Company or any
Subsidiary by notice of not more than 60 days for a cost of less than $25,000;
and
-14-
(i) any agreement with any executive officer or other key employee
of the Company or any Subsidiary (A) the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
involving the Company or any Subsidiary of the nature of any of the transactions
contemplated by this Merger Agreement, (B) providing any term of employment or
compensation guarantee extending for a period longer than three years or (C)
providing severance benefits or other benefits after the termination of
employment of such executive officer or key employee not comparable to benefits
available to employees generally.
All written Material Contracts are legally valid and binding obligations of the
Company and in full force and effect, and there are no defaults by the Company
or any Subsidiary thereunder, except those defaults that would not, individually
or in the aggregate, be reasonably expected to have a Material Adverse Effect.
The Company has previously made available for inspection by the Purchaser all
Material Contracts.
4.16 Title to Properties. Except as set forth in Section 4.16 of the
Disclosure Letter, the Company and its Subsidiaries have good title to all real,
personal and intangible property reflected in the Company's September 30, 2002
consolidated balance sheet previously delivered to Purchaser (except as disposed
of since such date in the ordinary course of business), free and clear of all
mortgages, security interests, liens, encumbrances, restrictions and other
burdens ("Liens"), other than statutory liens for current Taxes or assessments
not yet due or delinquent or the validity or amount of which is being contested
in good faith by appropriate proceedings and has been reserved for (to the
extent required under generally accepted accounting principles) on the Company's
balance sheet, (ii) mechanics', carriers', workers', repairers' and other
similar liens arising or incurred in the ordinary course of business relating to
obligations as to which there is no default on the part of the Company or its
Subsidiaries or the validity or amount of which is being contested in good faith
by appropriate proceedings, or pledges, deposits or other liens securing the
performance of bids, trade contracts, leases or statutory obligations (including
workers' compensation, unemployment insurance or other social security
legislation), (iii) zoning, entitlement, conservation restriction and other land
use and environmental regulations by governmental authorities which,
individually or in the aggregate, do not materially interfere with the present
use or operation of the assets or business of the Company and its Subsidiaries,
and (iv) all exceptions, restrictions, easements, charges, rights-of-way and
other encumbrances set forth in any state, local or municipal franchise under
which such business is conducted which, individually or in the aggregate, do not
materially interfere with the present use or operation of such assets or
business.
4.17 Labor Matters. Except as set forth in Section 4.17 of the Disclosure
Letter, there are no collective bargaining or other labor union agreements to
which the Company or any of its Subsidiaries is a party or by which any of them
is bound. To the knowledge of the Company, since January 1, 2000, neither the
Company nor any of its Subsidiaries has encountered any labor union organizing
activity, or had any actual or threatened employee strikes, work stoppages,
slowdowns or lockouts.
4.18 Environmental Matters. Except as disclosed in the SEC Reports prior
to the date hereof and except for such matters that, alone or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect, (i) the
Company and its Subsidiaries have complied
-15-
at all times with all applicable Environmental Laws; (ii) to the knowledge of
the executive officers of the Company, no property currently owned or operated
by the Company or any of its Subsidiaries (including soils, groundwater, surface
water, buildings or other structures) is contaminated with any Hazardous
Substance; (iii) to the knowledge of the executive officers of the Company, no
property formerly owned or operated by the Company or any of its Subsidiaries
was contaminated with any Hazardous Substance during or prior to such period of
ownership or operation; (iv) to the knowledge of the executive officers of the
Company, neither the Company nor any of its Subsidiaries is subject to liability
for any Hazardous Substance disposal or contamination on any third party
property; (v) neither the Company nor any of its Subsidiaries has released or
threatened to release of any Hazardous Substance; (vi) neither the Company nor
any of its Subsidiaries has received any notice, demand, letter, claim or
request for information alleging that the Company or any of its Subsidiaries may
be in violation of or subject to liability under any Environmental Law; (vii)
neither the Company nor any of its Subsidiaries is subject to any order, decree,
injunction or other arrangement with any governmental authority or any indemnity
or other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (viii) to the
knowledge of the executive officers of the Company, there are no other
circumstances or conditions involving the Company or any of its Subsidiaries
that could reasonably be expected to result in any claim, liability,
investigation, cost or restriction on the ownership, use, or transfer of any
property pursuant to any Environmental Law. The Company has delivered to
Purchaser copies of all environmental reports, studies, assessments, sampling
data and other environmental information in its possession relating to Company
or its Subsidiaries or their respective current and former properties or
operations.
As used herein, the term "Environmental Law" means any federal,
state, local or foreign statute, law, regulation, order, decree, permit,
authorization, opinion, common law or agency requirement relating to: (A) the
protection, investigation or restoration of the environment, health, safety, or
natural resources, (B) the handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or (C) noise, odor, indoor air,
wetlands, pollution, contamination or any injury or threat of injury to persons
or property relating to any Hazardous Substance.
As used herein, the term "Hazardous Substance" means any substance
that is: (A) listed, classified or regulated pursuant to any Environmental Law;
(B) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
material or radon; and (C) any other substance which may be the subject of
regulatory action by any governmental entity in connection with any
Environmental Law.
