UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number 0-16093
March 31, 2004
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)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The number of shares outstanding of registrant's common stock, as of May
6, 2004 is 29,725,874 shares.
CONMED CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
PART I FINANCIAL INFORMATION
Item Number Page
Item 1. Financial Statements
- Consolidated Condensed Statements
of Income for the three months ended
March 31, 2003 and 2004 1
- Consolidated Condensed Balance Sheets
as of December 31, 2003 and March
31, 2004 2
- Consolidated Condensed Statements
of Cash Flows for the three months
ended March 31, 2003 and 2004 3
- Notes to Consolidated Condensed
Financial Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
PART I FINANCIAL INFORMATION
Item 1.
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited, in thousands except per share amounts)
Three Months Ended March 31,
----------------------------
2003 2004
---- ----
Net sales ........................................................ $ 118,034 $ 133,964
Cost of sales .................................................... 56,378 63,605
------------ ------------
Gross profit ..................................................... 61,656 70,359
------------ ------------
Selling and administrative expense ............................... 37,145 43,793
Research and development expense ................................. 3,703 4,739
Write-off of purchased in-process research
and development assets ....................................... 7,900 --
Other expense (income), net ...................................... (7,658) --
------------ ------------
41,090 48,532
Income from operations ........................................... 20,566 21,827
Loss on early extinguishment of debt ............................. 166 --
Interest expense ................................................. 5,538 3,306
------------ ------------
Income before income taxes ....................................... 14,862 18,521
Provision for income taxes ....................................... 8,194 6,482
------------ ------------
Net income ....................................................... $ 6,668 $ 12,039
============ ============
Per share data:
Net income
Basic ........................................................ $ .23 $ .41
Diluted ...................................................... .23 .40
Weighted average common shares
Basic ........................................................ 28,876 29,303
Diluted ...................................................... 29,037 29,992
See notes to consolidated condensed financial statements.
1
CONMED CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share and per share amounts)
(Unaudited)
December 31, March 31,
2003 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 5,986 $ 9,467
Accounts receivable, net ................................................... 60,449 61,884
Inventories ................................................................ 120,945 115,214
Deferred income taxes ...................................................... 10,188 10,618
Prepaid expenses and other current assets .................................. 3,538 3,424
--------- ---------
Total current assets ..................................................... 201,106 200,607
--------- ---------
Property, plant and equipment, net ........................................... 97,383 96,302
Goodwill ..................................................................... 290,562 290,111
Other intangible assets, net ................................................. 193,969 192,542
Other assets ................................................................. 22,038 21,070
--------- ---------
Total assets ............................................................. $ 805,058 $ 800,632
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................................... $ 4,143 $ 3,906
Accounts payable ........................................................... 18,320 21,203
Accrued compensation and benefits .......................................... 10,685 7,607
Income taxes payable ....................................................... 10,877 7,118
Accrued interest ........................................................... 279 440
Other current liabilities .................................................. 10,551 8,461
--------- ---------
Total current liabilities ................................................ 54,855 48,735
--------- ---------
Long-term debt ............................................................... 260,448 237,507
Deferred income taxes ........................................................ 46,143 50,282
Other long-term liabilities .................................................. 10,122 10,093
--------- ---------
Total liabilities ........................................................ 371,568 346,617
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01 per share;
authorized 500,000 shares; none outstanding .............................. -- --
Common stock, par value $.01 per share;
100,000,000 shares authorized; 29,140,644 and
29,725,841 shares issued in
2003 and 2004, respectively ............................................ 291 298
Paid-in capital ............................................................ 237,076 245,641
Retained earnings .......................................................... 194,473 206,512
Accumulated other comprehensive income ..................................... 2,069 1,983
Less 37,500 shares of common stock in treasury,
at cost .................................................................. (419) (419)
--------- ---------
Total shareholders' equity ............................................... 433,490 454,015
--------- ---------
Total liabilities and shareholders' equity ............................. $ 805,058 $ 800,632
========= =========
See notes to consolidated condensed financial statements.
2
CONMED CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended March 31,
----------------------------
2003 2004
---- ----
Cash flows from operating activities:
Net income ....................................................................... $ 6,668 $ 12,039
-------- --------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation ............................................................... 2,374 2,645
Amortization ............................................................... 3,168 4,105
Deferred income taxes ...................................................... 4,409 4,248
Write-off of purchased in-process research and
development assets ..................................................... 7,900 --
Loss on the early extinguishment of debt ................................... 166 --
Increase (decrease) in cash flows
from changes in assets and liabilities:
Sale of accounts receivable ...................................... -- (1,000)
Accounts receivable .............................................. 1,270 (435)
Inventories ...................................................... (3,107) 4,089
Accounts payable ................................................. (1,580) 2,883
Income taxes payable ............................................. 2,375 (3,759)
Accrued compensation and benefits ................................ (1,943) (2,664)
Accrued interest ................................................. (2,736) 161
Other assets/liabilities, net .................................... 1,514 (1,784)
-------- --------
13,810 8,489
-------- --------
Net cash provided by operating activities .................................. 20,478 20,528
-------- --------
Cash flows from investing activities:
Payments related to business acquisitions,
net of cash acquired ....................................................... (48,177) --
Purchases of property, plant, and equipment .................................... (1,710) (1,620)
-------- --------
Net cash used in investing activities ...................................... (49,887) (1,620)
-------- --------
Cash flows from financing activities:
Proceeds from common stock issued under
employee plans ............................................................... 808 8,158
Payments on debt ................................................................. (3,051) (23,178)
Payments related to issuance of debt ............................................. -- (123)
Proceeds of debt ................................................................. 31,000 --
-------- --------
Net cash provided by (used in) financing activities ........................ 28,757 (15,143)
-------- --------
Effect of exchange rate changes
on cash and cash equivalents ................................................... 1,276 (284)
-------- --------
Net increase in cash and cash equivalents .......................................... 624 3,481
Cash and cash equivalents at beginning of period ................................... 5,626 5,986
-------- --------
Cash and cash equivalents at end of period ......................................... $ 6,250 $ 9,467
======== ========
See notes to consolidated condensed financial statements.
