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Securities and Exchange Commission
Washington, D.C.
20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 0-16093
CONMED CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0977505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 Broad Street, Utica, New York 13501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (315) 797-8375
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K. [ ]
The aggregate market value of the shares of the voting stock held by
non-affiliates of the Registrant was approximately $340,769,693 based upon
the average bid and asked prices of stock, which was $23.50 on February 12,
1998.
The number of shares of the Registrant's $0.01 par value common stock
outstanding as of February 12, 1998 was 15,061,538.
DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
CONMED Corporation's Current Report on Form 8-K/A filed February 17, 1998 is
incorporated by reference into Part II.
Portions of the Definitive Proxy Statement, scheduled to be mailed on or about
April 3, 1998 for the annual meeting of stockholders to be held May 19, 1998,
are incorporated by reference into Part III.
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CONMED CORPORATION
TABLE OF CONTENTS
FORM 10-K
Part I
Item Number
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Exhibit Index
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PART I
CONMED CORPORATION
Item 1: Business
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997
("Form 10-K") contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to CONMED Corporation ("CONMED" or the "Company") that is based on the
beliefs of the management of the Company, as well as assumptions made by and
information currently available to the management of the Company. When used in
this Form 10-K, the words "estimate," "project," "believe," "anticipate,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. Such statements involve known and unknown risks,
uncertainties and other factors, including those identified under the caption
"Item 1: Business -- Risk Factors" and elsewhere in this Form 10-K that may
cause the actual results, performance or achievements of the Company, 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 integration of any acquisitions, including the Linvatec
Acquisition (as defined herein); changes in business strategy; the indebtedness
of the Company; quality of management, business abilities and judgment of the
Company's personnel; the availability, terms and deployment of capital; and
various other factors referenced in this Form 10-K. See "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 1: Business." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
GENERAL
The Company is a leading developer, manufacturer and supplier of a broad
range of medical instruments and systems used in surgical and other medical
procedures. The Company's product offerings include electrosurgical systems,
electrocardiogram ("ECG") electrodes and accessories, surgical suction
instruments, intravenous ("IV") therapy accessories and wound care products. In
addition, through its recent acquisition of Linvatec Corporation ("Linvatec"),
the Company has broadened its product offerings to include arthroscopic surgery
devices and products, powered surgical instruments and imaging products for
minimally-invasive surgery. The Company's products are used in a variety of
clinical settings, such as operating rooms, surgery centers, physicians' offices
and critical care areas of hospitals. On a pro forma basis after giving effect
to the Company's acquisition of Linvatec (the "Linvatec Acquisition"),
approximately 75% of the Company's revenues in 1997 were derived from the sale
of single-use, disposable products. In addition, on a pro forma basis after
giving effect to the Linvatec Acquisition, approximately 22% of the Company's
revenues in 1997 were derived from sales outside of the United States.
The Company has used strategic business acquisitions to broaden its product
offerings, increase its market share in certain product lines and realize
economies of scale. During the last five years, the Company has completed seven
business acquisitions, including the recent acquisition of Linvatec. The
completed acquisitions, together with internal growth, have resulted in a
compound annual growth rate in net sales of 27% between 1993 and 1997 (57% on a
pro forma basis after giving effect to the Linvatec Acquisition).
On December 31, 1997, the Company acquired Linvatec and certain related
assets from Bristol-Myers Squibb Company ("BMS"). The Company expects the
Linvatec Acquisition to provide significant strategic benefits, including
providing the Company with expanded product lines, enhanced technological
capabilities and increased access to international markets. In addition, the
Company has identified opportunities to generate efficiencies in manufacturing
and overhead functions resulting from the Linvatec Acquisition, which it
believes could generate annual cost savings beyond those reflected in the
Company's pro forma financial statements. See "Unaudited Pro Forma Consolidated
Financial Information" in the Company's Current Report on Form 8-K/A filed
February 17, 1998. On a pro forma basis after giving effect to the Linvatec
Acquisition, the Company's net sales for 1997 were $327.4 million.
The Company was founded in 1970 by Eugene R. Corasanti, the Company's
Chairman of the Board, Chief Executive Officer and President. The Company's
principal offices are located at 310 Broad Street, Utica, New York 13501, and
the Company's telephone number is (315) 797-8375.
