SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2001 Commission File Number 0-16093 CONMED CORPORATION (Exact name of the registrant as specified in its charter) New York 16-0977505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 525 French Road, Utica, New York 13502 (Address of principal executive offices) (Zip Code) (315) 797-8375 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The number of shares outstanding of registrant's common stock, as of October 16, 2001 is 25,215,378 shares.
CONMED CORPORATION TABLE OF CONTENTS FORM 10-Q PART I FINANCIAL INFORMATION Item Number Page Item 1. Financial Statements - Consolidated Condensed Statements of Income 1 - Consolidated Condensed Balance Sheets 2 - Consolidated Condensed Statements of Cash Flows 3 - Notes to Consolidated Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibit Index 24
Item 1. CONMED CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands except per share amounts) (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September September 2000 2001 2000 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 92,838 $105,318 $293,527 $315,398 -------- -------- -------- -------- Cost of sales 44,136 51,332 140,124 150,971 Selling and administrative 31,495 35,029 95,504 103,780 Research and development 4,109 3,491 11,087 10,663 -------- -------- -------- -------- 79,740 89,852 246,715 265,414 -------- -------- -------- -------- Income from operations 13,098 15,466 46,812 49,984 Interest expense, net 8,834 7,630 25,477 23,809 -------- -------- -------- -------- Income before income taxes 4,264 7,836 21,335 26,175 Provision for income taxes 1,535 2,821 7,681 9,423 -------- -------- -------- -------- Net income $ 2,729 $ 5,015 $ 13,654 $ 16,752 ======== ======== ======== ======== Per share data: Net income Basic $ .12 $ .20 $ .59 $ .71 Diluted .12 .20 .59 .70 Weighted average common shares Basic 22,986 24,806 22,961 23,657 Diluted 23,132 25,381 23,246 23,990 </TABLE> See notes to consolidated condensed financial statements. 1
CONMED CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands except share amounts) <TABLE> <CAPTION> (unaudited) December September 2000 2001 --------- --------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 3,470 $ 2,015 Accounts receivable, net 78,626 85,719 Inventories 104,612 107,337 Deferred income taxes 1,761 1,761 Prepaid expenses and other current assets 3,562 3,806 --------- --------- Total current assets 192,031 200,638 --------- --------- Property, plant and equipment, net 62,450 91,898 Goodwill, net 225,801 251,574 Other intangible assets, net 195,008 190,058 Other assets 4,281 5,173 --------- --------- Total assets $ 679,571 $ 739,341 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 36,068 $ 39,581 Accounts payable 20,350 20,314 Accrued compensation 9,913 9,893 Income taxes payable 1,979 1,378 Accrued interest 5,130 2,541 Other current liabilities 4,836 5,398 --------- --------- Total current liabilities 78,276 79,105 --------- --------- Long-term debt 342,680 348,826 Deferred income taxes 12,154 19,318 Other long-term liabilities 15,858 16,285 --------- --------- Total liabilities 448,968 463,534 --------- --------- 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; 23,028,279 and 25,212,338 shares issued and outstanding in 2000 and 2001, respectively 230 252 Paid-in capital 127,985 159,415 Retained earnings 103,834 120,586 Accumulated other comprehensive loss (1,027) (4,027) Less 37,500 shares of common stock in treasury, at cost (419) (419) --------- --------- Total shareholders' equity 230,603 275,807 --------- --------- Total liabilities and shareholders' equity $ 679,571 $ 739,341 ========= ========= </TABLE> See notes to consolidated condensed financial statements. 2
CONMED CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Nine Months Ended September 2000 and 2001 (in thousands) (unaudited) <TABLE> <CAPTION> 2000 2001 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income ............................................. $ 13,654 $ 16,752 -------- -------- Adjustments to reconcile net income to net cash provided by operations: Depreciation ................................. 7,006 6,648 Amortization ................................. 14,813 16,381 Increase (decrease) in cash flows from changes in assets and liabilities, net of effects from acquisitions: Accounts receivable ......... 986 (7,052) Inventories ................. (18,373) (3,174) Prepaid expenses and other current assets ...... (571) (283) Accounts payable ............ 5,974 (80) Income taxes payable ........ (4,339) (601) Accrued compensation ........ (3,014) (20) Accrued interest ............ (1,934) (2,614) Other assets/liabilities, net 2,848 (2,385) -------- -------- 3,396 6,820 -------- -------- Net cash provided by operating activities .... 17,050 23,572 -------- -------- Cash flows from investing activities: Purchases of property, plant, and equipment ............ (11,869) (12,704) -------- -------- Net cash used by investing activities ........ (11,869) (12,704) -------- -------- Cash flows from financing activities: Borrowings under revolving credit facility ............. 19,000 14,000 Proceeds from issuance of common stock ................. 448 1,591 Payments on long-term debt ............................. (24,690) (27,034) -------- -------- Net cash used by financing activities ........ (5,242) (11,443) -------- -------- Effect of exchange rate changes on cash and cash equivalents ......................... (378) (880) -------- -------- Net decrease in cash and cash equivalents ................ (439) (1,455) Cash and cash equivalents at beginning of period ......... 3,747 3,470 -------- -------- Cash and cash equivalents at end of period ............... $ 3,308 $ 2,015 ======== ======== </TABLE> Supplemental non-cash investing and financing activities: As more fully described in Note 6, we acquired a business in the third quarter of 2001 through the exchange of 1,950,000 shares of our common stock. As more fully described in Note 6, we acquired certain property in the third quarter of 2001 through the assumption of approximately $22.8 million of debt and accrued interest. See notes to consolidated condensed financial statements. 3
