SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 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.) 310 Broad Street, Utica, New York 13501 (Address of principal executive offices) (Zip Code) (315) 797-8375 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares outstanding of registrant's common stock, as of May 3, 2001 is 15,430,275 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 13 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
Item 1. CONMED CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME Three Months Ended March 2000 and 2001 (in thousands except per share amounts) (unaudited) <TABLE> <CAPTION> 2000 2001 ---- ---- <S> <C> <C> Net sales ..................................................... $102,811 $105,909 -------- -------- Cost of sales ................................................. 48,661 49,674 Selling and administrative expense ............................ 30,762 34,829 Research and development expense .............................. 3,406 3,696 -------- -------- 82,829 88,199 -------- -------- Income from operations ........................................ 19,982 17,710 Interest expense, net ......................................... 8,405 8,331 -------- -------- Income before income taxes .................................... 11,577 9,379 Provision for income taxes .................................... 4,168 3,376 -------- -------- Net income .................................................... $ 7,409 $ 6,003 ======== ======== Per share data: Net income Basic ..................................................... $ .48 $ .39 Diluted ................................................... 48 .39 Weighted average common shares Basic ..................................................... 15,286 15,371 Diluted ................................................... 15,559 15,538 </TABLE> See notes to consolidated condensed financial statements 1
CONMED CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands except share amounts) <TABLE> <CAPTION> (unaudited) December March 2000 2001 -------- -------- ASSETS Current assets: <S> <C> <C> Cash and cash equivalents........................................................... $ 3,470 $ 4,104 Accounts receivable, net............................................................ 78,626 80,462 Inventories......................................................................... 104,612 104,472 Deferred income taxes............................................................... 1,761 1,761 Prepaid expenses and other current assets........................................... 3,562 4,228 -------- -------- Total current assets.............................................................. 192,031 195,027 -------- -------- Property, plant and equipment, net.................................................... 62,450 64,130 Goodwill, net......................................................................... 225,801 224,232 Other intangible assets, net.......................................................... 195,008 193,334 Other assets .................................................................... 4,281 4,368 -------- -------- Total assets...................................................................... $679,571 $681,091 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt................................................... $ 36,068 $ 36,866 Accounts payable.................................................................... 20,350 22,464 Accrued compensation................................................................ 9,913 10,093 Income taxes payable................................................................ 1,979 5,015 Accrued interest.................................................................... 5,130 2,016 Other current liabilities........................................................... 4,836 5,307 ------- -------- Total current liabilities......................................................... 78,276 81,761 ------- -------- Long-term debt........................................................................ 342,680 335,859 Deferred income taxes................................................................. 12,154 11,282 Other long-term liabilities........................................................... 15,858 17,715 ------- -------- Total liabilities................................................................. 448,968 446,617 ------- -------- 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; 15,352,186 and 15,430,275 shares issued and outstanding in 2000 and 2001, respectively..................................................... 153 154 Paid-in capital..................................................................... 128,062 128,542 Retained earnings................................................................... 103,834 109,837 Accumulated other comprehensive loss................................................ (1,027) (3,640) Less 25,000 shares of common stock in treasury, at cost........................................................................... (419) (419) -------- -------- Total shareholders' equity........................................................ 230,603 234,474 -------- -------- Total liabilities and shareholders' equity........................................ $679,571 $681,091 ======== ======== </TABLE> See notes to consolidated condensed financial statements 2