3
CONMED CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, in thousands except share and per share amounts)
Note 1 - Operations and Significant Accounting Policies
Organization and Operations
The accompanying consolidated condensed financial statements include the
accounts of CONMED Corporation and its controlled subsidiaries ("CONMED", the
"Company", "we" or "us"). All intercompany accounts and transactions have been
eliminated. CONMED 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, otolaryngologic
("ENT"), neuro-surgery and other surgical specialties. We are a leading
developer, manufacturer and supplier of radio frequency ("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 electrocardiogram
("ECG") electrodes for heart monitoring and other patient care products. We also
offer integrated operating room systems and equipment. Our products are used in
a variety of clinical settings, such as operating rooms, surgery centers,
physicians' offices and hospitals.
CONMED conducts its business through four principal operating units, CONMED
Patient Care, CONMED Endoscopy, CONMED Electrosurgery and Linvatec Corporation.
All of our operating units have been aggregated into one business segment due to
their similar economic characteristics, customer base, nature of products and
services, procurement, manufacturing and distribution processes. Total Company
performance is evaluated by our chief operating decision maker which has been
identified as the President and Chief Operating Officer, who reviews operating
results and makes resource allocation decisions. Therefore, all required
information regarding segment revenues, profitability and total assets may be
obtained from our consolidated condensed financial statements.
Certain prior year amounts have been reclassified to conform with the
presentation used in 2004.
Stock-based Compensation
We account for our stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". 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 Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and has been determined as if we had accounted for
our employee stock options under the fair value method of that statement.
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:
4
Three months ended
March 31,
2003 2004
---- ----
Net income-- as reported ................................ $ 6,668 $ 12,039
---------- ----------
Pro forma stock-based employee
compensation expense, net of related
income tax effect ..................................... (524) (558)
---------- ----------
Net income-- pro forma .................................. $ 6,144 $ 11,481
========== ==========
EPS - as reported:
Basic ............................................... $ .23 $ .41
Diluted ............................................. $ .23 $ .40
EPS - pro forma:
Basic ............................................... $ .21 $ .39
Diluted ............................................. $ .21 $ .38
Note 2 - Interim financial information
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Results for the period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
The consolidated condensed financial statements and notes thereto should be read
in conjunction with the financial statements and notes for the year-ended
December 31, 2003 included in our Annual Report on Form 10-K.
Note 3 - Other comprehensive income
Comprehensive income consists of the following:
Three months ended
March 31,
2003 2004
Net income .............................................. $ 6,668 $ 12,039
---------- ----------
Other comprehensive income:
Foreign currency
translation adjustment .............................. 1,313 (279)
Cash flow hedging
(net of income taxes) ............................... 393 193
---------- ----------
Comprehensive income .................................. $ 8,374 $ 11,953
========== ==========
5
Accumulated other comprehensive income consists of the following:
Accumulated
Cumulative Cash Other
Translation Flow Comprehensive
Adjustments Hedges Income
----------- ------ ------
Balance, December 31, 2003 .................................. $ 1,923 $ 146 $ 2,069
Foreign currency translation
adjustments ........................................... (279) -- (279)
Cash flow hedging (net of
income taxes) ......................................... -- 193 193
------- ------- -------
Balance, March 31, 2004 ..................................... $ 1,644 $ 339 $ 1,983
======= ======= =======
Note 4 - Inventories
Inventories consist of the following:
December 31, March 31,
2003 2004
---- ----
Raw materials ............................................... $ 35,352 $ 33,004
Work-in-process ............................................. 14,583 15,269
Finished goods .............................................. 71,010 66,941
---------- ----------
Total ........................................... $ 120,945 $ 115,214
========== ==========
Note 5 - Earnings per share
Basic earnings per share ("basic EPS") is computed based on the weighted average
number of common shares outstanding for the period. Diluted earnings per share
("diluted EPS") gives effect to all dilutive potential shares outstanding
resulting from employee stock options during the period. The following is a
reconciliation of the weighted average shares used in the calculation of basic
and diluted EPS (in thousands):
Three months ended
March 31,
2003 2004
---- ----
Shares used in the calculation
of basic EPS(weighted average
shares outstanding) ....................................... 28,876 29,303
Effect of dilutive potential
securities ................................................ 161 689
---------- ----------
Shares used in the calculation
of diluted EPS ............................................ 29,037 29,992
========== ==========
The shares used in the calculation of diluted EPS exclude options to purchase
shares where the exercise price was greater than the average market price of
common shares for the period. Shares excluded from the calculation of diluted
EPS aggregated 2,395 for the three months ended March 31, 2003; no such shares
were excluded from the calculation of diluted EPS for the three months ended
March 31, 2004.