4.19 Intellectual Property. Except as set forth in Section 4.19 of the
Disclosure Letter:
(a) the Company and/or its Subsidiaries owns all right, title and
interest to the Intellectual Property Rights identified in Section 4.19 of the
Disclosure Letter, and the Company has the right to use pursuant to a license
each of the Intellectual Property Rights conveyed in the licenses identified in
Section 4.19 of the Disclosure Letter;
(b) each such Intellectual Property Right specified in subparagraph
(a) of this Section 4.19 will be owned or, to the Company's best knowledge and
belief, available for use by the Surviving Corporation or its Subsidiaries
immediately subsequent to the Effective Time;
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(c) to the Company's best knowledge and belief, all issued patents
and trademark registrations owned by the Company or its Subsidiaries are valid
and enforceable;
(d) neither the Company nor any of its Subsidiaries is, nor will the
Company or any of its Subsidiaries be, as a result of the execution and delivery
of this Merger Agreement or the performance of its obligations hereunder, in
violation of any license, sublicense, or other agreement as to which the Company
or any of its Subsidiaries is a party and pursuant to which the Company or any
of its Subsidiaries is authorized to use any third-party Intellectual Property
Rights;
(e) neither the Company nor any of its Subsidiaries has had notice
of any claim, nor does the Company have knowledge of any valid grounds for any
bona fide claim against the Company or its Subsidiaries that the Intellectual
Property Rights used in the business of the Company and its Subsidiaries as
presently conducted (excluding in connection with products under development)
infringe, misappropriate or violate any Intellectual Property Rights of any
other person. To the Company's best knowledge and belief, except as otherwise
disclosed in Section 4.19 of the Disclosure Letter, no third party is presently
interfering with, infringing upon, misappropriating, or otherwise coming into
conflict with any Intellectual Property Rights of the Company or its
Subsidiaries in any material respect;
(f) up to the date hereof, the Company has paid all maintenance and
annuity fees for all patents and patent applications listed on Section 4.19 of
the Disclosure Letter, which includes patents and patent applications used in
the business of the Company and its Subsidiaries as presently conducted;
(g) Section 4.19 of the Disclosure Letter identifies each patent,
each trademark and service mark registration and each copyright registration
currently in effect, owned by the Company or its Subsidiaries; identifies each
pending patent application and pending application for registration of a
trademark or service mark currently in effect that the Company or its
Subsidiaries has made with respect to their Intellectual Property Rights; and
identifies each license, agreement or other permission that the Company or its
Subsidiaries has granted to any third party with respect to any of its owned
Intellectual Property Rights. The Company has delivered to the Purchaser correct
and complete copies of all such patents, registrations, applications, licenses,
agreements and permissions (as amended to date). With respect to each such
Intellectual Property Right that the Company or its Subsidiaries owns and is
identified in Section 4.19 of the Disclosure Letter, except as otherwise set
forth in Section 4.19 of the Disclosure Letter:
(i) the Company or its Subsidiaries possesses all right, title,
and interest in and to the Intellectual Property Right, free
and clear of any security interest, license, or other
restriction of which the Company is aware;
(ii) the Intellectual Property Right is not subject to any
outstanding injunction, judgment, order, decree, or ruling;
(iii) to the Company's best knowledge and belief, no action, suit,
proceeding, hearing, investigation, charge, complaint, claim,
or demand is pending or
-17-
threatened, which challenges the legality, validity,
enforceability, use or ownership of the Intellectual Property
Right; and
(iv) the Company and its Subsidiaries have not agreed to indemnify
any person for or against any interference, infringement,
misappropriation, or other conflict with respect to the
Intellectual Property Right;
(h) Section 4.19 of the Disclosure Letter identifies each
Intellectual Property Right that the Company and/or its Subsidiaries use
pursuant to license, sublicense, agreement, or permission. The Company has
delivered to Purchaser correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). With respect to
each such Intellectual Property Right identified in Section 4.19 of the
Disclosure Letter:
(i) to the Company's best knowledge and belief, the license,
sublicense, agreement, or permission covering the Intellectual
Property Right is legal, valid, binding, enforceable in
accordance with its terms, and in full force and effect in all
material respects;
(ii) to the Company's best knowledge and belief, no party to the
license, sublicense, agreement, or permission is in material
breach or default, and no event has occurred which with notice
or lapse of time would constitute a material breach or default
or permit termination, modification, or acceleration
thereunder; and
(iii) the Company and its Subsidiaries have not granted any
sublicense or similar right with respect to the license,
sublicense, agreement, or permission.
As used in this Merger Agreement, the term "Intellectual Property
Rights" means: (1) United States and foreign patents, patent applications,
continuations, continuations-in-part, continuing prosecution applications,
divisions, reissues, extensions or re-examinations; (2) United States, state,
foreign, and common law trademarks, service marks, domain names, logos, trade
dress and trade names (including all assumed or fictitious names under which the
Company and each Subsidiary is conducting its business), whether registered or
unregistered, and pending applications to register the foregoing; (3)
copyrightable expressions fixed in tangible form, United States and foreign
copyrights therein, whether registered or unregistered, and pending applications
to register the same; and (4) trade secrets, know-how, concepts, methods,
processes, formulae, reports, data, customer lists, mailing lists, business
plans and other information that is confidential and proprietary, in each case
either owned or used pursuant to a license.
4.20 FDA and Other Approval Status. All Products (as herein defined),
including any accessories to be sold, are marketable, and currently are being
manufactured and marketed in substantial compliance with the Federal Food, Drug
and Cosmetic Act and other United States and foreign legal requirements. As used
in this Merger Agreement, the term "Products" means any products related to the
businesses of the Company or its Subsidiaries that are manufactured or sold
through the Company or its Subsidiaries.
-18-
4.21 Inventory. All raw materials, work-in-progress and finished goods
inventory is recorded in accordance with the Company's inventory policy attached
as Schedule 4.21 of the Disclosure Letter. The Company's inventory reserves for
excess and obsolete inventory are adequate.
4.22 Customers and Suppliers. Since September 30, 2002, no material
customer or supplier of the Company has indicated that it will stop or
materially decrease the rate of business done with the Company, nor is any
receivable for any such customer over 90 days past due for which adequate
reserves have not been made.
4.23 ISO 9001 Certification. Except as set forth in Section 4.13 of the
Disclosure Letter, the Company's manufacturing facilities used in connection
with its businesses are ISO 9001 certified and comply in all material respects
with all requirements for such ISO 9001 certification.
4.24 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger
based upon arrangements made by or on behalf of the Company, other than
arrangements with U.S. Bancorp Piper Jaffray. A true and complete copy of the
engagement letter between the Company and U.S. Bancorp Piper Jaffray has
previously been delivered to the Purchaser.