CONMED CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended March 2000 and 2001 (in thousands) (unaudited) <TABLE> <CAPTION> 2000 2001 ---- ---- Cash flows from operating activities: <S> <C> <C> Net income.......................................................................... $ 7,409 $ 6,003 ------- ------- Adjustments to reconcile net income to net cash provided by operations: Depreciation.................................................................. 2,306 2,185 Amortization.................................................................. 4,798 5,381 Increase (decrease) in cash flows from changes in assets and liabilities: Accounts receivable................................................. (2,959) (1,837) Inventories......................................................... (2,213) (1,168) Prepaid expenses and other current assets.............................................. 25 (677) Accounts payable.................................................... 3,479 2,114 Income taxes payable................... ........................... 3,149 3,036 Accrued compensation................................................ (2,431) 180 Accrued interest.................................................... (1,443) (3,114) Other assets/liabilities, net....................................... (699) (987) ------- ------- 4,012 5,113 ------- ------- Net cash provided by operating activities..................................... 11,421 11,116 ------- ------- Cash flows from investing activities: Purchases of property, plant, and equipment......................................... (3,798) (3,867) ------- ------- Net cash used by investing activities......................................... (3,798) (3,867) ------- ------- Cash flows from financing activities: Borrowings under revolving credit facility.......................................... 1,000 3,000 Proceeds from issuance of common stock.............................................. 229 481 Payments on long-term debt.......................................................... (8,230) (9,023) ------- ------- Net cash used by financing activities......................................... (7,001) (5,542) ------- ------- Effect of exchange rate changes on cash and cash equivalents...................................................... (141) (1,073) ------- -------- Net increase in cash and cash equivalents............................................. 481 634 Cash and cash equivalents at beginning of period...................................... 3,747 3,470 ------- ------- Cash and cash equivalents at end of period............................................ $ 4,228 $ 4,104 ======= ======= </TABLE> 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 months ended March 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 months ended March 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 March 2000 2001 ---- ---- <S> <C> <C> Net income ........................................................... $ 7,409 $ 6,003 ------- ------- Other comprehensive income: Foreign currency translation adjustment .......................... (163) (1,063) Cash flow hedging (net of income taxes) .......................... -- (1,550) ------- ------- Comprehensive income ............................................. $ 7,246 $ 3,390 ======= ======= </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............ (1,063) - (1,063) Cash flow hedging (net of income taxes)............. - (1,550) (1,550) -------- --------- ----------- Balance, March 2001..................................... $ (2,090) $ (1,550) $ (3,640) ======== ========= =========== </TABLE> Note 4 - Inventories The components of inventory are as follows (in thousands): December March 2000 2001 ---- ---- Raw materials............................ $38,278 $38,877 Work-in-process.......................... 12,612 12,058 Finished goods........................... 53,722 53,537 ------- -------- Total ....................... $104,612 $104,472 ======== ======== Note 5 - Derivative financial instruments We adopted Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. SFAS No. 133 requires that derivatives be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from the changes in the values of the derivatives are accounted for depending on whether the derivative qualifies for hedge accounting. Upon adoption of SFAS No. 133, we recorded a net-of-tax cumulative-effect-type loss adjustment of $971,000 in accumulated other comprehensive income to recognize at fair value an interest rate swap which we have designated as a cash-flow hedge and which effectively converts $50,000,000 of LIBOR-based floating rate debt under our credit facility into fixed rate debt with a base interest rate of 7.01%. 5
Note 6 - 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): <TABLE> <CAPTION> Three months ended March 2000 2001 ---- ---- <S> <C> <C> Shares used in the calculation of Basic EPS (weighted average shares outstanding).......................... 15,286 15,371 Effect of dilutive potential securities............................ 273 167 Shares used in the calculation of Diluted EPS...................... 15,559 15,538 </TABLE> 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 1,485,000 and 2,296,000 for the three months ended March 2000 and 2001, respectively. Note 7 - Business acquisitions On November 20, 2000 we agreed to purchase certain assets of the disposable minimally invasive surgical business of Imagyn Medical Technologies, Inc. (the "Imagyn acquisition") for a purchase price of $6,000,000. The acquisition was funded through borrowings under our revolving credit facility and is being accounted for using the purchase method. The results of operations of the acquired business are included in our consolidated results from the date of acquisition. Goodwill associated with the acquisition is being amortized on a straight-line basis over a 40-year period. Note 8 - Guarantor financial statements Our credit facility and subordinated notes (the "Notes") are guaranteed (the "Subsidiary Guarantees") by our subsidiaries (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 March 2001 and for the three months ended March 2000 and 2001. 6