6
Note 6 - Other expense (income)
Other expense (income) consists of the following:
Three months ended
March 31,
2003 2004
---- ----
Gain on settlement of a contractual dispute,
net of legal costs ...................................... ($9,000) $ --
Acquisition-related costs ................................... 1,342 --
--------- ---------
Other expense (income), net ............................. $ (7,658) $ --
========= =========
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 paid us
$9.5 million in cash, which was recorded as a gain on settlement of a
contractual dispute net of $0.5 million in legal costs during the quarter ended
March 31, 2003.
During the quarter ended March 31, 2003, we incurred approximately $1.3 million
in acquisition and transition expenses related primarily to the December 31,
2002 acquisition of CORE Dynamics, Inc. (the "CORE acquisition") and the March
10, 2003 acquisition of Bionx Implants, Inc. (the "Bionx acquisition"). The $1.3
million consists of retention bonuses, severance and other expenses to wind down
CORE operations in Jacksonville, Florida and Bionx operations in Blue Bell,
Pennsylvania and has been recorded in other expense.
Note 7 - Goodwill and other intangible assets
The changes in the net carrying amount of goodwill for the three months ended
March 31, 2004 are as follows:
Balance as of January 1, 2004 ............................ $ 290,562
Adjustments to goodwill resulting from
business acquisitions finalized ........................ (502)
Foreign currency translation ............................. 51
---------
Balance as of March 31, 2004 ............................. $ 290,111
=========
Other intangible assets consist of the following:
December 31, 2003 March 31, 2004
----------------- --------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amortized intangible assets: Amount Amortization Amount Amortization
------ ------------ ------ ------------
Customer relationships ............................. $ 105,712 $ (15,447) $ 105,712 $ (16,144)
Patents and other intangible assets ................ 33,258 (16,498) 33,436 (17,406)
Unamortized intangible assets:
Trademarks and tradenames .......................... 86,944 -- 86,944 --
--------- --------- --------- ---------
$ 225,914 $ (31,945) $ 226,092 $ (33,550)
========= ========= ========= =========
Other intangible assets primarily represent allocations of purchase price to
identifiable intangible assets of acquired businesses. The weighted average
7
amortization period for intangible assets which are amortized is 22 years.
Customer relationships are being amortized over 38 years. Patents and other
intangible assets are being amortized over a weighted average life of 9 years.
Amortization expense related to intangible assets which are subject to
amortization totaled $1,605 in the three months ended March 31, 2004 and $1,352
in the three months ended March 31, 2003 and is included in selling and
administrative expense on the consolidated condensed statement of income.
The estimated amortization expense for the year ending December 31, 2004,
including the quarterly period ended March 31, 2004, and for each of the five
succeeding years is as follows:
2004 $6,076
2005 5,065
2006 4,500
2007 4,445
2008 4,444
2009 4,267
We performed impairment tests of goodwill and indefinite-lived intangible assets
and evaluate the useful lives of acquired intangible assets subject to
amortization. These tests and evaluations are performed in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." No impairment losses or adjustments to useful lives have
been recognized as a result of these tests. It is our policy to perform our
annual impairment tests in the fourth quarter.
Note 8 -- Guarantees
We provide warranties on certain of our products at the time of sale. The
standard warranty on our capital and reusable equipment is generally for a
period of one year. 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
three months ended March 31, 2004 are as follows:
Balance as of January 1, 2004 ......................... $ 3,588
Provision for warranties .............................. 936
Claims made ........................................... (970)
-------
Balance as of March 31, 2004 .......................... $ 3,554
=======
Note 9 - Pension Plan
Net periodic pension costs consist of the following:
Three months ended
March 31,
2003 2004
---- ----
Service cost ............................ $ 1,042 $ 1,069
Interest cost on projected
benefit obligation .................... 605 634
Expected return on plan assets .......... (432) (665)
Net amortization and deferral ........... 188 200
------- -------
Net periodic pension cost ............... $ 1,403 $ 1,238
======= =======
8
We previously disclosed in our Annual Report on Form 10-K for the year-ended
December 31, 2003 that we expected to fund our pension in 2004 by an amount not
to exceed $5.7 million. No pension funding was made during the quarter ended
March 31, 2004.
Note 10 - New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
and Interpretation of ARB No. 151," which requires variable interest entities
("VIE") 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. In December 2003,
the FASB completed deliberations on proposed modifications to FIN 46 and
reissued FIN 46(R) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. Adoption of this pronouncement has not had
any material impact on our financial condition or results of operations during
the first quarter of 2004.