5. CONDUCT OF BUSINESS PENDING THE MERGER
5.1 Conduct of Business by the Company Pending the Merger. The Company
covenants and agrees that, prior to the Effective Time, unless the Purchaser
shall otherwise agree in writing (such agreement not to be unreasonably
withheld) or as otherwise expressly contemplated by this Merger Agreement:
(a) the businesses of the Company and its Subsidiaries shall be
conducted only in, and the Company and its Subsidiaries shall not take any
action except in, the ordinary course of business and consistent with past
practice;
(b) the Company shall not (i) sell or pledge or agree to sell or
pledge any stock owned by it in any of its Subsidiaries; (ii) amend its Articles
of Incorporation or By-Laws; or (iii) split, combine or reclassify any shares of
its outstanding capital stock or declare, set aside or pay any dividend or other
distribution payable in cash, stock or property or redeem or otherwise acquire
any shares of its capital stock or shares of the capital stock of any of its
Subsidiaries;
(c) except as set forth Section 5.1 of the Disclosure Letter, the
Company shall not, and shall cause each of its Subsidiaries not to, (i)
authorize for issuance, issue or sell any additional shares of, or rights of any
kind to acquire any shares of, its capital stock of any class (whether through
the issuance or granting of options, warrants, commitments, subscriptions,
rights to purchase or otherwise), except for Shares reserved for issuance upon
the exercise of Stock Options in accordance with their existing terms, as such
Stock Options may be accelerated pursuant to their existing terms; (ii) acquire,
dispose of, transfer, lease, license, mortgage, pledge or encumber any fixed or
other assets other than in the ordinary course of business and consistent with
past practices; (iii) incur, assume or prepay any material indebtedness or any
other material
-19-
liabilities other than the incurrence of liabilities in the ordinary course of
business and borrowings under the credit agreement described in Section 5.1 of
the Disclosure Letter for working capital purposes up to the credit limit
described in Section 5.1 of the Disclosure Letter; (iv) assume, endorse (other
than in the ordinary course of business consistent with past practices),
guarantee or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the material obligations of any other person
(other than a Subsidiary); (v) make any loans, advances or capital contributions
to, or investments in, any other person, other than to its Subsidiaries, or
otherwise enter into any Material Contract; (vi) make any loans to employees,
other than advances in the ordinary course of business consistent with past
practices; (vii) fail to maintain adequate insurance consistent with past
practices for their businesses and properties (to the extent available at
commercially reasonable prices); and (viii) make capital expenditures in excess
of $25,000 individually or $250,000 in the aggregate;
(d) the Company shall use reasonable business efforts to preserve
intact the business organization of the Company and its Subsidiaries, to keep
available the services of its and their present officers and key employees, and
to preserve the goodwill of those having business relationships with it and
them;
(e) the Company shall not and shall cause its Subsidiaries not to
(i) enter into any new agreements (other than in its ordinary course of business
consistent with past practice) or amend or modify any existing agreements (other
than in its ordinary course of business consistent with past practice) with any
of their respective officers, directors or employees or with any "disqualified
individuals" (as defined in Section 280G(c) of the Code), (ii) grant any
increases in the compensation of their respective directors, officers and
employees or any "disqualified individuals" other than increases in the ordinary
course of business and consistent with past practice to persons who are not
directors or corporate officers of or "disqualified individuals" with respect to
the Company or any Subsidiary, (iii) enter into, adopt, amend or terminate, or
grant any new benefit not presently provided for under, any employee benefit
plan or arrangement, except as required by law or to maintain the Tax qualified
status of the plan; provided, however, it is understood that the Company is
permitted to pay bonuses to the extent described in Section 5.1 of the
Disclosure Letter; or (iv) except as contemplated by Section 6.14, take any
action with respect to the grant of any severance or termination pay other than
in the ordinary course of business and consistent with past practice and
pursuant to policies or practices in effect on the date of this Merger
Agreement;
(f) the Company shall not, and shall not permit any Subsidiary to,
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets (other than
in the ordinary course of business) that are material, individually or in the
aggregate, to the Company and its Subsidiaries taken as a whole;
(g) except as set forth in Section 5.1 of the Disclosure Letter,
neither the Company nor any of its Subsidiaries shall settle or compromise any
material claims or litigation or, except in the ordinary and usual course of
business modify, amend or terminate any of its Material Contracts or waive,
release or assign any material rights or claims;
-20-
(h) neither the Company nor any of its Subsidiaries shall make any
material Tax election or permit any insurance policy naming it as a beneficiary
or loss-payable payee to be cancelled or terminated except in the ordinary and
usual course of business;
(i) neither the Company nor any of its Subsidiaries shall take any
action or omit to take any action that would cause any of its representations
and warranties herein to become untrue in any material respect;
(j) neither the Company nor any of its Subsidiaries will authorize
or enter into an agreement to do any of the foregoing; and
(k) except as required by the Pennsylvania Law or the Company's
By-Laws, the Company will not call any meeting of its shareholders to be held
prior to December 31, 2003 other than a special or annual meeting of
shareholders to consider and vote upon the Merger.
6. ADDITIONAL AGREEMENTS
6.1 Proxy Statement. Promptly after the date hereof, the Company shall
prepare and (subject to the Purchaser's approval, which shall not be
unreasonably withheld) file with the SEC under the Exchange Act, and shall use
all reasonable efforts to have promptly cleared by the SEC and promptly mailed
to the Company's shareholders, a proxy statement (the "Proxy Statement") with
respect to the meeting of the Company's shareholders referred to in Section 6.2.
The Company agrees, as to itself and its Subsidiaries, that none of the
information supplied or to be supplied by it or its Subsidiaries for inclusion
or incorporation by reference in the Proxy Statement and any amendment thereof
or supplement thereto will, at the date of mailing to stockholders and at the
time of the meeting of stockholders of the Company to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Purchaser agrees that none of the information supplied or to
be supplied by the Purchaser or Merger Sub in writing to the Company for
inclusion in the Proxy Statement and any amendment thereof or supplement thereto
will, at the date of mailing to stockholders and at the time of the Company
Shareholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements contained therein, in light to the circumstances under
which they were made, not misleading. The Company will cause the Proxy Statement
to comply as to form in all material respects with the applicable provisions of
the Exchange Act and the rules and regulations thereunder. Subject to the
fiduciary duty obligations of the Board of Directors of the Company under
Pennsylvania Law, the Proxy Statement shall contain the recommendation of the
Board of Directors of the Company in favor of the Merger and for approval and
adoption of this Merger Agreement.
6.2 Meeting of Shareholders of the Company. Promptly after the date
hereof, the Company shall take all action necessary in accordance with the
Pennsylvania Law and the Company's Articles of Incorporation and By-Laws to
convene a meeting of its shareholders (the "Company Shareholders' Meeting") to
consider and vote upon this Merger Agreement and the Merger and shall use its
best efforts to convene the Company Shareholders' Meeting prior to May 15, 2003.
Subject to the fiduciary duty obligations of the Board of Directors of the
-21-
Company under Pennsylvania Law, the Board of Directors of the Company will
recommend that the shareholders of the Company vote to adopt and approve the
Merger and this Merger Agreement and the Company shall use all reasonable
efforts to solicit from shareholders of the Company proxies in favor of such
adoption and approval.
6.3 Other Actions by the Company and Purchaser. If any Takeover Statute is
or may become applicable to the Merger or the other transactions contemplated by
this Merger Agreement, each of Purchaser and the Company shall use their best
efforts to grant such approvals and take such actions as are necessary so that
such transactions may be consummated as promptly as practicable on the terms
contemplated by this Merger Agreement or by the Merger and otherwise use their
best efforts to eliminate or minimize the effects of such statute or regulation
on such transactions.