CONMED CORPORATION CONSOLIDATING CONDENSED BALANCE SHEET December 2000 (in thousands) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total -------- -------- --------- -------- ASSETS Current assets: <S> <C> <C> <C> <C> 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..................................... 153 1 (1) 153 Paid-in capital.................................. 128,062 - - 128,062 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> 7
CONMED CORPORATION CONSOLIDATING CONDENSED BALANCE SHEET March 2001 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total -------- -------- ------------ -------- ASSETS Current assets: <S> <C> <C> <C> <C> Cash and cash equivalents........................ $ - $ 4,104 $ - $ 4,104 Accounts receivable, net......................... 32,763 47,699 - 80,462 Inventories...................................... 20,456 84,016 - 104,472 Deferred income taxes............................ 1,761 - - 1,761 Prepaid expenses and other current assets............................... 761 3,467 - 4,228 -------- -------- -------- -------- Total current assets....................... 55,741 139,286 - 195,027 -------- -------- -------- -------- Property, plant and equipment, net................... 40,781 23,349 - 64,130 Goodwill, net........................................ 61,194 163,038 - 224,232 Other intangible assets, net......................... 7,500 185,834 - 193,334 Other assets......................................... 474,822 40,400 (510,854) 4,368 -------- -------- --------- -------- Total assets..................................... $640,038 $551,907 $(510,854) $681,091 ======== ======== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt................ $ 36,866 $ - $ - $ 36,866 Accounts payable................................. 5,798 16,666 - 22,464 Accrued compensation............................. 2,242 7,851 - 10,093 Income taxes payable............................. 4,414 601 - 5,015 Accrued interest................................. 2,016 - - 2,016 Other current liabilities........................ 2,361 2,946 - 5,307 -------- ------- --------- -------- Total current liabilities.................... 53,697 28,064 - 81,761 -------- -------- --------- -------- Long-term debt....................................... 335,859 - - 335,859 Deferred income taxes................................ 11,282 - - 11,282 Other long-term liabilities.......................... 4,726 381,135 (368,146) 17,715 -------- -------- ---------- -------- Total liabilities................................ 405,564 409,199 (368,146) 446,617 -------- -------- --------- -------- Shareholders' equity: Preferred stock.................................. - - - - Common stock..................................... 154 1 (1) 154 Paid-in capital.................................. 128,542 - - 128,542 Retained earnings................................ 109,837 144,797 (144,797) 109,837 Accumulated other comprehensive loss......................................... (3,640) (2,090) 2,090 (3,640) Less common stock in treasury, at cost............................... (419) - - (419) -------- -------- --------- -------- Total shareholders' equity................... 234,474 142,708 (142,708) 234,474 -------- -------- --------- -------- Total liabilities and shareholders' equity....................... $640,038 $551,907 $(510,854) $681,091 ======== ======== ========= ======== </TABLE> 8
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF INCOME Three Months Ended March 2000 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total -------- -------- ------------ -------- <S> <C> <C> <C> <C> Net sales............................................ $ 20,620 $ 82,191 $ - $102,811 -------- -------- -------- -------- Cost of sales........................................ 11,053 37,608 - 48,661 Selling and administrative expense................... 5,245 25,517 - 30,762 Research and development expense..................... 487 2,919 - 3,406 -------- -------- -------- -------- 16,785 66,044 - 82,829 -------- -------- -------- -------- Income from operations............................... 3,835 16,147 - 19,982 Interest expense, net................................ - 8,405 - 8,405 -------- -------- -------- -------- Income before income taxes........................... 3,835 7,742 - 11,577 Provision for income taxes........................... 1,381 2,787 - 4,168 -------- -------- -------- -------- Income before equity in earnings of unconsolidated subsidiaries..................... 2,454 4,955 - 7,409 Equity in earnings of unconsolidated subsidiaries....................................... 4,955 - (4,955) - -------- -------- -------- -------- Net income........................................... $ 7,409 $ 4,955 $ (4,955) $ 7,409 ======== ======== ======== ======== </TABLE> 9
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF INCOME Three Months Ended March 2001 (in thousands) (unaudited) <TABLE> <CAPTION> Parent Company Subsidiary Company Only Guarantors Eliminations Total -------- -------- ------------ -------- <S> <C> <C> <C> <C> Net sales............................................ $ 20,470 $ 85,439 $ - $105,909 -------- -------- -------- -------- Cost of sales........................................ 12,483 37,191 - 49,674 Selling and administrative expense................... 6,098 28,731 - 34,829 Research and development expense..................... 382 3,314 - 3,696 -------- -------- -------- -------- 18,963 69,236 - 88,199 -------- -------- -------- -------- Income from operations............................... 1,507 16,203 - 17,710 Interest expense, net................................ - 8,331 - 8,331 -------- -------- -------- -------- Income before income taxes........................... 1,507 7,872 - 9,379 Provision for income taxes........................... 543 2,833 - 3,376 -------- -------- -------- -------- Income before equity in earnings of unconsolidated subsidiaries..................... 964 5,039 - 6,003 Equity in earnings of unconsolidated subsidiaries....................................... 5,039 - (5,039) - -------- -------- -------- -------- Net income........................................... $ 6,003 $ 5,039 $ (5,039) $ 6,003 ======== ======== ======== ======== </TABLE> 10