CONMED CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 - Organization and operations The consolidated condensed financial statements include the accounts of CONMED Corporation and its subsidiaries ("CONMED", the "Company", "we" or "us"). All intercompany accounts and transactions have been eliminated. CONMED Corporation is a medical technology company specializing in instruments and implants for arthroscopic sports medicine, and powered surgical instruments, for orthopaedic, ENT, neuro-surgery and other surgical specialties. We are also a leading developer, manufacturer and supplier of advanced medical devices, including RF electrosurgery systems used in all types of surgery, ECG electrodes for heart monitoring, and minimally invasive surgical devices. Our products are used in a variety of clinical settings, such as operating rooms, surgery centers, physicians' offices and critical care areas of hospitals. Our business is organized, managed and internally reported as a single segment, since our product offerings have similar economic, operating and other related characteristics. Note 2 - Interim financial information The statements for the three and nine months ended September 2000 and 2001 are unaudited; in our opinion such unaudited statements include all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation of the results for such periods. The consolidated condensed financial statements for the year ending December 2001 are subject to adjustment at the end of the year when they will be audited by independent accountants. The results of operations for the three and nine months ended September 2001 are not necessarily indicative of the results of operations to be expected for any other quarter nor for the year ending December 2001. The consolidated condensed financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year ended December 2000 included in our Annual Report to the Securities and Exchange Commission on Form 10-K. Certain prior year amounts have been reclassified to conform with the presentation used in 2001. Note 3 - Other comprehensive income (loss) Comprehensive income (loss) consists of the following: <TABLE> <CAPTION> Three months ended Nine months ended September September --------- --------- 2000 2001 2000 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income ................ $ 2,729 $ 5,015 $ 13,654 $ 16,752 -------- -------- -------- -------- Other comprehensive income: Foreign currency translation adjustment (135) 35 (397) (857) Cash flow hedging (net of income taxes) . -- (707) -- (2,143) -------- -------- -------- -------- Comprehensive income .... $ 2,594 $ 4,343 $ 13,257 $ 13,752 ======== ======== ======== ======== </TABLE> 4
Accumulated other comprehensive income (loss) consists of the following: <TABLE> <CAPTION> Accumulated Cumulative Cash Other Translation Flow Comprehensive Adjustments Hedges Income (loss) --------- --------- ------------- <S> <C> <C> <C> Balance, December 2000 ................................$ (1,027) $ -- $ (1,027) --------- --------- --------- Foreign currency translation adjustments ........ (857) -- (857) Cash flow hedging (net of income taxes) ......... -- (2,143) (2,143) --------- --------- --------- Balance, September 2001 ...............................$ (1,884) $ (2,143) $ (4,027) ========= ========= ========= </TABLE> Note 4 - Inventories The components of inventory are as follows (in thousands): <TABLE> <CAPTION> December September 2000 2001 --------- --------- <S> <C> <C> Raw materials ............................ $ 38,278 $ 39,945 Work-in-process .......................... 12,612 11,288 Finished goods ........................... 53,722 56,104 --------- --------- Total ................. $ 104,612 $ 107,337 ========= ========= </TABLE> Note 5 - Earnings per share Basic earnings per share (EPS) is computed based on the weighted average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential shares outstanding (ie., options and warrants) during the period. The following is a reconciliation of the weighted average shares used in the calculation of basic and diluted EPS (in thousands): Three months ended Nine months ended September September --------- --------- 2000 2001 2000 2001 ---- ---- ---- ---- Shares used in the calculation of Basic EPS(weighted average shares outstanding) ......... 22,986 24,806 22,961 23,657 ------ ------ ------ ------ Effect of dilutive potential securities .................. 146 575 285 333 ------ ------ ------ ------ Shares used in the calculation of Diluted EPS .............. 23,132 25,381 23,246 23,990 ====== ====== ====== ====== The shares used in the calculation of diluted EPS exclude warrants and options to purchase shares where the exercise price was greater than the average market price of common shares for the period. Such shares aggregated 3,617,000 and 1,988,000 for the three months ended September 2000 and 2001, respectively, and 3,241,000 and 3,027,000 for the nine months ended September 2000 and 2001, respectively. 5