INDUSTRY
The number of surgical procedures performed in the United States is
increasing. According to SMG Marketing Group, the total number of U.S. surgical
procedures was approximately 32 million in 1996, and, according to SMG Marketing
Group, is expected to increase to 36 million in 2001. In addition, the number of
outpatient surgical procedures performed in the United States increased at a
compound annual growth rate of 7% from 16 million in 1991 to 20 million in 1995
and, according to SMG Marketing Group, is projected to grow at a compound annual
growth rate of 6% to 29 million in 2001. This growth in surgical procedures
reflects demographic trends, such as the aging of the population, and
technological advancements which result in safer and less invasive surgical
procedures. These less invasive surgical procedures are increasingly being
performed in outpatient surgical centers and physician offices rather than in
hospitals. According to SMG Marketing Group, outpatient surgery centers and
physician offices represented 15% and 10%, respectively, of the total surgeries
performed in 1996, and, according to SMG Marketing Group, are projected to
increase to 19% and 15%, respectively, in 2001.
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In response to rising health care costs, managed care companies and other
payors have placed pressures on health care providers to reduce costs. As a
result, health care providers have focused on the high cost areas such as
surgery, both operative and recovery. To reduce costs, health care providers use
minimally-invasive techniques, which generally reduce patient trauma, recovery
time and ultimately the length of hospitalization. According to Dorland's
Biomedical, the total number of minimally-invasive surgical procedures performed
in the United States increased at a compound annual growth rate of 14%, from 1.8
million in 1990 to an estimated 3.9 million in 1996.
In addition, health care providers are increasingly purchasing single-use,
disposable products, which reduce the costs associated with sterilizing surgical
instruments and products following surgery. The single-use nature of disposable
products lowers the risk of incorrectly sterilized instruments spreading
infection into the patient and increasing the cost of post-operative care.
Furthermore, in the United States, the pressure on health care providers to
contain costs has altered their purchasing patterns for general surgical
instruments and disposable medical products. Many health care providers have
entered into comprehensive purchasing contracts with fewer suppliers, who offer
a broader array of products at lower prices. In addition, many health care
providers have aligned themselves with group purchasing organizations ("GPOs").
GPOs aggregate the purchasing volume of its members in order to negotiate
competitive pricing with suppliers, including manufacturers of surgical
products. The Company believes that these trends will favor entities that offer
a broad product portfolio.
The Company believes that foreign markets offer growth opportunities for
manufacturers of surgical products. As economic conditions improve in developing
countries, expenditures on health care are expected to rise; according to
Dorland's Biomedical, expenditures on surgical products in developing countries
increased 15% from $14 billion in 1995 to $16 billion in 1996 and are projected
to grow at a compounded growth rate of 17% to $65 billion in 2005.
COMPETITIVE STRENGTHS
The Company attributes its strong position in certain markets to the
following competitive factors:
LEADING MARKET POSITION IN KEY PRODUCT AREAS. The Company is a leading
provider of arthroscopic surgery devices, electrosurgical systems, powered
surgical instruments and ECG electrodes. The Company's product breadth has
enhanced its ability to market to hospitals, surgery centers, GPOs and other
customers, particularly as institutions seek to reduce costs and minimize the
number of suppliers. In addition, many of the Company's products are sold under
leading brand names, including CONMED(R), Linvatec(R), Aspen Labs(R) and Hall(R)
Surgical.
BROAD PRODUCT OFFERING IN KEY PRODUCT AREAS. The Company offers a broad
product line in its key product areas. For example, the Company offers a
complete set of the electrosurgical products a surgeon requires for most
electrosurgery procedures, including pencils, ground pads, generators and
related disposables. The Company's product offerings have enabled it to meet a
wide range of customer requirements and preferences. In addition, the Company's
customers are increasingly dealing with fewer vendors and demanding a broader
product offering from vendors in order to reduce administrative costs.
MARKETING AND DISTRIBUTION NETWORK. The Company's national sales force
consists of approximately 170 sales representatives who seek to maintain close
relationships with end-users. The Company's sales representatives are trained
and educated in the applications for the products they sell and call directly on
hospital departments, outpatient surgery centers and physician offices. In
January 1997, CONMED realigned its 90 person sales force to provide the full
range of CONMED's products to each salesperson, thereby permitting them to focus
greater attention on accounts and eliminating duplicative calling efforts.
Linvatec's 80 person sales force and 13 service associates will continue their
focus on the Company's arthroscopic products calling on orthopedic surgeons. In
addition, in connection with the Linvatec Acquisition, the Company entered into
agreements with Zimmer Inc. ("Zimmer"), a subsidiary of BMS, pursuant to which
Zimmer has agreed to continue to distribute certain of Linvatec's products for
periods ranging from six months to three years. The Company also maintains
distributor relationships domestically and in numerous countries worldwide.