In December 2003, the Staff of the Securities and Exchange Commission ("SEC" or
the "Staff") issued Staff Accounting Bulletin No. 104, "Revenue Recognition"
("SAB 104"), which supercedes Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 104 rescinds accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of Emerging Issues Task Force Issue No.
00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple
Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers issued with SAB 101
that had been codified in SEC topic 13, "Revenue Recognition". While the wording
of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104. We do not expect the adoption of SAB 104 to have a material effect on
our financial condition or results of operations.
Note 11 - 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, as would typically be the case primarily in lawsuits
alleging patent infringement, 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 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
9
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.
In November 2003, we commenced litigation against Johnson & Johnson and several
of its subsidiaries, including Ethicon, Inc. for violation of federal and state
antitrust laws. The lawsuit claims that Johnson & Johnson engaged in illegal and
anticompetitive conduct with respect to sales of product used in endoscopic
surgery, resulting in higher prices to consumers and the exclusion of
competition. We have sought relief which includes an injunction restraining
Johnson & Johnson from continuing its anticompetitive practice as well as
receiving the maximum amount of damages allowed by law. Our claims against
Johnson & Johnson are currently in the discovery stage. While we believe that
our claims are well-grounded in fact and law, there can be no assurance that we
will be successful in our claim.
Note 12 - Writeoff of Purchased In-Process Research and Development Assets
As disclosed in our Annual Report on Form 10-K for the year-ended December 31,
2003, we wrote-off $7.9 million of purchased in-process research and development
assets during the three month period ended March 31, 2003. These assets were
acquired in connection with the Bionx acquisition and are not deductible for
income tax purposes.
Note 13 - Shareholders' Equity
During the three month period ended March 31, 2004, we issued 0.6 million
additional shares of common stock to employees under our stock option plans and
employee stock purchase plan. This issuance of common stock resulted in a $8.6
million increase in Paid-in capital.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
In this Report on Form 10-Q, we make forward-looking statements about our
financial condition, results of operations and business. Forward-looking
statements are statements made by us concerning events that may or may not occur
in the future. These statements may be made directly in this document or may be
"incorporated by reference" from other documents. You can find many of these
statements by looking for words like "believes," "expects," "anticipates,"
"estimates" or similar expressions.
Forward-Looking Statements are not Guarantees of Future Performance
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, including those that may cause our actual results, performance or
achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include those identified under "Risk
Factors" in our Annual Report on Form 10-K for the year-ended December 31, 2003
and the following, among others:
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;
o the ability to evaluate, finance and integrate acquired businesses,
products and companies;
o changes in business strategy;
o the possibility that United States or foreign regulatory and/or
administrative agencies may initiate enforcement actions against us or our
distributors;
o future levels of indebtedness and capital spending;
o quality of our management and business abilities and the judgment of our
personnel;
o the risk of litigation, especially patent litigation as well as the cost
associated with patent and other litigation;
o changes in foreign exchange and interest rates;
o changes in regulatory requirements; and
o the availability, terms and deployment of capital.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" below and "Business" in our Annual Report on Form 10-K for the
year-ended December 31, 2003 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 Quarterly Report on Form 10-Q or to reflect
the occurrence of unanticipated events.
11
Overview:
CONMED Corporation ("CONMED", the "Company", "we" or "us") is a medical
technology company with six principal product lines. These product lines and the
percentage of consolidated revenues associated with each of them, are as
follows:
Three months ended
March 31,
2003 2004
---- ----
Arthroscopy ...................................... 35.3% 37.6%
Powered Surgical Instruments ..................... 26.3 25.0
Patient Care ..................................... 14.7 13.4
Electrosurgery ................................... 14.2 15.1
Endoscopy ........................................ 9.1 8.2
Integrated Operating Room Systems ................ 0.4 0.7
----- -----
Consolidated Net Sales ....................... 100% 100%
===== =====
A significant amount of our products are used in surgical procedures with
approximately 75% of our revenues derived from the sale of disposable products.
We manufacture substantially all of our products in facilities located in the
United States. We market our products both domestically and internationally
directly to customers and through distributors. International sales represent a
significant portion of our business. During the three months ended March 31,
2004, sales to purchasers outside of the United States totaled 36% of total net
sales.
Business Environment, Opportunities and Challenges
The aging of the worldwide population along with lifestyle changes, continued
cost containment pressures on healthcare systems and the desire of clinicians
and administrators to use less invasive (or noninvasive) procedures are
important trends which are driving the growth for our surgical and patient care
products.
We have historically used strategic business acquisitions and exclusive
distribution relationships to diversify our product offerings, increase our
market share in certain product lines and realize economies of scale. In 2003 we
made important progress in broadening our Arthroscopy product line with the
acquisition of Bionx Implants, Inc. In January 2004, we announced an agreement
with Dolphin Medical, Inc., a subsidiary of OSI Systems, Inc. under which we
became the exclusive North American distributor for a full line of Dolphin pulse
oximetry products. These products are included in our Patient Care product line.
In March 2004, we announced a strategic co-marketing relationship with
eTrauma(R) Corporation, a developer and manufacturer of picture archiving,
digital communication systems and electronic medical records software. Through
this partnership our integrated operating room product offerings will include
eTrauma's digital communications product.