Note 6 - 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 $6,000,000. The acquisition was funded through borrowings under our revolving credit facility. Annual sales of the acquired product lines are approximately $5.0 million. The results of operations of the acquired business are included in our consolidated results from the date of acquisition. 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 results of operations of the acquired business are included in our consolidated results from July 6, 2001, the date of acquisition. The new products, with expected annual revenues of $18.0 to $20.0 million, give us a significant presence in the laparoscopic instrument market. Under the terms of the acquisition agreement, we issued Imagyn 1,950,000 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. The issued stock is subject to certain sales restrictions. As discussed in Note 7, during the third quarter of 2001, we incurred certain nonrecurring costs in connection with the second Imagyn acquisition. 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 $22,782,000 (the "Largo acquisition"). In connection with the acquisition, we assumed the existing debt on the property and financed the remainder with the seller. The assumed debt on the property 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"). The seller-financed note 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 $12,185,000, $6,254,000 and $4,228,000, respectively, at the date of acquisition. 6
Note 7 - Nonrecurring charges 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 $1,509,000, before income taxes, or $.04 per diluted share, in the second quarter of 2000. This nonrecurring charge is included in selling and administrative expense. During the quarter ended September 2001, we incurred various nonrecurring charges in connection with 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 $886,000, before income taxes, or $.02 per diluted share in the third quarter of 2001 and are included in cost of sales. We expect an additional $500,000 of such costs in the fourth quarter of 2001. Note 8 - Common stock dividend 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, and the number of shares used in the calculation of earnings per share have all been restated to retroactively reflect the split. Note 9 - Subsequent events On November 1, 2001, we established a five-year accounts receivable securitization facility 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 to a commercial paper conduit. Sale of these receivables will be reflected in the balance sheet as a reduction in accounts receivable. Creditors of CRC have a claim to its assets before any equity becomes available to us. We used the initial $40.0 million in proceeds from the facility to repay a portion of our loans under our bank credit facility. Note 10 - New accounting pronouncements In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective for us July 1, 2001 and January 1, 2002, respectively. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, amortization of goodwill and certain intangibles, including goodwill and certain intangibles recorded in past business combinations, will discontinue upon adoption of this standard. In addition, goodwill and certain intangibles recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. We are currently reviewing the provisions of SFAS 141 7
and SFAS 142 and assessing the impact of adoption. Note 11 - Guarantor financial statements Our credit facility and subordinated notes (the "Notes") are guaranteed (the "Subsidiary Guarantees") by each of our subsidiaries except CRC (the "Subsidiary Guarantors"). 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 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 for the Company as of December 2000 and September 2001 and for the three and nine months ended September 2000 and 2001. 8
CONMED CORPORATION CONSOLIDATING CONDENSED BALANCE SHEET December 2000 (in thousands) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents ....... $ -- $ 3,470 $ -- $ 3,470 Accounts receivable, net ........ 35,218 43,408 -- 78,626 Inventories ..................... 20,174 84,438 -- 104,612 Deferred income taxes ........... 1,761 -- -- 1,761 Prepaid expenses and other current assets ............ 598 2,964 -- 3,562 --------- --------- --------- --------- Total current assets .... 57,751 134,280 -- 192,031 --------- --------- --------- --------- Property, plant and equipment, net .... 38,275 24,175 -- 62,450 Goodwill, net ......................... 61,651 164,150 -- 225,801 Other intangible assets, net .......... 7,498 187,510 -- 195,008 Other assets .......................... 473,408 5,217 (474,344) 4,281 --------- --------- --------- --------- Total assets .................... $ 638,583 $ 515,332 $(474,344) $ 679,571 ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 36,068 $ -- $ -- $ 36,068 Accounts payable ................ 4,398 15,952 -- 20,350 Accrued compensation ............ 2,147 7,766 -- 9,913 Income taxes payable ............ 1,338 641 -- 1,979 Accrued interest ................ 