CONMED CORPORATION CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Three Months Ended March 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.......................................... $ 3,801 $ 7,620 $ - $ 11,421 ------- ------- ------- -------- Cash flows from investing activities: Distributions from subsidiaries.................... 5,247 - (5,247) - Purchases of property, plant and equipment.................................... (2,428) (1,370) - (3,798) ------- ------- ------- -------- Net cash provided (used) by investing activities.................. 2,819 (1,370) (5,247) ( 3,798) ------- ------- ------- -------- Cash flows from financing: Distributions to parent.......................... - (5,247) 5,247 - Borrowings under revolving credit facility.............................. 1,000 - - 1,000 Proceeds from issuance of common stock................................. 229 - - 229 Payments on long-term debt....................... (8,230) - - (8,230) ------- ------- ------- --------- Net cash provided (used) by financing activities...................... (7,001) (5,247) 5,247 (7,001) ------- ------- ------- -------- Effect of exchange rate changes on cash and cash equivalents............................... - (141) - (141) ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents.................................... (381) 862 - 481 Cash and cash equivalents at beginning of period................................. 598 3,149 - 3,747 ------- ------- ------- -------- Cash and cash equivalents at end of period....................................... $ 217 $ 4,011 $ - $ 4,228 ======= ======= ======= ======== </TABLE> 11
CONMED CORPORATION CONSOLIDATING STATEMENT OF CASH FLOWS Three Months Ended March 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.......................................... $ 3,120 $ 7,996 $ - $ 11,116 ------- ------- ------- -------- Cash flows from investing activities: Distributions from subsidiaries.................... 5,661 - (5,661) - Purchases of property, plant and equipment.................................... (3,239) (628) - (3,867) ------- ------- ------- -------- Net cash provided (used) by investing activities................. 2,422 (628) (5,661) (3,867) ------- ------- ------- -------- Cash flows from financing: Distributions to parent.......................... - (5,661) 5,661 - Borrowings under revolving credit facility.............................. 3,000 - - 3,000 Proceeds from issuance of common stock................................. 481 - - 481 Payments on long-term debt....................... (9,023) - - (9,023) ------- ------- ------- -------- Net cash provided (used)by financing activities...................... (5,542) (5,661) 5,661 (5,542) ------- ------- ------- -------- Effect of exchange rate changes on cash and cash equivalents............................... - (1,073) - (1,073) ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents.................................... - 634 - 634 Cash and cash equivalents at beginning of period................................. - 3,470 - 3,470 ------- -------- ------- -------- Cash and cash equivalents at end of period....................................... $ - $ 4,104 $ - $ 4,104 ======= ======== ======= ======== </TABLE> 12
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 March 2001 compared to three months ended March 2000 Sales for the quarter ended March 2001 were $105.9 million, an increase of 3.0% compared to sales of $102.8 million in the same quarter a year ago. Sales in our orthopaedic businesses grew 2.8% to $70.8 million from $68.8 million in the comparable quarter last year. Arthroscopy sales, which represent approximately 56.8% of total orthopaedic revenues, grew 2.0% to $40.2 million from $39.4 million in the same period a year ago. Powered surgical instrument sales, which represent approximately 43.2% of orthopaedic revenues, grew 4.0% to $30.6 million from $29.4 million in the same quarter last year. Adjusted for constant foreign currency exchange rates, orthopaedic sales growth in the first quarter of 2001 would have been approximately 4.8% compared with the first quarter of 2000. Patient care sales for the three months ended March 2001 were $17.6 million, a 6.0% decline from $18.7 million in the same period a year ago, reflecting expected declines in sales of our surgical suction product lines as a result of increased competition and pricing pressures. Electrosurgery sales for the three months ended March 2001 were $15.0 million, an increase of 7.5% from $13.9 million in the first quarter of last year, reflecting improved generator and disposable product sales. Sales of minimally invasive surgery (MIS) products increased 90.2% to $2.5 million in the three months ended March 2001 from $1.3 million in the same period a year ago. Approximately 77.1% of the total increase in MIS sales is a result of our November 2000 Imagyn acquisition (Note 7 to the condensed consolidated financial statements), while 13.1% is a result of internal growth. 13