6.4 Acquisition Proposals. The Company agrees that neither it nor any of
its Subsidiaries nor any of the officers and directors of it or its Subsidiaries
shall, and that it shall direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate
any inquiries or the making of any proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or similar transaction involving,
or any purchase of all or 25% or more of the assets or 25% or more of any equity
securities of, it or any of its Subsidiaries (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal"). The Company further
agrees that neither it nor any of its Subsidiaries nor any of the officers and
directors of it or its Subsidiaries shall, and that it shall direct and use its
best efforts to cause its and its Subsidiaries' employees, agents and
representatives (including any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any Person relating to an Acquisition
Proposal. The Company agrees that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any Acquisition Proposals. The Company
agrees that it will take the necessary steps to promptly inform the individuals
or entities referred to in the first sentence hereof who may be involved in any
such discussion of the obligations undertaken in this Section and in the
Confidentiality Agreement (as defined in Section 9.7). The Company agrees that
it will notify Purchaser immediately if any such inquiries, proposals or offers
are received by, any such information is requested from, or any such discussions
or negotiations are sought to be initiated or continued with, any of its
representatives indicating, in connection with such notice, the name of such
Person and the material terms and conditions of any proposals or offers and
thereafter shall keep Purchaser informed, on a current basis, as to the status
and terms of any such proposals or offers. The Company also agrees that it will
promptly request each Person that has heretofore executed a confidentiality
agreement in connection with its consideration of acquiring it or any of its
Subsidiaries to return or destroy all confidential information heretofore
furnished to such Person by or on behalf of it or any of its Subsidiaries.
6.5 Stock Exchange De-listing. The Surviving Corporation shall use its
best efforts to cause the Shares to no longer be quoted on the Nasdaq National
Market System and de-registered under the Exchange Act as soon as practicable
following the Effective Time.
-22-
6.6 Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the Merger and all other transactions contemplated by
this Merger Agreement, including (i) filing the Articles of Merger referred to
in Section 1.4, (ii) using reasonable efforts to remove any legal impediment to
the consummation or effectiveness of such transactions, (iii) satisfying the
conditions to each other parties' obligation to consummate the Merger as
contemplated hereby and (iv) using reasonable efforts to obtain all necessary
waivers, consents and approvals and to effect all necessary registrations and
filings, including, but not limited to, filings under the HSR Act, if
applicable, and submissions of information requested by governmental
authorities. Subject to applicable laws relating to the exchange of information,
Purchaser shall have the right to review in advance, and consult with the
Company on, all filings made with, or written materials submitted to, any third
party and/or any governmental authority in connection with the Merger and the
other transactions contemplated by this Merger Agreement.
6.7 Expenses. The Surviving Corporation shall pay all charges and
expenses, including those of the Disbursing Agent, in connection with the
transactions contemplated in Article II hereof, and Purchaser shall reimburse
the Surviving Corporation for such charges and expenses. Except as otherwise
provided in Section 8.5(b), whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Merger Agreement and the Merger
and the other transactions contemplated by this Merger Agreement shall be paid
by the party incurring such expense.
6.8 Indemnification, Exculpation and Insurance.
(a) From and after the Effective Time, Purchaser agrees that it will
indemnify and hold harmless each present and former director and officer of the
Company (when acting in such capacity) determined immediately prior to the
Effective Time (the "Indemnified Persons"), against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent that the Company would have been
permitted under Pennsylvania law and its articles of incorporation or by-laws in
effect on the date hereof to indemnify such Indemnified Person (and Purchaser
shall also advance expenses as incurred to the fullest extent permitted under
applicable law, provided the Indemnified Person to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately determined
that such Indemnified Person is not entitled to indemnification); and provided,
further, that any determination required to be made with respect to whether an
officer's or director's conduct complies with the standards set forth under
Pennsylvania law and the Company's articles of incorporation and by-laws shall
be made by independent counsel reasonably acceptable to both the Surviving
Corporation and the Indemnified Person.
(b) Any Indemnified Person wishing to claim indemnification under
paragraph (a) of this Section 6.8, upon learning of any such claim, action,
suit, proceeding or
-23-
investigation, shall promptly notify Purchaser thereof, but the failure to so
notify shall not relieve Purchaser of any liability it may have to such
Indemnified Person if such failure does not materially prejudice the
indemnifying party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i)
Purchaser or the Surviving Corporation shall have the right to assume the
defense thereof and Purchaser shall not be liable to such Indemnified Persons
for any legal expenses of other counsel or any other expenses subsequently
incurred by such Indemnified Persons in connection with the defense thereof,
except that if Purchaser or the Surviving Corporation elects not to assume such
defense or counsel for the Indemnified Persons advises that there are issues
which raise conflicts of interest between Purchaser or the Surviving Corporation
and the Indemnified Persons, the Indemnified Persons may retain counsel
satisfactory to them, and Purchaser or the Surviving Corporation shall pay all
reasonable fees and expenses of such counsel for the Indemnified Persons
promptly as statements therefor are received; provided, however, that Purchaser
shall be obligated pursuant to this paragraph (b) to pay for only one firm of
counsel for all Indemnified Persons in any jurisdiction, (ii) the Indemnified
Persons will cooperate in the defense of any such matter and (iii) Purchaser
shall not be liable for any settlement effected without its prior written
consent; and provided, further, that Purchaser shall not have any obligation
hereunder to any Indemnified Person if and when a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final, that the indemnification of such Indemnified Person in the manner
contemplated hereby is prohibited by applicable law.
(c) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person and
is not the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers or conveys all or substantially all its properties
and assets to any person, then, and in each such case, the Purchaser shall cause
proper provision to be made so that the successors and assigns of the Surviving
Corporation assume the obligations set forth in this Section 6.8.