5,130 -- -- 5,130 Other current liabilities ....... 1,890 2,946 -- 4,836 --------- --------- --------- --------- Total current liabilities ... 50,971 27,305 -- 78,276 --------- --------- --------- --------- Long-term debt ........................ 342,680 -- -- 342,680 Deferred income taxes ................. 12,154 -- -- 12,154 Other long-term liabilities ........... 2,175 349,295 (335,612) 15,858 --------- --------- --------- --------- Total liabilities ............... 407,980 376,600 (335,612) 448,968 --------- --------- --------- --------- Shareholders' equity: Preferred stock ................. -- -- -- -- Common stock .................... 230 1 (1) 230 Paid-in capital ................. 127,985 -- -- 127,985 Retained earnings ............... 103,834 139,758 (139,758) 103,834 Accumulated other comprehensive loss ...................... (1,027) (1,027) 1,027 (1,027) Less common stock in treasury, at cost ................ (419) -- -- (419) --------- --------- --------- --------- Total shareholders' equity 230,603 138,732 (138,732) 230,603 --------- --------- --------- --------- Total liabilities and shareholders' equity ...... $ 638,583 $ 515,332 $(474,344) $ 679,571 ========= ========= ========= ========= </TABLE> 9
CONMED CORPORATION CONSOLIDATING CONDENSED BALANCE SHEET September 2001 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents ....... $ -- $ 2,015 $ -- $ 2,015 Accounts receivable, net ........ 37,252 48,467 -- 85,719 Inventories ..................... 22,747 84,590 -- 107,337 Deferred income taxes ........... 1,761 -- -- 1,761 Prepaid expenses and other current assets ............ 920 2,886 -- 3,806 --------- --------- --------- --------- Total current assets .... 62,680 137,958 -- 200,638 --------- --------- --------- --------- Property, plant and equipment, net .... 45,927 45,971 -- 91,898 Goodwill, net ......................... 86,760 164,814 -- 251,574 Other intangible assets, net .......... 7,727 182,331 -- 190,058 Other assets .......................... 478,923 40,736 (514,486) 5,173 --------- --------- --------- --------- Total assets .................... $ 682,017 $ 571,810 $(514,486) $ 739,341 ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 38,463 $ 1,118 $ -- $ 39,581 Accounts payable ................ 4,478 15,836 -- 20,314 Accrued compensation ............ 3,443 6,450 -- 9,893 Income taxes payable ............ 1,243 135 -- 1,378 Accrued interest ................ 2,274 267 -- 2,541 Other current liabilities ....... 2,653 2,745 -- 5,398 --------- --------- --------- --------- Total current liabilities ... 52,554 26,551 -- 79,105 --------- --------- --------- --------- Long-term debt ........................ 327,284 21,542 -- 348,826 Deferred income taxes ................. 19,318 -- -- 19,318 Other long-term liabilities ........... 7,054 372,832 (363,601) 16,285 --------- --------- --------- --------- Total liabilities ............... 406,210 420,925 (363,601) 463,534 --------- --------- --------- --------- Shareholders' equity: Preferred stock ................. -- -- -- -- Common stock .................... 252 1 (1) 252 Paid-in capital ................. 159,415 -- -- 159,415 Retained earnings ............... 120,586 152,768 (152,768) 120,586 Accumulated other comprehensive loss ...................... (4,027) (1,884) 1,884 (4,027) Less common stock in treasury, at cost ................ (419) -- -- (419) --------- --------- --------- --------- Total shareholders' equity 275,807 150,885 (150,885) 275,807 --------- --------- --------- --------- Total liabilities and shareholders' equity ...... $ 682,017 $ 571,810 $(514,486) $ 739,341 ========= ========= ========= ========= </TABLE> 10
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF INCOME Three Months Ended September 2000 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> Net sales .......................... $ 17,577 $ 75,261 $ -- $ 92,838 -------- -------- -------- -------- Cost of sales ...................... 9,961 34,175 -- 44,136 Selling and administrative expense . 5,577 25,918 -- 31,495 Research and development expense ... 508 3,601 -- 4,109 -------- -------- -------- -------- 16,046 63,694 -- 79,740 -------- -------- -------- -------- Income from operations ............. 1,531 11,567 -- 13,098 Interest expense, net .............. -- 8,834 -- 8,834 -------- -------- -------- -------- Income before income taxes ......... 1,531 2,733 -- 4,264 Provision for income taxes ......... 551 984 -- 1,535 -------- -------- -------- -------- Income before equity in earnings of unconsolidated subsidiaries ... 980 1,749 -- 2,729 Equity in earnings of unconsolidated subsidiaries ..................... 1,749 -- (1,749) -- -------- -------- -------- -------- Net income ......................... $ 2,729 $ 1,749 $ (1,749) $ 2,729 ======== ======== ======== ======== </TABLE> 11
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF INCOME Three Months Ended September 2001 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> Net sales .......................... $ 24,715 $ 80,603 $ -- $105,318 -------- -------- -------- -------- Cost of sales ...................... 14,342 36,990 -- 51,332 Selling and administrative expense . 7,970 27,059 -- 35,029 Research and development expense ... 332 3,159 -- 3,491 -------- -------- -------- -------- 22,644 67,208 -- 89,852 -------- -------- -------- -------- Income from operations ............. 2,071 13,395 -- 15,466 Interest expense, net .............. -- 7,630 -- 7,630 -------- -------- -------- -------- Income before income taxes ......... 2,071 5,765 -- 7,836 Provision for income taxes ......... 746 2,075 -- 2,821 -------- -------- -------- -------- Income before equity in earnings of unconsolidated subsidiaries ... 1,325 3,690 -- 5,015 Equity in earnings of unconsolidated subsidiaries ..................... 3,690 -- (3,690) -- -------- -------- -------- -------- Net income ......................... $ 5,015 $ 3,690 $ (3,690) $ 5,015 ======== ======== ======== ======== </TABLE> 12