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VERTICALLY-INTEGRATED MANUFACTURING. The Company manufactures most of its
products. The Company's vertically integrated manufacturing process have allowed
it to provide quality products, react to changes in demand and generate
manufacturing efficiencies, including purchasing raw materials used in a variety
of disposable products in bulk. The Company believes that its manufacturing
capabilities allow it to contain costs, control quality control and maintain
security of proprietary processes. The Company continually evaluates its
manufacturing processes with the objective of increasing automation,
streamlining production and enhancing efficiency in order to achieve cost
savings.
RESEARCH AND DEVELOPMENT CAPABILITIES. Both CONMED and Linvatec have
utilized their research and development capabilities to introduce new products,
product enhancements and new technologies. On a pro forma basis after giving
effect to the Linvatec Acquisition, research and development expenditures
were $11.3 million in 1997. Recent new product introductions include Universal
Plus(R) suction and irrigation systems, TroGARD(R) Finesse(TM) trocars, the
Apex(R) irrigation system, BioScrew(R) bioresorbable interference screws,
autoclavable imaging cameras and MicroChoice(R) powered handpieces.
INTEGRATING ACQUISITIONS. Since 1993, the Company has completed seven
acquisitions and is in the process of integrating the recently-completed
Linvatec Acquisition. These acquisitions have enabled the Company to broaden its
product categories, expand its sales and distribution capabilities and increase
its international presence. The Company's experienced management team has
demonstrated an historical ability to identify complementary acquisitions and
integrate acquired companies into the Company's operations.
BUSINESS STRATEGY
The Company intends to implement the following business strategies:
REALIZE MANUFACTURING AND OPERATING EFFICIENCIES. The Company expects to
continue to review opportunities for consolidating product lines and
streamlining production. The Company believes its vertically integrated
manufacturing process should produce further opportunities to reduce overhead
and increase operating efficiencies and capacity utilization.
INCREASE INTERNATIONAL SALES. The Company believes there are significant
sales opportunities for its surgical products outside the United States. The
Linvatec Acquisition increased the Company's access to international markets.
The Company intends to seek to expand its international presence and increase
its penetration in international markets by utilizing Linvatec's relationships
with foreign surgeons, hospitals and third-party payers, as well as foreign
distributors. The Company also intends to utilize Linvatec's sales relationships
to introduce Linvatec's customers to CONMED's products.
PROVIDE BROAD PRODUCT OFFERING IN KEY PRODUCT AREAS. As a result of
competitive pressures in the health care industry, many health care providers
have aligned themselves with GPOs, which are increasingly dealing with fewer
vendors and demanding a broader product offering from their vendors in order to
reduce administrative costs. The Company believes that its broad product line is
a positive factor in the Company's efforts to meet such demands. In addition,
the Company has a corporate sales department that markets the Company's broad
product offering to GPOs.
INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS. The Company's research
and development program is focused on the development of new surgical products,
as well as the enhancement of existing products. In addition to its own research
and development, the Company benefits from the dialogue and suggestions for
product innovations from its relationships with surgeons and other users of the
Company's products.
PURSUE STRATEGIC ACQUISITIONS. The Company believes that strategic
acquisitions represent a cost-effective means of broadening its product line.
The Company has historically targeted companies with proven technologies,
established brand names and a significant portion of sales from single-use,
disposable products. Since 1993, the Company has completed seven acquisitions,
expanding its product line to include surgical suction instruments, wound care
products and most recently arthroscopic products and powered surgical
instruments. The Credit Facility contains certain restrictive covenants which
will affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to engage in mergers and acquisitions. These
covenants may prevent the Company from pursuing acquisitions, which would result
in lower levels of growth for the Company in the future.
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RISK FACTORS
Investors should carefully consider the specific factors set forth below
as well as the other information included or incorporated by reference in this
Form 10-K. See "Item 1: Business -- Forward Looking Statements" relating to
certain forward-looking statements in this Form 10-K.
The Credit Facility contains certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to engage in mergers and acquisitions. These
covenants may prevent the Company from pursuing acquisitions, which would result
in lower levels of growth for the Company in the future.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company has indebtedness which is substantial in relation to its
shareholders' equity, as well as interest and debt service requirements that
are significant compared to its cash flow from operations. As of December 31,
1997, the Company had $365.0 million of debt outstanding, which represented
69.2% of total capitalization. In addition, on December 31, 1997, the Company
had approximately $85.0 million available for borrowing under the revolving
portion of the Company's principal bank credit agreement (the "Credit
Facility").