(d) For six (6) years after the Effective Time, the Purchaser shall
maintain in effect a directors' and officers' liability insurance policy
covering only those persons currently covered by the Company's current
directors' and officers' liability insurance policy (the "Insured Parties") for
acts or omissions occurring prior to the Effective Time on terms with respect to
such coverage and amounts no less favorable in any material respect to such
Insured Parties than the terms in effect under the Company's directors' and
officers' liability insurance policy as in effect on the date of this Merger
Agreement; provided that the Purchaser shall not be required to pay an annual
premium therefor to the extent in excess of 300% of the last annual premium
payable prior to the date hereof; provided further that if the annual premiums
for such coverage exceeds such maximum amount, the Purchaser shall be obligated
to obtain a policy with the greatest standard coverage amount available for a
cost not exceeding such maximum amount. The Purchaser shall use its reasonable
best efforts to obtain the insurance policy or policies maintained under this
Section 6.8(d) from a reputable insurance carrier that has a financial strength
rating from A.M. Best (or its successor) that is equal to or better than the
financial strength rating that was assigned by A.M. Best to the Company's
current directors' and officers' liability insurance carrier on May 5, 2002. The
Purchaser's obligation to maintain the insurance policy or policies pursuant to
this Section 6.8(d) shall be contingent on the cooperation of the Insured
Parties in responding to reasonable requests for information from the Purchaser,
with all such communications to be made through a single intermediary designated
by the Insured
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Parties. Any costs and expenses incurred by any Insured Party or the
intermediary designated by the Insured Parties in connection with any such
requests shall be paid by the Insured Parties.
(e) The provisions of this Section 6.8 are intended to be for the
benefit of, and will be enforceable by, each Indemnified Person, his or her
heirs and his or her representatives.
6.9 Notification of Certain Matters. The Company shall give prompt notice
to the Purchaser, and the Purchaser shall give prompt notice to the Company, of
(i) the occurrence, or failure to occur, of any event, which occurrence or
failure would be likely to cause any representation or warranty contained in
this Merger Agreement to be untrue or inaccurate in any material respect at any
time from the date hereof to the Effective Time, provided that each party's
obligation hereunder is limited to events of which its senior management has
knowledge, and (ii) any material failure of the Company or the Purchaser, as the
case may be, or any officer, director, employee or agent thereof, to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder. The Company and Purchaser each shall keep the other apprised of
the status of matters relating to completion of the transactions contemplated
hereby, including promptly furnishing the other with copies of notices or other
substantive communications received by Purchaser or the Company, as the case may
be, or any of its Subsidiaries, from any third party and/or any governmental
authority with respect to the Merger and the other transactions contemplated by
this Merger Agreement. The Company shall give prompt notice to Purchaser of any
change that could result in a Material Adverse Effect.
6.10 Access; Communications with Distributors. The Company shall, and
shall cause its Subsidiaries, officers, directors, employees and agents to,
afford the officers, employees and agents of the Purchaser complete access at
all reasonable times, from the date hereof to the Effective Time, to its
officers, employees, agents, properties, books and records and shall furnish the
Purchaser all financial, operating and other data and information as the
Purchaser, through its officers, employees or agents, may reasonably request.
All such information shall be governed by the terms of the Confidentiality
Agreement. From the date hereof to the Effective Time, the Company and the
Purchaser agree to take the actions set forth in Section 6.10 of the Disclosure
Letter.
6.11 Employee Benefits. The Purchaser and the Company agree that all
employees of the Company and its Subsidiaries immediately prior to the Effective
Time shall be employed by the Surviving Corporation and its subsidiaries
immediately after the Effective Time, it being understood that, except for
employees of the Company and its subsidiaries with employment agreements as set
forth in Section 6.14, the Purchaser shall not have any obligation to continue
employing such employees for any length of time thereafter. Except as set forth
in Section 6.11 of the Disclosure Letter, the Purchaser and the Company agree
that, after the Effective Time, all employees of the Company and its
Subsidiaries shall, at the Purchaser's option (i) continue to be entitled to and
shall receive the same benefits currently provided to the employees of the
Company and its Subsidiaries under the existing Company benefit plans ("Company
Plans") for three (3) months from the Effective Time so long as the continued
provision of such Company Plans to such employees does not cause any Purchaser
benefit plan to be in violation of any law or regulation governing such plans,
or (ii) shall be offered benefits similar to those available to the Purchaser's
employees. From and after three (3) months from the Effective Time, the then
employees of the Surviving Corporation and its subsidiaries shall be entitled to
and shall receive
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such benefits as the then constituted management of the Surviving Corporation
deems necessary and appropriate for the Purchaser, subject to consent and advice
from the Purchaser's executive management. With respect to any such benefit
arrangements ("Ultimate Plans"), the Purchaser shall grant all employees of the
Company and its Subsidiaries, who become participants in the Ultimate Plans
after the Effective Time, credit for all service with the Company and its
Subsidiaries, or their respective predecessors (or any other party for which
service has been recognized by the Company), prior to the Effective Time for all
purposes for which such service was recognized by the Company prior to the
Effective Time. To the extent that the Company Plans or Ultimate Plans provide
medical or dental welfare benefits after the Effective Time, the Purchaser shall
cause all pre-existing condition exclusions and actively-at-work requirements,
to the extent such requirements would have been met at the Company, to be waived
and the Purchaser shall provide that any expenses incurred on or before the
Effective Time shall be taken into account under the Ultimate Plans for purposes
of satisfying the applicable deductible, coinsurance and maximum out-of-pocket
provisions. Subject to the rules governing eligibility, vesting and all other
terms of any 401(k) plan or other qualified retirement plan or ERISA pension
plan maintained by the Purchaser and its subsidiaries (the "Retirement Plans"),
the employees of the Company and its Subsidiaries shall be eligible to
participate in the Retirement Plans on terms similar to the benefits provided to
similarly situated employees of the Purchaser and its subsidiaries, with credit
granted for purposes of eligibility and vesting for prior service with the
Company and its Subsidiaries, but not for purposes of accrual. The Purchaser
shall permit the Company to fully vest the accounts of the participants under
the Company's 401k Plan effective as of the Effective Time.
6.12 Antitrust Laws. As promptly as practicable, the Company, the
Purchaser and Merger Sub shall make any and all filings and submissions under
the HSR Act as may be reasonably required to be made in connection with this
Merger Agreement and the transactions contemplated hereby. Subject to Section
6.10 hereof, the Company will furnish to the Purchaser and Merger Sub, and the
Purchaser and Merger Sub will furnish to the Company, such information and
assistance as the other may reasonably request in connection with the
preparation of any such filings or submissions. Subject to Section 6.10 hereof,
the Company will provide the Purchaser and Merger Sub, and the Purchaser and
Merger Sub will provide the Company, with copies of all correspondence, filings
or communications (or memoranda setting forth the substance thereof) between
such party or any of its representatives, on the one hand, and any governmental
agency or authority or members of their respective staffs, on the other hand,
with respect to this Merger Agreement and the transactions contemplated hereby;
provided, however, that the Purchaser and Merger Sub shall not be required to
provide the Company with copies of confidential documents or information
included in any filings and submissions made by the Purchaser under the HSR Act
and the Company shall not be required to provide the Purchaser or Merger Sub
with copies of confidential documents or information included in any filings and
submissions made by the Company under the HSR Act.