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF INCOME Nine Months Ended September 2000 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> Net sales .......................... $ 57,124 $ 236,403 $ -- $ 293,527 --------- --------- --------- --------- Cost of sales ...................... 31,933 108,191 -- 140,124 Selling and administrative expense . 16,234 79,270 -- 95,504 Research and development expense ... 1,465 9,622 -- 11,087 --------- --------- --------- --------- 49,632 197,083 -- 246,715 --------- --------- --------- --------- Income from operations ............. 7,492 39,320 -- 46,812 Interest expense, net .............. -- 25,477 -- 25,477 --------- --------- --------- --------- Income before income taxes ......... 7,492 13,843 -- 21,335 Provision for income taxes ......... 2,697 4,984 -- 7,681 --------- --------- --------- --------- Income before equity in earnings of unconsolidated subsidiaries ... 4,795 8,859 -- 13,654 Equity in earnings of unconsolidated subsidiaries ..................... 8,859 -- (8,859) -- --------- --------- --------- --------- Net income ......................... $ 13,654 $ 8,859 $ (8,859) $ 13,654 ========= ========= ========= ========= </TABLE> 13
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF INCOME Nine Months Ended September 2001 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> Net sales .......................... $ 65,688 $ 249,710 $ -- $ 315,398 --------- --------- --------- --------- Cost of sales ...................... 38,641 112,330 -- 150,971 Selling and administrative expense . 20,135 83,645 -- 103,780 Research and development expense ... 1,064 9,599 -- 10,663 --------- --------- --------- --------- 59,840 205,574 -- 265,414 --------- --------- --------- --------- Income from operations ............. 5,848 44,136 -- 49,984 Interest expense, net .............. -- 23,809 -- 23,809 --------- --------- --------- --------- Income before income taxes ......... 5,848 20,327 -- 26,175 Provision for income taxes ......... 2,106 7,317 -- 9,423 --------- --------- --------- --------- Income before equity in earnings of unconsolidated subsidiaries ... 3,742 13,010 -- 16,752 Equity in earnings of unconsolidated subsidiaries ..................... 13,010 -- (13,010) -- --------- --------- --------- --------- Net income ......................... $ 16,752 $ 13,010 $ (13,010) $ 16,752 ========= ========= ========= ========= </TABLE> 14
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Nine Months Ended September 2000 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> Net cash flows from operating activities ............................. $ 4,529 $ 12,521 $ -- $ 17,050 -------- -------- -------- -------- Cash flows from investing activities: Distributions from subsidiaries ....... 9,498 -- (9,498) -- Purchases of property, plant and equipment ................... (9,383) (2,486) -- (11,869) -------- -------- -------- -------- Net cash provided (used) by investing activities . 115 (2,486) (9,498) (11,869) -------- -------- -------- -------- Cash flows from financing: Distributions to parent ........... -- (9,498) 9,498 -- Borrowings under revolving credit facility ............. 19,000 -- -- 19,000 Proceeds from issuance of common stock ................ 448 -- -- 448 Payments on long-term debt ........ (24,690) -- -- (24,690) -------- -------- -------- -------- Net cash provided (used) by financing activities ......... (5,242) (9,498) 9,498 (5,242) -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents .................. -- (378) -- (378) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents ....................... (598) 159 -- (439) Cash and cash equivalents at beginning of period .................... 598 3,149 -- 3,747 -------- -------- -------- -------- Cash and cash equivalents at end of period .......................... $ -- $ 3,308 $ -- $ 3,308 ======== ======== ======== ======== </TABLE> 15
CONMED CORPORATION CONSOLIDATING STATEMENT OF CASH FLOWS Nine Months Ended September 2001 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total ---- ---------- ------------ ----- <S> <C> <C> <C> <C> Net cash flows from operating activities ............................ $ 5,092 $ 18,480 $ -- $ 23,572 -------- -------- -------- -------- Cash flows from investing activities: Distributions from subsidiaries ...... 15,990 -- (15,990) -- Purchases of property, plant and equipment .................. (9,639) (3,065) -- (12,704) -------- -------- -------- -------- Net cash provided (used) by investing activities 6,351 (3,065) (15,990) (12,704) -------- -------- -------- -------- Cash flows from financing: Distributions to parent .......... -- (15,990) 15,990 -- Borrowings under revolving credit facility ............ 14,000 -- -- 14,000 Proceeds from issuance of common stock ............... 