The degree to which the Company is leveraged could have important
consequences to investors, including but not limited to the following: (i) a
substantial portion of the Company's cash flow from operations must be
dedicated to debt service and will not be available for operations, capital
expenditures, acquisitions and other purposes; (ii) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; and
(iii) certain of the Company's borrowings, including its borrowings under the
Credit Facility, are and will continue to be at variable rates of interest,
which exposes the Company to the risk of increased interest rates.
The Company's ability to satisfy its obligations will depend upon the
Company's future operating performance, which will be affected by the Company's
ability to effectively integrate acquired businesses, including Linvatec, with
the Company's operations and by prevailing economic conditions and financial,
business and other factors, many of which are beyond the Company's control. See
"-- Ability to Integrate Linvatec" below. There can be no assurance that the
Company's operating results will be sufficient for the Company to meet its
obligations. If the Company is unable to service its indebtedness, it will be
forced to adopt an alternative strategy that may include actions such as
forgoing acquisitions, reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
implemented on terms acceptable to the Company, if at all. See "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ABILITY TO INTEGRATE LINVATEC
The Company's success is dependent in part upon its ability to effectively
integrate Linvatec with the Company's operations. In the Linvatec Acquisition,
which represents the Company's largest acquisition to date, the Company acquired
products not previously manufactured or sold by the Company and substantially
increased its international presence. The Company has entered into arrangements
with Zimmer for distribution of the Company's small bone, large bone and
specialty powered instruments in the United States. The integration and
consolidation of the Linvatec Acquisition will require substantial management
time and other resources and may pose risks with respect to production, sales,
customer service and market share. While the Company believes that it has
sufficient management and other resources to accomplish the integration of the
Linvatec Acquisition, there can be no assurance in this regard or that the
Company will not experience difficulties with customers, suppliers, personnel or
others. In addition, there can be no assurance that the Company will be able to
achieve any cost savings from the Linvatec Acquisition. Although the Company
believes that the Linvatec Acquisition will enhance the competitive position and
business prospects of the Company, there can be no assurance that such benefits
will be realized, that the distribution arrangements with Zimmer will be
sufficient and not be terminated or that the combination of CONMED and Linvatec
will be more successful than both such companies would have been if they had
remained independent. See "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" and "Item 1:
Business -- Strategy."
As a result of the Linvatec Acquisition, the Company's international sales
increased from 14% of total 1997 sales to 22% of total 1997 sales on a pro forma
basis. The Company has entered into distribution and transitional agreements
with respect to Linvatec's international business with affiliates of BMS, the
former parent of Linvatec. See "Item 1: Business -- Marketing." The Company
intends to replace such transitional services with its own operations and other
distribution arrangements. There can be no assurance that the transitional
services will be sufficient to maintain the Company's international business
acquired in the Linvatec Acquisition, that the Company will be able to
successfully replace the transitional services and distribution arrangements
provided by BMS affiliates with its own services and arrangements or that the
Company will be able to expand its international business during or following
the transition.
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EFFECTS OF ACQUISITIONS GENERALLY
An important element of the Company's business strategy has been to expand
through acquisitions and the Company may seek to pursue acquisitions in the
future. Most recently, in July 1997, the Company acquired a surgical suction
instrument and tubing product line from Davol (the "Davol Acquisition") and, in
December 1997, acquired Linvatec. The success of the Company is dependent in
part upon its ability to effectively integrate acquired operations with the
Company's operations. While the Company believes that it has sufficient
management and other resources to accomplish the integration of its past and
future acquisitions, there can be no assurance in this regard or that the
Company will not experience difficulties with customers, suppliers, personnel or
others. In addition, there can be no assurance that the Company will be able to
identify and make acquisitions on acceptable terms or that the Company will be
able to obtain financing for such acquisitions on acceptable terms. In addition,
the financial performance of the Company is now and will continue to be subject
to various risks associated with the acquisition of businesses, including the
financial effects associated with the integration of such businesses.
The Credit Facility contains certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to engage in mergers and acquisitions. These
covenants may prevent the Company from pursuing acquisitions, which would result
in lower levels of growth for the Company in the future.
LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS
The Credit Facility contains certain restrictive covenants which will
affect, and in many respects significantly limit or prohibit, among other
things, the ability of CONMED and its subsidiaries to incur indebtedness, make
prepayments of certain indebtedness, make investments, engage in transactions
with affiliates, sell assets, engage in mergers and acquisitions and realize
important elements of its business strategy. The Credit Facility also requires
the Company to meet certain financial ratios and tests. These covenants may
prevent the Company from integrating its acquired businesses, pursuing
acquisitions, significantly limit the operating and financial flexibility of
the Company and limit its ability to respond to changes in its business or
competitive activities. The ability of the Company to comply with such
provisions may be affected by events beyond its control. In the event of any
default under the Credit Facility, the Credit Facility leaders could elect to
declare all amounts borrowed under the Credit Facility, together with accrued
interest, to be due and payable. If the Company were unable to repay such
borrowings, the lenders thereunder could proceed against the collateral
securing the Credit Facility, which consists of substantially all of the
property and assets of CONMED and its subsidiaries.
SIGNIFICANT COMPETITION AND OTHER MARKET CONSIDERATIONS
The market for the Company's products is highly competitive. Many of these
competitors offer a range of products in areas other than those in which the
Company competes, which may make such competitors more attractive to GPOs,
hospitals and others. In addition, many of the Company's competitors are larger
and have greater financial resources than the Company and offer a range of
products broader than the Company's. Competitive pricing pressures or the
introduction of new products by the Company's competitors could have an adverse
effect on the Company's revenues and profitability. Some of the companies with
which the Company now competes or may compete in the future have or may have
more extensive research, marketing and manufacturing capabilities and
significantly greater technical and personnel resources than the Company, and
may be better positioned to continue to improve their technology in order to
compete in an evolving industry. See "Item 1: Business -- Competition."
Demand for and use of the Company's products may fluctuate as a result of
changes in surgeon preferences, the introduction of new products or new features
to existing products, the introduction of alternative surgical technology and
advances in surgical procedures and discoveries or developments in the health
care industry. In recent years, the health care industry has undergone
significant change driven by various efforts to reduce costs, including efforts
at national health care reform, trends toward managed care, cuts in Medicare,
consolidation of health care distribution companies and collective purchasing
arrangements by office-based health care practitioners. There can be no
assurance that demand for the Company's products will not be adversely affected
by such fluctuations and trends.
PATENTS AND PROPRIETARY TECHNOLOGY
Much of the technology used in the markets in which the Company competes is
covered by patents. The Company has numerous U.S. patents and corresponding
foreign patents on products expiring at various dates from 1998 through 2015 and
has additional patent applications pending. See "Item 1: Business -- Research
and Development Activities." Although the Company does not rely solely on its
patents to maintain its competitive position, the loss of the Company's patents
could reduce the value of the related products and any related competitive
advantage. Competitors may also be able to design around the Company's patents
and effectively compete with the Company's products. In addition, the cost to
prosecute infringements of the Company's patents or the cost to defend the
Company against patent infringement actions by others could be substantial.
There can be no assurance that pending patent applications will result in issued
patents, that patents issued to or licensed by the Company will not be
challenged by competitors or that such patents will be found to be valid or
sufficiently broad to protect the Company's technology or provide the Company
with a competitive advantage.
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GOVERNMENT REGULATION OF PRODUCTS
All of the Company's products are classified as medical devices subject to
regulation by the Food and Drug Administration (the "FDA"). As a manufacturer of
medical devices, the Company's manufacturing processes and facilities are
subject to on-site inspection and continuing review by the FDA to insure
compliance with "Good Manufacturing Practices," as defined by the FDA. Failure
to comply with applicable requirements can result in fines, recall or seizure of
products, total or partial suspension of production, withdrawal of existing
product approvals or clearances, refusal to approve or clear new applications or
notices and criminal prosecution. Many of the Company's products are also
subject to industry-set standards.
Foreign sales are also subject to substantial government regulation. For
example, the Company's European Community sales are subject to government
regulations known as the "CE" mark certification. Although a majority of the
Company's products have received "CE" mark certification and the Company
believes its products meet all applicable requirements for "CE" mark
certification, there can be no assurance that all of the Company's products will
receive a "CE" mark certification prior to the date that such certification is
required to continue to market such products.
The Company is subject to product recall. The Company's product lines have
experienced a number of product recalls. The Company has completed actions to
close all these recalls except one which the Company is currently addressing.
See "Item 1: Business -- Government Regulation." Although no recall or
production matter has had a material adverse effect on the Company's financial
condition, there can be no assurance to this effect in the future.