Cost of sales increased to $49,674,000 in the current quarter as compared to $48,661,000 in the same quarter a year ago as a result of the increased sales volumes described above. Gross margin percentage improved to 53.1% in the first quarter of 2001 compared to 52.7% in the first quarter of 2000, primarily as a result of increased sales volumes in our orthopaedic product lines which carry higher gross margins than certain of our other product lines. Selling and administrative expenses increased to $34,829,000 in the first quarter of 2001 as compared to $30,762,000 in the first quarter of 2000. As a percentage of sales, selling and administrative expenses totaled 32.9% in the first quarter of 2001 compared to 29.9% in the first quarter of 2000. In the second quarter of 2000, we announced a plan to replace our arthroscopy direct sales force with non-stocking exclusive sales agent groups in certain geographic regions of the United States. This plan resulted in greater sales force coverage in the affected geographic regions. The increase in selling and administrative expense is a result of higher commission and other costs associated with the change to exclusive sales agent groups as well as increased spending on sales and marketing programs. Research and development expense increased to $3,696,000 in the first quarter of 2001 as compared to $3,406,000 in the first quarter of 2000. As a percentage of sales, research and development expense increased to 3.5% in the current quarter compared to 3.3% in the same quarter a year ago. This increase represents expanded research and development efforts primarily focused on new product development in the orthopaedic product lines. Interest expense in the first quarter of 2001 was $8,331,000 compared to $8,405,000 in the first quarter of 2000. The decrease in interest expense is a result of lower total borrowings during the current quarter as compared to the same period a year ago, as total current and long-term debt outstanding decreased from approximately $387,439,000 at March 2000 to $372,725,000 at March 2001. Partially offsetting the lower interest expense resulting from lower borrowings has been an increase in the weighted average interest rates on our term loans and revolving credit facility in the first quarter of 2001 as compared to the first quarter of 2000 (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 decreased slightly to $113,266,000 at March 2001 compared to $113,755,000 at December 2000. Net cash provided by operations was $11,116,000 for the first three months of 2001 compared to $11,421,000 for the same period a year ago. Operating cash flow in the first quarter of 2001 was positively impacted by depreciation, amortization and increases in accounts payable and income taxes payable. Operating cash flow in the first quarter of 2001 was negatively impacted by increases in accounts receivable and inventory and decreases in accrued interest. The increases in accounts receivable and inventory are primarily related to higher sales levels in the current quarter. The increases in accounts payable and income taxes payable and decreases in accrued interest are primarily related to the timing of the payment of these liabilities. Net cash used by investing activities for the three months ended March 2001 and 2000 consisted of $3,798,000 and $3,867,000, respectively, in capital expenditures. Financing activities during the three months ended March 2001 consisted primarily of scheduled payments of $9,023,000 on our term loans and $3,000,000 in borrowings on our revolving credit facility. Financing activities during the three months ended March 2000 consisted primarily of scheduled payments of $8,230,000 on our term loans and $1,000,000 in borrowings on our revolving credit facility. Our term loans under our credit facility at March 2001 aggregate $191,911,000. Our term loans are repayable quarterly over remaining terms of approximately five years. 14
Our credit facility also includes a $100,000,000 revolving credit facility which expires December 2002, of which $50,000,000 was available at March 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 March 2001 under the term loans and the revolving credit facility were 7.94% and 8.14%, respectively. Additionally, we are obligated to pay a fee of .375% per annum on the unused portion of the revolving credit facility. We use interest rate swaps, a form of derivative financial instrument, to manage interest rate risk. As discussed in Note 5 to the condensed consolidated financial statements, 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 $2,422,000. There were no material changes in our market risk during the quarter ended March 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. The credit facility is collateralized by all of our personal property. The credit facility contains covenants and restrictions which, among other things, require maintenance of certain working capital levels and financial ratios, prohibit dividend payments and restrict the incurrence of 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. 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 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). Management believes that cash generated from operations, its current cash resources and funds available under its credit facility will provide sufficient liquidity to ensure continued working capital for operations, debt service and funding of capital expenditures in the foreseeable future. 15
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. 16
Item 6. Exhibits and Reports on Form 8-K List of Exhibits None Reports on Form 8-K None 17
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 11, 2001 Robert D. Shallish, Jr. ----------------------------- Robert D. Shallish, Jr. Vice President - Finance (Principal Financial Officer) 18