6.13 Public Announcements. The Purchaser and Merger Sub, on the one hand,
and the Company, on the other hand, agree that they will use reasonable efforts
to consult with the other party prior to issuing any press release or otherwise
making any public statement, including, without limitation, making any filing
with any third party or governmental authority, or responding to any press
inquiry with respect to this Merger Agreement or the transactions contemplated
hereby, except as may be required by applicable law, court process or by
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obligations pursuant to any listing agreement with any national securities
exchange or national securities quotation system.
6.14 Employment Arrangements. The Purchaser shall cause the Surviving
Corporation to (a) assume and perform each of the employment agreements
described in Section 6.14A of the Disclosure Letter, including, without
limitation, the "Change in Control" and severance provisions thereof and (b)
assume and perform each of the agreements and obligations described in Section
6.14B of the Disclosure Letter.
7. CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. This Merger Agreement shall have been duly
approved by holders of Shares constituting the Company Requisite Vote in
accordance with applicable law and the articles of incorporation and by-laws of
the Company.
(b) Regulatory Consents. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated, if applicable, and, other than the filing provided for in Section
1.4, all notices, reports and other filings required to be made prior to the
Effective Time by the Company or Purchaser or any of their respective
Subsidiaries with, and all consents, registrations, approvals, permits and
authorizations required to be obtained prior to the Effective Time by the
Company or Purchaser or any of their respective Subsidiaries from, any
governmental authority (collectively, "Governmental Consents") in connection
with the execution and delivery of this Merger Agreement and the consummation of
the Merger and the other transactions contemplated hereby by the Company,
Purchaser and Merger Sub shall have been made or obtained (as the case may be).
(c) Litigation. No court or governmental authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, law, ordinance, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger or the
other transactions contemplated by this Merger Agreement (collectively, an
"Order"), and no governmental authority shall have instituted any proceeding
seeking any such Order.
7.2 Conditions to Obligations of Purchaser and Merger Sub. The obligations
of Purchaser and Merger Sub to effect the Merger are also subject to the
satisfaction or waiver by Purchaser at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Merger Agreement shall be true and
correct as of the date of this Merger Agreement and as of the Closing Date as
though made on and as of the Closing Date (except to the extent any such
representation or warranty expressly speaks as of an earlier date), and
Purchaser shall have received a certificate signed on behalf of the Company by
the Chief Executive Officer of the Company to such effect (containing the
following proviso); provided,
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however, that notwithstanding anything herein to the contrary, this Section
7.2(a) shall be deemed to have been satisfied even if such representations or
warranties are not so true and correct unless the failure of such
representations or warranties to be so true and correct, individually or in the
aggregate, has had, or could reasonably be expected to have, a Material Adverse
Effect or could prevent or materially burden or materially impair the ability of
the Company to consummate the transactions contemplated by this Merger
Agreement.
(b) Performance of Obligations of the Company. The Company shall
have performed in all material respects all material obligations required to be
performed by it under this Merger Agreement at or prior to the Closing Date, and
Purchaser shall have received a certificate signed on behalf of the Company by
the Chief Executive Officer of the Company to such effect.
(c) Consents Under Agreements. The Company shall have obtained the
consent or approval of each Person whose consent or approval shall be required
under the Contracts identified with an asterisk in Section 4.5 of the Disclosure
Letter.
(d) Resignations. Purchaser shall have received the resignations of
each person who at the Closing is a director or officer of the Company and each
of its Subsidiaries.
(e) Employment Agreements. The Company's employment agreements with
Gerard S. Carlozzi and Pertti Tormala shall be in full force and effect and
neither party shall be in material default thereunder.
7.3 Conditions to Obligation of the Company. The obligation of the Company
to effect the Merger is also subject to the satisfaction or waiver by the
Company at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Purchaser and Merger Sub set forth in this Merger Agreement shall
be true and correct as of the date of this Merger Agreement and as of the
Closing Date as though made on and as of the Closing Date (except to the extent
any such representation and warranty expressly speaks as of an earlier date) and
the Company shall have received a certificate signed on behalf of Purchaser by
the President of Purchaser and the President of Merger Sub to such effect
(containing the following proviso); provided, however, that notwithstanding
anything herein to the contrary, this Section 7.3(a) shall be deemed to have
been satisfied even if such representations or warranties are not so true and
correct unless the failure of such representations or warranties to be so true
and correct, individually or in the aggregate, could prevent or materially
burden or materially impair the ability of Purchaser to consummate the
transactions contemplated by this Merger Agreement.
(b) Performance of Obligations of Purchaser and Merger Sub. Each of
Purchaser and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Merger Agreement at or
prior to the Closing Date, and the Company shall have received a certificate
signed on behalf of Purchaser and Merger Sub by the President of Purchaser to
such effect.
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8. TERMINATION, AMENDMENT AND WAIVER
8.1 Termination by Mutual Consent. This Merger Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by stockholders of the Company referred to in
Section 7.1(a), by mutual written consent of the Company and Purchaser by action
of their respective Boards of Directors.
8.2 Termination by Either Purchaser or the Company. This Merger Agreement
may be terminated and the Merger may be abandoned at any time prior to the
Effective Time by action of the Board of Directors of either Purchaser or the
Company if (i) the Merger shall not have been consummated by July 31, 2003,
whether such date is before or after the date of approval by the stockholders of
the Company (the "Termination Date"), (ii) the approval of the Company's
stockholders required by Section 7.1(a) shall not have been obtained at a
meeting duly convened therefor or at any adjournment or postponement thereof, or
(iii) any Order permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable (whether before
or after the approval by the stockholders of the Company); provided, that the
right to terminate this Merger Agreement pursuant to clause (i) above shall not
be available to any party that has breached in any material respect its
obligations under this Merger Agreement in any manner that shall have
proximately contributed to the occurrence of the failure of the Merger to be
consummated by the Termination Date.
8.3 Termination by the Company. This Merger Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by stockholders of the Company referred to in
Section 7.1(a), by action of the Board of Directors of the Company if there has
been a breach of any representation, warranty, covenant or agreement made by
Purchaser or Merger Sub in this Merger Agreement, or any such representation and
warranty shall have become untrue after the date of this Merger Agreement, such
that Section 7.3(a) or 7.3(b) would not be satisfied and such breach or
condition is not curable or, if curable, is not cured within 30 days after
written notice thereof is given by the Company to Purchaser.