RISKS RELATING TO INTERNATIONAL OPERATIONS
A portion of the Company's operations are conducted outside the United
States, with 22% of the Company's pro forma 1997 net sales constituting foreign
sales. As a result of its international operations, the Company is subject to
risks associated with operating in foreign countries, including devaluations
and fluctuations in currency exchange rates, imposition of limitations on
conversions of foreign currencies into dollars or remittance of dividends and
other payments by foreign subsidiaries, imposition or increase of withholding
and other taxes on remittances and other payments by foreign subsidiaries,
trade barriers, political risks, including political instability,
hyperinflation in certain foreign countries and imposition or increase of
investment and other restrictions by foreign governments. There can be no
assurance that such risks will not have a material adverse effect on the
Company's business and results of operations.
RISK OF PRODUCT LIABILITY ACTIONS
The nature of the Company's products as medical devices and today's
litigious environment in the United States should be regarded as potential
risks that could significantly and adversely affect the Company's financial
condition and results of operations. The Company maintains insurance to protect
against claims associated with the use of its products, but there can be no
assurance that its insurance coverage would adequately cover the amount or
nature of any claim asserted against the Company. See "Item 3: Legal
Proceedings."
ENVIRONMENTAL MATTERS
The Company's operations are subject to various environmental laws and
regulations governing among other things, air emissions, wastewater discharges,
hazardous substances and waste disposal. Certain environmental laws can impose
liability for the entire cost of environmental remediation upon current or
former property owners and operators without regard to fault. While the Company
does not believe that the present costs of environmental compliance and
remediation are material, there can be no assurance that future compliance or
remedial obligations could not have a material adverse effect on the Company's
financial condition or results of operations. See "Item 1: Business--Legal
Proceedings."
SURGERY PRODUCTS
The Company is a leading developer, manufacturer and supplier of a broad
range of medical instruments and systems used in surgical and other medical
procedures. The Company's surgery products include arthroscopic surgery devices
and products, electrosurgical systems, powered surgical instruments and, to a
lesser extent, surgical suction instruments and imaging products used in
minimally invasive surgery. These products are sold to hospitals, outpatient
surgery centers and physician offices primarily in the United States.
Additionally, the Company provides repairs and services for its surgical
products. On a pro forma basis after giving effect to the Linvatec Acquisition,
surgical products represented 82% of 1997 sales.
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ARTHROSCOPIC SURGERY DEVICES AND PRODUCTS
As a result of the Linvatec Acquisition, the Company offers a broad line of
devices and products for use in arthroscopic surgery. On a pro forma basis
after giving effect to the Linvatec Acquisition, net sales attributable to
arthroscopy products represented 33% of the Company's 1997 net sales.
Arthroscopy refers to diagnostic and therapeutic surgical procedures
performed on joints with the use of minimally-invasive endoscopes and related
instruments. Minimally-invasive arthroscopy procedures enable surgical repairs
to be completed with less trauma to the patient, resulting in shorter recovery
times and cost savings. Approximately 75% of all arthroscopy is performed on
knee joints, although arthroscopic procedures are increasingly being done on
smaller joints and shoulders.
The Company's arthroscopy products include arthroscopes, reconstructive
systems, tissue repair sets, fluid management systems, imaging products,
implants and related disposable products. It is the Company's ordinary practice
to transfer some of these products, such as arthroscopic resection shavers, to
customers at no charge and benefits by obtaining customers' disposables
business. The Company has benefited from the introduction of new products and
new technologies in the arthroscopic area, such as bioresorbable screws,
"push-in" suture anchors and Apex(R) resection shavers.
ARTHROSCOPIC SURGERY DEVICES AND PRODUCTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BRAND NAME
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Resection Shavers Reusable shavers and disposable blades to Apex(R)
resect and remove soft tissue and bone;
used in knee, shoulder and small joint
surgery, as well as endoscopic sinus
surgery.
Reconstructive Systems Products used in knee reconstructive Paramax(R)
surgery; includes instrumentation, screws, Pinn-ACL(R)
pins, rasps and curettes.
Tissue Repair Sets Sets of instruments designed to attach Spectrum(R)
specific torn or damaged soft tissue to Revo(R)
bone or other tissue in the knee, shoulder Bio-Anchor(R)
and wrist; includes guides, hooks, suture Inteq(R)
devices and anchors.
Fluid Management Disposable tubing sets, disposable and Apex(R)
Systems reusable inflow devices, pumps and PuddleVac(R)
suction/waste management systems for use in Quick-Flow(R)
arthroscopic and general surgeries.