Continued innovation and commercialization of new proprietary products and
processes are essential elements of our long-term growth strategy. In March
2004, we unveiled fourteen new products at the American Academy of Orthopedic
Surgeons Annual Meeting which will enhance our arthroscopy and powered
instrument product offerings. Our reputation as an innovator is exemplified by
these recent product introductions, which include an IM3300 progressive scan,
enhanced definition, autoclavable camera; a PowerPro(R) pneumatic powered
instrument system; shoulder suture and suture anchors; Arthroscopic shaver
blades; a knee femoral screw; SmartNail(R) 2.4m bioresorbable nail; and the
10k(TM) pump fluid management system.
Certain of our products, particularly our line of surgical suction instruments,
tubing and ECG electrodes are more commodity in nature, with limited opportunity
for product differentiation. These products compete in mature, price sensitive
markets. As a result, while sales volumes have continued to increase we have
experienced and expect
12
that we will continue to experience pricing and margin pressures in these
product lines. We believe that we may continue to profitably compete in these
product lines by maintaining and improving our low cost manufacturing structure.
In addition, we expect to continue to use cash generated from these low margin,
low investment products to invest in, improve and expand higher margin product
lines.
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 in our Annual
Report on Form 10-K for the year-ended December 31, 2003 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. There have been no significant changes in our critical
accounting estimates during the first quarter of 2004.
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. Payment by the customer is due under fixed
payment terms.
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 equipment shipment and we
recognize revenue upon the disposable product shipment. The cost of
the equipment is amortized over the term of the individual
commitment agreements.
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 an analysis of historical customer
returns and credits, rebates, discounts and current market
conditions.
o The Company's terms of sale to customers do not include any
obligations 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 based upon an
analysis of historical data.
o Amounts billed to customers related to shipping and handling are
included in net sales. Shipping and handling costs 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 $1.7
million at March 31, 2004 is adequate to provide for any probable
losses from accounts receivable.
13
Inventory Reserves
We maintain reserves for excess and obsolete inventory resulting from the
inability to sell our products at prices in excess of current carrying costs.
The markets in which we operate are highly competitive, with new products and
surgical procedures introduced on an on-going basis. Such marketplace changes
may cause our products to become obsolete. We make estimates regarding the
future recoverability of the costs of our products and record a provision for
excess and obsolete inventories based on historical experience, expiration of
sterilization dates and expected future trends. If actual product life cycles,
product demand or acceptance of new product introductions are less favorable
than projected by management, additional inventory write-downs may be required.
Business Acquisitions
We have a history of growth through acquisitions, including the Bionx
acquisition in 2003. 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 $290.1 million
and other intangible assets of $192.5 million at March 31, 2004.
In accordance with Statement of Financial Accounting Standards 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 at
least 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 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.
In connection with the Bionx acquisition, significant estimates were made in the
$7.9 million valuation of the purchased in-process research and development
assets ("IPRD"). The purchased in-process research and development value relates
to next generation arthroscopy products, which have been or are expected to be
released between the second quarter of 2003 and fourth quarter of 2004. The
acquired projects include enhancements and upgrades to existing device
technology, introduction of new device functionality and the development of new
materials technology for arthroscopic applications.
The value of the Bionx in-process research and development was calculated using
a discounted cash flow analysis of the anticipated net cash flow stream
associated with the in-process technology of the related product sales. The
estimated net cash flows were discounted using a discount rate of 22%, which was
based on the weighted-average cost of capital for publicly-traded companies
within the medical device industry and adjusted for the stage of completion of
each of the in-process research and development projects. The risk and return
considerations surrounding the stage of completion were based on costs,
man-hours and complexity of the work completed versus to be completed and other
risks associated with achieving technological feasibility. In total, these
projects were approximately 40% complete as of the acquisition date. The total
budgeted costs for the projects were approximately $5.5 million and the
remaining costs to complete these projects were approximately $3.3 million as of
the acquisition date.
14
The major risks and uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm the safety and
efficacy of the technologies and products based on the data from clinical trials
and obtaining the necessary regulatory approvals. In addition, no assurance can
be given that the underlying assumptions used to forecast the cash flows or the
timely and successful completion of such projects will materialize, as
estimated. For these reasons, among others, actual results may vary
significantly from the estimated results.
Pension Plan
We sponsor a defined benefit pension plan covering substantially all our
employees. Major assumptions used in the accounting for the plan 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.
As a result of lower market interest rates, we have lowered the discount rate
used in determining pension expense from 6.75% in 2003 to 6.25% in 2004. This
change in assumption will result in higher pension expense in 2004.
We have used an expected rate of return on pension plan assets of 8.0% for
purposes of determining the net periodic pension benefit cost. In determining
the expected return on pension plan assets, we consider the relative weighting
of plan assets, the historical performance of total plan assets and individual
asset classes and economic and other indicators of future performance. In
addition, we consult with financial and investment management professionals in
developing appropriate targeted rates of return. As a result of funding the
maximum deductible pension contributions in 2003, pension plan assets have
increased substantially, which will result in higher expected returns and
decreased pension expense in 2004.