1,591 -- -- 1,591 Payments on long-term debt ....... (27,034) -- -- (27,034) -------- -------- -------- -------- Net cash provided (used)by financing activities ........ (11,443) (15,990) 15,990 (11,443) -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents ................. -- (880) -- (880) -------- -------- -------- -------- Net decrease in cash and cash equivalents ...................... -- (1,455) -- (1,455) Cash and cash equivalents at beginning of period ................... -- 3,470 -- 3,470 -------- -------- -------- -------- Cash and cash equivalents at end of period ......................... $ -- $ 2,015 $ -- $ 2,015 ======== ======== ======== ======== </TABLE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information that is based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this Form 10-Q, 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 discussed in our Annual Report on Form 10-K for the year ended December 2000, 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: general economic and business conditions; changes in customer preferences; competition; changes in technology; the introduction of new products; the integration of any acquisition; changes in business strategy; the possibility that United States or foreign regulatory and/or administrative agencies might initiate enforcement actions against us or our distributors; our indebtedness; quality of our management and business abilities and the judgment of our personnel; the availability, terms and deployment of capital; the risk of litigation, especially patent litigation as well as the cost associated with patent and other litigation and changes in regulatory requirements. 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-Q or to reflect the occurrence of unanticipated events. Three months ended September 2001 compared to three months ended September 2000 Sales for the quarter ended September 2001 were $105.3 million, an increase of 13.5% compared to sales of $92.8 million in the same quarter a year ago. Sales in our orthopaedic businesses grew 4.4% to $63.8 million from $61.1 million in the comparable quarter last year. Arthroscopy sales, which represent approximately 58.2% of total orthopaedic revenues, grew 11.4% to $37.1 million from $33.3 million in the same period a year ago. Powered surgical instrument sales, which represent approximately 41.8% of orthopaedic revenues, declined 4.0% to $26.7 million from $27.8 million in the same quarter last year. Adjusted for constant foreign currency exchange rates, orthopaedic sales growth in the third quarter of 2001 would have been approximately 5.5% compared with the third quarter of 2000. Patient care sales for the three months ended September 2001 were $16.8 million, a 5.0% increase from $16.0 million in the same period a year ago, as sales of our ECG and surgical suction product lines improved compared to the same period a year ago. Electrosurgery sales for the three months ended September 2001 were $16.8 million, an increase of 17.5% from $14.3 million in the third quarter of last year, reflecting improved capital and disposable product sales. Endoscopy sales for the three months ended September 2001 were $7.9 million, an increase of 464% from $1.4 million in the third quarter of last year. Excluding the impact of the Imagyn acquisitions (Note 6 to the consolidated condensed financial statements), the increase in sales was approximately 12.4%. Cost of sales increased to $51,332,000 in the current quarter as compared to $44,136,000 in the same quarter a year ago, primarily as a result of the increased sales volumes described above. As discussed in Note 7 to the consolidated condensed 17
financial statements, during the quarter ended September 2001, we incurred various nonrecurring charges in connection with 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 $886,000 in the third quarter of 2001 and are included in cost of sales. Excluding the impact of these non-recurring adjustments, cost of sales was $50,446,000. Gross margin percentage for the third quarter 2001, excluding the Imagyn-related charges, was 52.1% compared to 52.5% in the third quarter of 2000. The decrease in gross margin percentage is primarily a result of product mix, as sales in the higher gross margin orthopaedic product lines declined to 60.6% of total sales in the quarter ended September 2001 compared to 65.8% in the quarter ended September 2000. Selling and administrative expenses increased to $35,029,000 in the third quarter of 2001 as compared to $31,495,000 in the third quarter of 2000. As a percentage of sales, selling and administrative expenses totaled 33.3% in the third quarter of 2001,consistent with 33.9% in the third quarter of 2000. The increase in selling and administrative expense is a result of higher commissions and other selling expenses in the third quarter of 2001 as compared to the third quarter of 2000 associated with the increased sales volumes described above. Research and development expense decreased to $3,491,000 in the third quarter of 2001 as compared to $4,109,000 in the third quarter of 2000. As a percentage of sales, research and development expense decreased to 3.3% in the current quarter compared to 4.4% in the same quarter a year ago. Interest expense in the third quarter of 2001 was $7,630,000 compared to $8,834,000 in the third quarter of 2000. The decrease in interest expense is primarily a result of lower weighted average interest rates on our term loans and revolving