8.4 Termination by Purchaser. This Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of Purchaser if (a) the Board of Directors of the Company
shall have withdrawn or adversely modified in any material respect its approval
or recommendation of this Merger Agreement or failed to reconfirm its
recommendation in favor of this Merger Agreement within five business days after
a written request by Purchaser to do so, (b) there has been a breach of any
representation, warranty, covenant or agreement made by the Company in this
Merger Agreement, or any such representation and warranty shall have become
untrue after the date of this Merger Agreement, such that Section 7.2(a) or
7.2(b) would not be satisfied and such breach or condition is not curable or, if
curable, is not cured within 30 days after written notice thereof is given by
Purchaser to the Company, or (c) the Company or any of the other Persons
described in Section 6.4 as affiliates, representatives or agents of the Company
who have reason to be involved in the activities proscribed by Section 6.4 shall
take any of the actions that would be proscribed by Section 6.4.
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8.5 Effect of Termination and Abandonment.
(a) In the event of termination of this Merger Agreement and the
abandonment of the Merger pursuant to this Article VIII, this Merger Agreement
(other than as set forth in Section 9.1) shall become void and of no effect with
no liability on the part of any party hereto (or of any of its directors,
officers, employees, agents, legal and financial advisors or other
representatives); provided, however, except as otherwise provided herein, no
such termination shall relieve any party hereto of any liability or damages
resulting from any willful breach of this Merger Agreement.
(b) In the event that this Merger Agreement is terminated by
Purchaser pursuant to Section 8.4 (a) or (c), then the Company shall promptly,
but in no event later than two days after the date of such termination, pay
Purchaser a termination fee of $2,500,000 (the "Termination Fee") and shall
promptly, but in no event later than two days after being notified of such by
Purchaser, pay all of the out-of-pocket charges and expenses (but excluding any
investment banking fees), including those of the Disbursing Agent, incurred by
Purchaser or Merger Sub in connection with this Merger Agreement and the
transactions contemplated by this Merger Agreement, in each case payable by wire
transfer of same day funds. The Company acknowledges that the agreements
contained in this Section 8.5(b) are an integral part of the transactions
contemplated by this Merger Agreement, and that, without these agreements,
Purchaser and Merger Sub would not enter into this Merger Agreement;
accordingly, if the Company fails to promptly pay the amount due pursuant to
this Section 8.5(b), and, in order to obtain such payment, Purchaser or Merger
Sub commences a suit which results in a judgment against the Company for the fee
set forth in this paragraph (b), the Company shall pay to Purchaser or Merger
Sub its costs and expenses (including attorneys' fees) in connection with such
suit, together with interest on the amount of the fee at the prime rate of
JPMorgan Chase Bank in effect on the date such payment was required to be made.
8.6 Amendment. This Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
8.7 Waiver. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed on behalf of such party by a duly
authorized officer.
9. GENERAL PROVISIONS
9.1 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS MERGER
AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The
parties hereby irrevocably submit to the jurisdiction of the courts of the State
of New York and the Federal courts of the United States of America located in
the State of New York solely in respect of the interpretation and enforcement of
the provisions of this Merger Agreement and of the documents referred to in this
Merger Agreement, and in respect of the transactions contemplated hereby, and
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hereby waive, and agree not to assert, as a defense in any action, suit or
proceeding for the interpretation or enforcement hereof or of any such document,
that it is not subject thereto or that such action, suit or proceeding may not
be brought or is not maintainable in said courts or that the venue thereof may
not be appropriate or that this Merger Agreement or any such document may not be
enforced in or by such courts, and the parties hereto irrevocably agree that all
claims with respect to such action or proceeding shall be heard and determined
in such a New York State or Federal court. The parties hereby consent to and
grant any such court jurisdiction over the person of such parties and over the
subject matter of such dispute and agree that mailing of process or other papers
in connection with any such action or proceeding in the manner provided in
Section 9.3 or in such other manner as may be permitted by law shall be valid
and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH
MAY ARISE UNDER THIS MERGER AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS MERGER AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS MERGER
AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND
(iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS MERGER AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.1.
9.2 Survival. This Article 9 and the agreements of the Company, Purchaser
and Merger Sub contained in Sections 2.6 (Exercise and Cancellation of Company
Options), 6.5 (Stock Exchange De-listing), 6.7 (Expenses), 6.8 (Indemnification;
Directors' and Officers' Insurance) and 6.11 (Employee Benefits) shall survive
the consummation of the Merger. This Article 9, the agreements of the Company,
Purchaser and Merger Sub contained in Section 6.7 (Expenses), Section 8.5
(Effect of Termination and Abandonment) and the Confidentiality Agreement shall
survive the termination of this Merger Agreement. All other representations,
warranties, covenants and agreements in this Merger Agreement shall not survive
the consummation of the Merger or the termination of this Merger Agreement.
9.3 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be delivered personally, by facsimile,
by overnight courier or sent by certified or registered mail, postage prepaid,
and shall be deemed given when so delivered personally, or when so received by
facsimile or courier, or if mailed, three calendar days after the date of
mailing, as follows (or at such other address for a party as shall be specified
by like notice):
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(a) if to the Purchaser or Merger Sub:
CONMED Corporation
525 French Road
Utica, New York 13502
Attention: President
Telephone: (315) 797-8375
Facsimile: (315) 797-0321
With copies to:
CONMED Corporation
525 French Road
Utica, New York 13502
Attention: General Counsel
Telephone: (315) 624-3208
Facsimile: (315) 793-8929
Linvatec Corporation
11311 Concept Boulevard
Largo, Florida 33773
Attention: President
Telephone: (727) 399-5444
Facsimile: (727) 399-5289
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004
Attention: Robert W. Downes
Telephone: (212)-558-4312
Facsimile: (212)-558-3588
(b) if to the Company:
Bionx Implants, Inc.
1777 Sentry Parkway West
Gwynedd Hall, Suite 400
Blue Bell, PA 19422
Attention: President
Telephone: (215) 643-5000
Facsimile (215) 641-0916
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With copies to:
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
Attention: Peter H. Ehrenberg
Telephone: (973)-597-2350
Facsimile: (973)-597-2351
9.4 Interpretation. When a reference is made in this Merger Agreement to
subsidiaries of the Purchaser or the Company, the word "subsidiaries" or
"Subsidiaries" means any corporation or entity more than fifty percent (50%) of
whose outstanding voting securities or equity interests are directly or
indirectly owned by the Purchaser or the Company, as the case may be. The
headings contained in this Merger Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Merger
Agreement.