Based on these and other factors, 2004 pension expense is estimated at
approximately $5.0 million. Actual expense may vary significantly from this
estimate. For the three month period ended March 31, 2004 we recorded $1.2
million in pension expense and for the three month period ended March 31, 2003
we recorded $1.4 million.
Income Taxes
The recorded future tax benefit arising from net deductible temporary
differences and tax carryforwards is approximately $15.5 million at March 31,
2004. 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.
We have established a valuation allowance to reflect the uncertainty of
realizing the benefits of certain net operating loss carryforwards recognized in
connection with the Bionx acquisition. 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.
15
Results of Operations
Three months ended March 31, 2004 compared to three months ended March 31, 2003
The following table presents, as a percentage of net sales, certain categories
included in our consolidated statements of income for the periods indicated:
Three Months Ended
March 31,
2003 2004
---- ----
(unaudited)
Net sales ....................................... 100.0% 100.0%
Cost of sales ................................... 47.8 47.5
----- -----
Gross profit ............................... 52.2 52.5
Selling and administrative expense .............. 31.5 32.7
Research and development expense ................ 3.1 3.5
Write-off of purchased IPRD ..................... 6.7 --
Other expense (income), net ..................... (6.5) --
----- -----
Income from operations ..................... 17.4 16.3
Loss on early extinguishment of debt ............ 0.1 --
Interest expense ................................ 4.8 2.5
----- -----
Income before income taxes ................. 12.5 13.8
Provision for income taxes ...................... 6.9 4.8
----- -----
Net income ................................. 5.6% 9.0%
===== =====
Sales for the quarterly period ended March 31, 2004 were $134.0 million, an
increase of $16.0 million (13.6%) compared to sales of $118.0 million in the
comparable 2003 period. The Bionx acquisition accounted for $3.3 million of the
above increase and favorable foreign currency exchange rates accounted for $4.0
million.
Arthroscopy sales increased $8.6 million (20.6%) in the quarterly period ended
March 31, 2004 to $50.3 million from $41.7 million in the comparable 2003
period. The Bionx acquisition accounted for $3.3 million of the above increase,
along with increased sales of our procedure specific, fluid, resection and
imaging products.
Powered surgical instrument sales increased $2.5 million (8.1%) in the quarterly
period ended March 31, 2004 to $33.5 million from $31.0 million in the
comparable 2003 period, principally as a result of increased sales of our
PowerPro(R) line of instrument products. This increase was partially offset by
decreased sales of our small bone and specialty products.
Patient care sales increased $0.7 million (4.0%) in the quarterly period ended
March 31, 2004 to $18.0 million from $17.3 million in the comparable 2003
period. This increase in sales is primarily attributable to improved sales in
our surgical suction product lines.
Electrosurgery sales increased $3.4 million (20.2%) in the quarterly period
ended March 31, 2004 to $20.2 million from $16.8 million in the comparable 2003
period, principally as a result of increased sales of our new System 5000(R)
electrosurgical generator.
Endoscopy sales increased $0.3 million (2.8%) in the quarterly period ended
March 31, 2004 to $11.0 million from $10.7 million in the comparable 2003
period. This increase is principally due to increased sales of our various
laparoscopic instrument products and systems.
Integrated operating room system sales increased $0.5 million in the quarterly
period ended March 31, 2004 to $1.0 million from $0.5 million in the comparable
2003 period.
16
Cost of sales increased to $63.6 million in the first quarter 2004 as compared
to $56.4 million in the same period a year ago on increased sales volumes in all
of our principal product lines. During the three months ended March 31, 2003 we
incurred $0.4 million in acquisition related charges as a result of the step-up
to fair value recorded related to the sale of inventory acquired in the Bionx
and CORE acquisitions. Gross margin percentage increased to 52.5% in 2004 as
compared to 52.2% in 2003.
Selling and administrative expense increased to $43.8 million in the first
quarter of 2004 as compared to $37.1 million in the comparable 2003 period. The
transition to a larger, independent sales agent based sales force in our
arthroscopy and powered surgical instrument product lines and increased sales
volumes in all of our principal product lines accounted for the increased
expense levels. As a percentage of sales, selling and administrative expense was
32.7% in the first quarter of 2004 compared to 31.5% in the first quarter of
2003.
Research and development expense totaled $4.7 million in the first quarter of
2004 as compared to $3.7 million in the first quarter of 2003. This increase is
principally due to research efforts focused on the development of arthroscopy
and powered surgical instrument products, which accounted for $0.6 million of
the above increase and patient care products which accounted for $0.4 million.
As a percentage of sales, research and development expense increased to 3.5% in
the current quarter compared to 3.1% in the comparable 2003 period.
As discussed in Critical Accounting Estimates - Business Acquisitions, in the
first quarter of 2003 we wrote-off purchased in-process research and development
assets of $7.9 million in connection with the Bionx acquisition.
In the three months ended March 31, 2004 we did not record a charge to other
expense (income). As discussed in Note 6 to the consolidated condensed financial
statements, other income in the first quarter of 2003 consisted of a net gain on
the settlement of a contractual dispute of $9.0 million offset by acquisition
related costs of $1.3 million.