credit facility which have declined to 5.66% and 5.62%, respectively at September 2001 as compared to 8.53% and 8.93%, respectively at September 2001 resulting in decreased interest expense. (See Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations). Nine months ended September 2001 compared to nine months ended September 2000 Sales for the nine months ended September 2001 were $315.4 million, an increase of 7.5% compared to sales of $293.5 million in the same quarter a year ago. Sales in our orthopaedic businesses grew 4.4% to $201.0 million from $192.6 million in the comparable period last year. Arthroscopy sales, which represent approximately 57.4% of total orthopaedic revenues, grew 6.0% to $115.3 million from $108.8 million in the same period a year ago. Powered surgical instrument sales, which represent approximately 42.6% of orthopaedic revenues, grew 2.3% to $85.7 million from $83.8 million in the same period last year. Adjusted for constant foreign currency exchange rates, orthopaedic sales growth in the first nine months of 2001 would have been approximately 6.0% compared with the first nine months of 2000. Patient care sales for the nine months ended September 2001 were $52.0 million, a 1.0% increase from $51.5 million in the same period a year ago, reflecting modest increases in sales of our ECG and surgical suction product lines. Electrosurgery sales for the nine months ended September 2001 were $48.9 million, an increase of 8.7% from $45.0 million in the first nine months of last year, reflecting improved generator and disposable product sales. Endoscopy sales for the nine months ended September 2001 were $13.4 million, an increase of 212% from $4.3 million in the same period a year ago. Excluding the 18
impact of the Imagyn acquisitions (Note 6 to the consolidated condensed financial statements), the increase in sales was approximately 9.5%. Cost of sales increased to $150,971,000 in the nine months ended September 2001 compared to $140,124,000 in the same period a year ago, primarily as a result of the increased sales volumes described above. As discussed in Note 7 to the consolidated condensed financial statements, during the quarter ended September 2001, we incurred various nonrecurring charges in connection with 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 $886,000 in the third quarter of 2001 and are included in cost of sales. Excluding the impact of these non-recurring adjustments, cost of sales for the nine months ended September 2001 was $150,085,000. Gross margin percentage for the nine months ended September 2001, excluding the Imagyn-related charges, was 52.4% comparable with the 52.3% experienced in the same period a year ago. Selling and administrative expenses increased to $103,780,000 in the first nine months of 2001 as compared to $95,504,000 in the first nine months of 2000. As a percentage of sales, selling and administrative expenses totaled 32.9% in the first nine months of 2001, consistent with 32.5% in the first nine months of 2000. The increase in selling and administrative expense is a result of higher commissions and other selling expenses in the first nine months of 2001 as compared to 2000 associated with the increased sales volumes described above. Research and development expense decreased to $10,663,000 in the first nine months of 2001 as compared to $11,087,000 in the first nine months of 2000. As a percentage of sales, research and development expense decreased to 3.4% in the current period compared to 3.8% in the same period a year ago. Interest expense in the first nine months of 2001 was $23,809,000 compared to $25,477,000 in the first nine months of 2000. The decrease in interest expense is primarily a result of lower weighted average interest rates on our term loans and revolving credit facility which have declined, to 5.66% and 5.62%, respectively, at September 2001 as compared to 8.53% and 8.93%, respectively, at September 2000 resulting in decreased interest expense. (See Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations). Liquidity and Capital Resources Our net working capital position increased to $121,533,000 at September 2001 compared to $113,755,000 at December 2000. The increase in net working capital is largely a result of increases in accounts receivable and inventories at September 2001 compared to December 2000 as a result of higher overall sales levels in 2001 compared to 2000 and the effects of the second Imagyn acquisition. Net cash used by investing activities for the nine months ended September 2001 and 2000 consisted of $12,704,000 and $11,869,000, respectively, in capital expenditures. Financing activities during the nine months ended September 2001 consisted primarily of scheduled payments of $27,034,000 on our term loans and $14,000,000 in borrowings on our revolving credit facility. Financing activities during the nine months ended September 2000 consisted primarily of scheduled payments of $24,690,000 on our term loans and $19,000,000 in borrowings on our revolving credit facility. Our term loans under our credit facility at September 2001 aggregate $173,952,000. Our term loans are repayable quarterly over remaining terms of approximately four years. Our credit facility also includes a $100,000,000 revolving credit facility which expires and is expected to be renegotiated prior to December 2002, of which 19