9.5 No Third Party Beneficiaries. Except for the current and former
officers and directors of the Company (who are third-party beneficiaries of the
provisions set forth in Section 6.8 hereof), there are no third party
beneficiaries of this Merger Agreement and nothing in this Merger Agreement,
express or implied, is intended to or shall confer upon any person other than
the parties hereto and their respective successors and permitted assigns, any
rights, remedies, obligations or liabilities.
9.6 Counterparts. This Merger Agreement may be executed in one or more
counterparts, which together shall constitute a single agreement.
9.7 Entire Agreement; NO OTHER REPRESENTATIONS. This Merger Agreement
(including any exhibits hereto), the Disclosure Letter and the Confidentiality
Agreement, dated November 20, 2001, between Purchaser and the Company (the
"Confidentiality Agreement") constitute the entire agreement, and supersede all
other prior agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter hereof.
9.8 Severability. The provisions of this Merger Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Merger Agreement, or the application thereof to any Person or
any circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Merger Agreement and the application of
such provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.9 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Merger Agreement
and shall not be deemed to limit or otherwise affect any of the provisions
hereof. Where a reference in this Merger Agreement is made to a Section, such
reference shall be to a Section of this Merger Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Merger Agreement, they shall be deemed to be followed by the words "without
limitation."
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9.10 Assignment. This Merger Agreement shall not be assignable by
operation of law or otherwise; provided, however, that Purchaser may designate,
by written notice to the Company, another wholly-owned direct or indirect
subsidiary to be a constituent corporation in lieu of Merger Sub, in which event
all references herein to Merger Sub shall be deemed references to such other
subsidiary, except that (i) the representations and warranties in Sections 3.1
through 3.4 made herein with respect to Merger Sub as of the date of this Merger
Agreement shall be deemed made with respect to such other subsidiary as of the
date of such designation and (ii) the representation and warranty in Section 3.5
made herein with respect to Merger Sub as of the date of this Merger Agreement
shall be deemed made with respect to such other subsidiary as of the date of
this Merger Agreement.
9.11 Defined Terms. The following terms are defined in the following
sections of this Merger Agreement:
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Acquisition Proposal 6.4
Benefit Plans 4.9(a)
Closing 1.3
Closing Date 1.3
Code 4.9(b)
Company Lead-in
Company Disclosure Schedule Opening Paragraph of Article IV
Company Options 2.6
Company Plans 6.11
Company Requisite Vote 4.5
Company Shareholders Meeting 6.2
Company Stock Option Plans 2.6
Contracts 4.5
Costs 6.8(a)
Disbursing Agent 2.3
Disclosure Letter Opening Paragraph of Article IV
Disqualified Individuals 5.1(e)
Distributors 4.1
Effective Time 1.4
Environmental Law 4.18
ERISA 4.9(a)
Exchange Act 3.2
HSR Act 3.2
Indemnified Person 6.8(a)
Insured Parties 6.8(d)
Intellectual Property Rights 4.19
Investment Plan 4.4
Laws 4.13
Liens 4.16
Material Adverse Effect 4.1
Material Contracts 4.15
Merger Recital
Merger Agreement Lead-in
Merger Consideration 2.1(a)
Merger Sub Lead-in
Option Payments 2.6
Payment Fund 2.2
Pennsylvania Law 1.1
Pension Plans 4.9(b)
Permitted Investments 2.2
Products 4.20
Proxy Statement 6.1
Purchaser Lead-in
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Retirement Plans 6.11
SEC 4.6(a)
SEC Documents 4.6(a)
Shares Recital
Stock Option Plan 4.4
Stock Options 4.4
Subsidiary or subsidiary 9.4
Surviving Corporation 1.1
Takeover Statute 4.5
Tax 4.10
Tax Affiliate 4.10
Termination Date 8.2
Termination Fee 8.5(b)
Ultimate Plans 6.11
Unaudited Third Quarter Financial Statements 4.6
Voting Agreements Recital
10-K 4.6
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IN WITNESS WHEREOF, the Purchaser, Merger Sub and the Company have caused
this Merger Agreement to be executed as of the date first written above by their
respective duly authorized officers.
CONMED CORPORATION
By: /s/ Heather L. Cohen
------------------------------------
Title: Assistant Secretary
ARROW MERGER CORPORATION
By: /s/ Heather L. Cohen
------------------------------------
Title: Assistant Secretary
BIONX IMPLANTS, INC.
By: /s/ Gerard S. Carlozzi
------------------------------------
Title: President and
Chief Executive Officer
EXHIBIT 12
CONMED Corporation
Statement Showing Computations of Ratio of Earnings to Fixed Charges
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
Income before income
taxes and extraordinary
item ..................... $30,276 $42,436 $30,178 $38,134 $54,836
Interest expense ............. 30,891 32,360 34,286 30,824 24,513
Portion of rentals
representative of interest
factor ................... 875 978 1,114 919 681
------- ------- ------- ------- -------
Total earnings available for
fixed charges ............ $62,042 $75,774 $65,578 $69,877 $80,030
======= ======= ======= ======= =======
Interest expense ............. $30,891 $32,360 $34,286 $30,824 $24,513
Portion of rentals
representative of interest
factor ................... 875 978 1,114 919 681
------- ------- ------- ------- -------
Total fixed charges .......... $31,766 $33,338 $35,400 $31,743 $25,194
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges ............ 1.95 2.27 1.85 2.20 3.18
======= ======= ======= ======= =======
EXHIBIT 21
CONMED Corporation
Subsidiaries of the Registrant
Name State or Country of Incorporation
- -------------------------------------- ---------------------------------
Aspen Laboratories, Inc. Colorado
Bionx Implants, Inc. Pennsylvania
CONMED Andover Medical, Inc. New York
CONMED Integrated O.R. Solutions, Inc. New York
CONMED Receivables Corporation New York
Envision Medical Corporation California
Largo Lakes I Limited Partnership Florida
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
Nortrex Medical Corporation Canada
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, 333-78987 and 333-90444) and Form S-3 (No.
333-66764) of CONMED Corporation of our report dated March 28, 2003 relating
to the financial statements and financial statement schedule, which appears on
page F-1 in this Form 10-K.
PricewaterhouseCoopers LLP
Syracuse, New York
March 28, 2003