During the three months ended March 31, 2003 we repurchased $2.6 million of our
9% senior subordinated notes and recorded a loss on the early extinguishment of
debt of $0.2 million.
Interest expense in the first quarter of 2004 was $3.3 million compared to $5.5
million in the first quarter of 2003. The decrease in interest expense is
primarily as a result of lower total outstanding borrowings during the current
quarter as compared to the same period a year ago and lower average interest
rates on our borrowings (inclusive of the implicit finance charge on our
accounts receivable sale facility). This decrease in interest expense is a
consequence of our redemption of $130.0 million in 9% subordinated notes in June
2003. Our total outstanding borrowings have decreased to $241.4 million at March
31, 2004 as compared to $285.3 million at March 31, 2003. The weighted average
interest rates on our borrowings has decreased to 4.34% for the three months
ended March 31, 2004 as compared to 7.55% for the three months ended March 31,
2003.
A provision for income taxes has been recorded at an effective tax rate of 35%
for the first quarter 2004 and 55% for the first quarter of 2003. The effective
tax rate for the first quarter of 2003 was substantially higher than the
effective tax rates we have experienced historically as a result of the
non-deductibility for income tax purposes of the $7.9 million in-process
research and development write-off recorded in conjunction with the Bionx
acquisition. A reconciliation of the United States statutory income tax rate to
our effective tax rate is included in our Annual Report on Form 10-K for the
year-ended December 31, 2003, Note 7 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Cash generated from operations, including sales of accounts receivable and
borrowings under our revolving credit facility, provide the necessary liquidity
to fund our working capital requirements, debt service under the senior credit
agreement and the funding of capital investments. In addition, we use term
borrowings, including
17
borrowings under our senior credit agreement and borrowings under separate loan
facilities, in the case of real property acquisitions, to finance our
acquisitions.
Cash provided by operations
Our net working capital position was $151.9 million at March 31, 2004. Net cash
provided by operating activities was $20.5 million in the three months ended
March 31, 2004 and $20.5 million in the three months ended March 31, 2003.
Net cash provided by operating activities in the quarterly period ended March
31, 2004 was favorably impacted by the following: depreciation, amortization,
deferred income taxes; decreases in inventory; and increases in accounts payable
and accrued interest, primarily related to the timing of the payment of these
liabilities.
Net cash provided by operating activities in the quarterly period ended March
31, 2004 was negatively impacted by the following: decreases in accounts
receivable sold under the accounts receivable sale facility; decreases in income
taxes payable; and decreases in accrued compensation and benefits.
Investing cash flows
Capital expenditures were $1.6 million and $1.7 million for the three months
ended March 31, 2004 and 2003, respectively. These capital expenditures
represent the ongoing capital investment requirements of our business.
Investing cash flows in 2003 include $48.2 million in payments related to
business acquisitions, net of cash acquired, principally related to the Bionx
acquisition.
Financing cash flows
Financing activities in the three months ended March 31, 2004 consisted
primarily of the repayment of $23.2 million in borrowings.
Our senior credit agreement consists of a $100 million revolving credit facility
and a $260 million term loan. There were no borrowings outstanding on the
revolving credit facility as of March 31, 2004. As of March 31, 2004, the total
amount outstanding on the term loan was $223.4 million. The term loan is
scheduled to be repaid over a period of approximately 6 years, with scheduled
principal payments of $2.6 million annually through December 2007 increasing to
$71.0 million in 2008 and the remaining balance outstanding due in December
2009. We may be required, under certain circumstances, to make additional
principal payments based on excess annual cash flow as defined in the senior
credit agreement. Interest rates on the term facility are at the London
Interbank Offered Rate ("LIBOR") plus 2.25% (3.34% at March 31, 2004). Interest
rates on the revolving credit facility are at LIBOR plus 2.50% (3.59% at March
31, 2004).
The senior credit agreement is collateralized by substantially all of our
personal property and assets, except for our accounts receivable and related
rights which have been sold in connection with our accounts receivable sales
agreement. The 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 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 2001 in connection with the purchase of property in Largo,
Florida utilized by our Linvatec facility 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-
18
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 aggregated
$12.3 million, $6.2 million and $4.2 million, respectively, at the date of
acquisition. In January 2004 we paid the remaining outstanding balance on the
seller-financed note in the amount of $3.8 million. The principal balances
outstanding on the Class A note and Class C note aggregated $9.5 million and
$7.7 million, respectively, at March 31, 2004. These loans are secured by our
Largo, Florida property.
Management believes that cash generated from operations, including accounts
receivable sales, current cash resources and available borrowing capacity under
our senior credit agreement will be adequate to meet our anticipated operating
working capital requirements, debt service and the funding of capital
expenditures in the foreseeable future.