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION BRAND NAME
- -------------------------------------------------------------------------------------
<S> <C> <C>
Imaging Surgical video systems for endoscopic Apex(R)
procedures; includes single-chip digital 8180 Series
and three-chip camera consoles, heads,
endoscopes, light sources, monitors, VCRs
and printers.
Implants Products including bioresorbable and metal BioScrew(R)
interference screws, anchors and staples Guardsman(R)
for attaching tissue to bone in the knee
and shoulder.
Other Instruments and Forceps, graspers, suction punches, probes, Shutt(R)
Accessories cases and other general instruments for TractionTower(R)
arthroscopic procedures.
</TABLE>
ELECTROSURGICAL SYSTEMS
During 1995, 1996 and 1997 and for pro forma 1997, net sales attributable
to electrosurgery products represented 53%, 49%, 45% and 19%, respectively, of
the Company's net sales.
Electrosurgery is the technique of using a high-frequency electric current
which, when applied to tissue through special instruments, can be used to cut
tissue, coagulate, or cut and coagulate simultaneously. An electrosurgical
system consists of a generator, an active electrode in the form of a pencil or
other instrument which the surgeon uses to apply the current from the generator
to the target tissue and a ground pad to safely return the current to the
generator. Electrosurgery is routinely used in most forms of surgery, including
general dermatologic, thoracic, orthopedic, urologic, neurosurgical,
gynecological, laparoscopic, arthroscopic and other endoscopic procedures.
The Company's electrosurgical products include electrosurgical pencils,
ground pads, generators, the argon-beam coagulation system, ABC(R), and related
disposable products. ABC(R) is a special method of electrosurgery, which allows
a faster and more complete coagulation of many tissues as compared to
conventional electrosurgery. Unlike conventional electrosurgery, the current
travels in a beam of ionized argon gas, allowing the current to be dispersed
onto the bleeding tissue without the instrument touching the tissue. Clinicians
have reported notable benefits of ABC(R) over traditional electrosurgical
coagulation in certain clinical situations, including open-heart, liver, spleen
and trauma surgery.
<TABLE>
<CAPTION>
ELECTROSURGICAL SYSTEMS
- ----------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BRAND NAME
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Pencils Disposable and resuseable instruments designed Hand-trol(R)
to deliver high-frequency electric current to
cut and/or coagulate tissue.
Ground Pads Disposable ground pads to safely return the Macrolyte(R)
current to the generator; available in adult, Bio-gard(R)
pediatric and infant sizes.
Generators Monopolar and bipolar generators for surgical EXCALIBUR
procedures performed in a physician's office or Plus PC(R)
clinic setting. SABRE(R)
Hyfrecator Plus(R)
Argon Beam Coagulation Specialized electrosurgical generators, ABC(R)
Systems disposable hand pieces and ground pads for Beamer Plus(R)
non-contact cutting and coagulation of tissue.
Accessories Disposable products such as blades, forceps, CONMED(R)
adapters and cables. Aspen Labs(R)
</TABLE>
10
<PAGE> 11
POWERED INSTRUMENTS
As a result of the Linvatec Acquisition, the Company offers a broad line of
powered instruments. On a pro forma basis after giving effect to the Linvatec
Acquisition, net sales attributable to powered instruments represented 25% of
the Company's 1997 net sales.
Powered instruments are used to perform orthopedic, arthroscopic and other
surgical procedures, such as cutting, drilling or reaming and are driven by
electric, battery or pneumatic power. Each instrument consists of one or more
handpieces and related accessories as well as disposable and limited reuse items
(e.g., burs, saw blades, drills and reamers). Powered instruments are generally
categorized as either small bone, large bone or specialty powered instruments.
The Company's line of powered instruments are sold principally under the
Hall(R) Surgical brand name, for use in orthopedic, oral/maxillofacial,
podiatric, plastic and to a limited extent, neurological and thoracic surgeries.
Large bone powered instruments and specialty powered instruments are sold
primarily to hospitals while small bone powered instruments are sold to
hospitals, outpatient facilities and physician offices. Linvatec has devoted
substantial resources to developing a new technology base for small bone
instruments that can be easily adapted and modified for new procedures. In 1996,
Linvatec introduced its first product line using this new technology,
MicroChoice(R).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
POWERED INSTRUMENTS
- ----------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BRAND NAME
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Small Bone Powered saws, drills and related disposable Hall(R) Surgical
accessories for small bone and joint surgical MicroChoice(R)
procedures. Surgairtome(R)
Large Bone Powered saws, drills and related disposable Hall(R) Surgical
accessories for use primarily in total knee and VersiPower(R)
hip joint replacements and trauma surgical Series 4(R)
procedures.