$39,000,000 was available at September 2001. The borrowings under the credit facility carry interest rates based on a spread over LIBOR or an alternative base interest rate. The covenants of the credit facility provide for increase and decrease to this interest rate spread based on our operating results. The weighted average interest rates at September 2001 under the term loans and the revolving credit facility were 5.66% and 5.62%, respectively. Additionally, we are obligated to pay a fee of .375% per annum on the unused portion of the revolving credit facility. The credit facility is collateralized by all of our personal property, except for our accounts receivable and related rights, which are pledged in connection with the accounts receivable securitization facility described below. The credit facility contains covenants and restrictions which, among other things, require maintenance of certain working capital levels and financial ratios, prohibit dividend payments and restrict the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We are also required to make mandatory prepayments from net cash proceeds from any issue of equity and asset sales. Mandatory prepayments are to be applied first to the prepayment of the term loans and then to reduce borrowings under the revolving credit facility. The Notes are in aggregate principal amount of $130,000,000 and have a maturity date of March 15, 2008. The Notes bear interest at 9.0% per annum which is payable semi-annually. The indenture governing the Notes has certain restrictive covenants and provides for, among other things, mandatory and optional redemptions by us. The credit facility and Notes are guaranteed by each of our subsidiaries except CRC. The Subsidiary Guarantees provide that each Subsidiary Guarantor will fully and unconditionally guarantee our obligations on a joint and several basis. Each Subsidiary Guarantor is wholly-owned by CONMED Corporation. Under the credit facility and Note indenture, our subsidiaries except CRC are subject to the same covenants and restrictions that apply to us (except that the Subsidiary Guarantors are permitted to make dividend payments and distributions, including cash dividend payments, to us or another Subsidiary Guarantor). The principal balances outstanding related to the Largo acquisition, discussed in Note 6 to the consolidated condensed financial statements, aggregated $12,185,000, $6,275,000 and $4,200,000, at September 2001 on the Class A note, Class C note and Seller note respectively, which are secured by, among other things, recorded and unrecorded mortgage liens on the Largo property. As discussed in Note 9 to the consolidated condensed financial statements, on November 1, 2001, we established a five-year accounts receivable securitization facility. We used the initial $40.0 million in proceeds from the facility to repay a portion of our loans under the credit facility. 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 $50,000,000 of LIBOR-based floating rate debt under our credit facility into fixed rate debt with a base interest rate of 7.01%. The interest rate swap expires in June 2003 and is included in liabilities on the balance sheet with a fair value approximating $3,348,000. There were no material changes in our market risk during the quarter ended September 2001. For a detailed discussion of market risk, see our Annual Report on Form 10-K for the year ended December 2000, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk. We believe that cash generated from operations, our current cash resources and funds available under our credit facility will provide sufficient liquidity to ensure continued working capital for operations, debt service and funding of capital expenditures in the foreseeable future. 20
Foreign Operations Our foreign operations are subject to special risks inherent in doing business outside the United States, including governmental instability, war and other international conflicts, civil and labor disturbances, requirements of local ownership, partial or total expropriation, nationalization, currency devaluation, foreign exchange controls and foreign laws and policies, each of which may limit the movement of assets or funds or result in the deprivation of contract rights or the taking of property without fair compensation. 21
Item 6. Exhibits and Reports on Form 8-K List of Exhibits Exhibit No. Description of Instrument - ----------- ------------------------- 10.1 The Purchase and Sale Agreement dated November 1, 2001 among CONMED Corporation, et al and CONMED Receivables Corporation (included in EDGAR filing only) 10.2 The Receivables Purchase Agreement dated November 1, 2001 among CONMED Receivables Corporation, Blue Keel Funding, LLC and Fleet National Bank (included in EDGAR filing only) Reports on Form 8-K None 22
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: November 13, 2001 /s/ Robert D. Shallish, Jr. ----------------------------- Robert D. Shallish, Jr. Vice President - Finance (Principal Financial Officer) 23
Exhibit Index <TABLE> <CAPTION> Sequential Page Exhibit Number - ------- ------ <S> <C> 10.1 The Purchase and Sale Agreement dated November 1, 2001 among CONMED Corporation, et al and CONMED Receivables Corporation (included in EDGAR filing only) 10.2 The Receivables Purchase Agreement dated November 1, 2001 among CONMED Receivables Corporation, Blue Keel Funding, LLC and Fleet National Bank. (included in EDGAR filing only) </TABLE> 24