Off-Balance Sheet Arrangements
We have an 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, bankruptcy-remote,
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 accounts
receivable sales agreement was amended and restated on substantially the same
terms and conditions on October 23, 2003 but replaced the commercial paper
conduit with a bank. The commercial paper conduit or the bank's (the
"purchaser") share of collections on accounts receivable are calculated as
defined in the accounts receivable sales agreement, as amended. Effectively,
collections on the pool of receivables flow first to the purchaser and then to
CRC, but to the extent that the purchaser's share of collections were less than
the amount of the 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 purchaser. As of March 31, 2004, the undivided percentage
ownership interest in receivables sold by CRC to the purchaser aggregated $43.0
million, 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 purchaser's financing costs to purchase
the accounts receivable were $0.2 million in the three month period ended March
31, 2004 and are included in interest expense.
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 purchaser. The pool of
receivables is in 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 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, as amended, also requires us
to obtain a commitment (the "purchaser commitment"), on an annual basis, from
the purchaser to fund the purchase of our accounts receivable. The purchaser
commitment expires on October 21, 2004. In the event we are unable to renew our
purchaser commitment, we would need to access an alternate source of working
capital, such as our $100 million revolving credit facility.
Contractual Obligations
The following table summarizes our contractual obligations for the next five
years and thereafter (amounts in thousands). There were no capital lease
obligations as of March 31, 2004:
19
Payments Due By Period
----------------------
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 years
----- ------ ----- ----- -------
Long-term debt ...................... $241,413 $ 3,906 $ 8,296 $ 94,805 $134,406
Purchase obligations ................ 54,321 53,862 433 26 --
Operating lease
obligations ....................... 11,246 1,996 3,549 3,656 2,045
-------- -------- -------- -------- --------
Total contractual
obligations ....................... $306,980 $ 59,764 $ 12,278 $ 98,487 $136,451
======== ======== ======== ======== ========
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in our exposures to market risk during the
three months ended March 31, 2004. For a detailed discussion of market risk, see
our Annual Report on Form 10-K for the year-ended December 31, 2003, Part II,
Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was carried out under the supervision and
with the participation of the Company's management, including the Chairman and
Chief Executive Officer and the Vice President-Finance and Chief Financial
Officer ("the Certifying Officers") as of March 31, 2004. Based on that
evaluation, the Certifying Officers concluded that the Company's disclosure
controls and procedures are effective to bring to the attention of the Company's
management the relevant information necessary to permit an assessment of the
need to disclose material developments and risks pertaining to the Company's
business in its periodic filings with the Securities and Exchange Commission.
There was no change in the Company's internal control over financial reporting
during the quarter ended March 31, 2004 that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
31.1 Certification of Eugene R. Corasanti pursuant to Rule
13a-14(a) or Rule 15d-14(a), of the Securities Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of Robert D. Shallish, Jr. pursuant to Rule
13a-14(a) or Rule 15d-14(a), of the Securities Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of Eugene R. Corasanti and Robert D. Shallish,
Jr. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
On April 29, 2004, the Company filed a Report on Form 8-K under Item 4
announcing that the Company's Audit Committee of the Board of Directors and
management approved a change in the independent accountants of the CONMED
Corporation Retirement Savings Plan from PricewaterhouseCoopers LLP to Insero,
Kasperski, Ciaccia & Company, P.C., for the unaudited interim period from
January 1, 2003 through April 22, 2004. The Company also filed an exhibit under
Item 7 relating to the letter from the prior independent accountants.
On April 23, 2004, the Company filed a Report on Form 8-K furnishing as Exhibit
99.1 under Item 12, an April 22, 2004 press release announcing financial results
for the first quarter ended March 31, 2004.
On February 3, 2004, the Company filed a Report on Form 8-K furnishing as
Exhibit 99.1 under Item 12, a January 29, 2004 press release announcing fourth
quarter and year-ended December 31, 2003 financial results.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONMED CORPORATION
(Registrant)
Date: May 6, 2004
/s/ Robert D. Shallish, Jr.
---------------------------------
Robert D. Shallish, Jr.
Vice President - Finance
(Principal Financial Officer)
22
Exhibit Index
Sequential Page
Exhibit Number
- ------- ------
31.1 Certification of Eugene R. Corasanti pursuant
to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 E-1
31.2 Certification of Robert D. Shallish, Jr. pursuant
to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 E-2
32.1 Certification of Eugene R. Corasanti and Robert D.
Shallish, Jr. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 E-3
23
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eugene R. Corasanti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CONMED Corporation;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
May 6, 2004
/s/ Eugene R. Corasanti
-----------------------
Eugene R. Corasanti
Chairman of the Board and
Chief Executive Officer
E-1
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert D. Shallish, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of CONMED Corporation;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
May 6, 2004
/s/ Robert D. Shallish, Jr.
---------------------------
Robert D. Shallish, Jr.
Vice President - Finance and
Chief Financial Officer
E-2
Exhibit 32.1
CERTIFICATIONS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of CONMED Corporation, a New York corporation (the
"Corporation"), does hereby certify that:
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2004
(the "Form 10-Q") of the Corporation fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in the Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of the Corporation.
Date: May 6, 2004 /s/ Eugene R. Corasanti
--------------------------
Eugene R. Corasanti
Chairman of the Board and
Chief Executive Officer
Date: May 6, 2004 /s/ Robert D. Shallish, Jr.
--------------------------
Robert D. Shallish, Jr.
Vice President-Finance and
Chief Financial Officer
E-3