Specialty Procedure-specific powered saws, drills and UltraPower(R)
related disposable accessories for use in Hall Osteon(R)
oral/maxillofacial, otolaryngology and thoracic Orthairtome(R)
procedures.
Other Powered Powered sternum saw handpieces and disposable Hall(R) Surgical
Instruments saw blades for use by cardiothoracic surgeons UltraPower(R)
during open-heart procedures. Micro 100
- ----------------------------------------------------------------------------------------------
</TABLE>
OTHER GENERAL SURGICAL PRODUCTS
The Company's other general surgical products include a variety of products
used in surgical settings. On a pro forma basis after giving effect to the
Linvatec Acquisition, other general surgical products represented 5% of the
Company's 1997 net sales.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
OTHER GENERAL SURGICAL PRODUCTS
- ----------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BRAND NAME
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Laparoscopic Specialized trocars, suction/irrigation UNIVERSAL Plus(R)
Instruments electrosurgical instrument systems for use in TroGard(R)
laparoscopic surgery; includes disposable TroGard
handles, valve/control assemblies with Finesse(TM)
disposable accessories and monopolar and
bipolar scissors, graspers and loops.
Surgical Suction Disposable surgical suction instruments and CONMED(R)
Instruments and connecting tubing, including Yankauer, Poole,
Tubing Frazier and Sigmoidoscopic instrumentation, for
use by physicians in the majority of open
surgical procedures.
- ----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PATIENT CARE PRODUCTS
During 1995, 1996 and 1997 and for pro forma 1997, net sales attributable
to patient care products represented 44%, 48%, 43% and 18%, respectively, of the
Company's net sales.
The Company manufactures a variety of patient care products for use in
monitoring cardiac rhythms, wound care management and IV therapy. These products
include ECG electrodes and cables, wound dressings and catheter stabilization
dressings. These products are sold to hospitals, outpatient surgery centers and
physician offices primarily in the United States. The majority of the Company's
sales in this category are derived from the sale of ECG electrodes. Although
wound management and intravenous therapy product sales are comparatively small,
the application of these products in the operating room complements the
Company's surgery business.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PATIENT CARE PRODUCTS
- ----------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BRAND NAME
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ECG Monitoring Line of disposable electrodes, monitoring CONMED(R)
cables, lead wire products and accessories Ultratrace(R)
designed to transmit ECG signals from the heart
to an ECG monitor or recorder.
Wound Care Disposable transparent wound dressings ClearSite(R)
comprising proprietary hydrogel; able to absorb Hydrogauze(R)
2 1/2 times its weight in wound exudate;
manufactured for CURAD.
Intravenous Therapy Disposable IV drip rate gravity controller and VENI-GARD(R)
disposable catheter stabilization dressing MasterFlow(R)
designed to hold and secure an IV needle or Stat 2(R)
catheter for use in IV therapy.
- ----------------------------------------------------------------------------------------------
</TABLE>
MARKETING
CONMED markets its products domestically through a direct sales and
marketing force of approximately 90 persons. Linvatec markets its arthroscopy
products domestically principally through a direct sales force of approximately
80 sales representatives and 13 service associates. Both the CONMED and Linvatec
sales forces will continue to be separately maintained by the Company. Linvatec
historically marketed its powered instruments domestically through Zimmer, a
subsidiary of BMS specializing in orthopedic implant products. In connection
with the Linvatec Acquisition, Zimmer agreed to continue distribution of the
Company's large bone powered instruments in the United States for three years.
Additionally, Zimmer has agreed to distribute all brands of the Company's small
bone and specialty powered instruments in the United States for up to one year
while the Company establishes a domestic sales force to sell these particular
products to physicians and hospitals.
Prior to January 1, 1997, CONMED's domestic sales force was principally
structured into two groups, Electrosurgical Systems and Patient Care, with each
group responsible for selling only the products in its category. While this
structure had been effective in maintaining business associated with recent
acquisitions, it was not efficient as CONMED had multiple sales people calling
on individual customers. Accordingly, effective January 1, 1997, the two groups
were combined into one sales force where each territory manager now markets both
product lines. The Company believes that this new structure permits greater
attention to accounts and facilitates focused selling of CONMED's products.
CONMED has located its salespeople in key metropolitan areas. They are
supervised and supported by district managers and regional managers. Home office
sales and marketing management provide the overall direction for the sales of
the Company's products. Each CONMED sales person is compensated with a
combination of salary and commission. For hospital inventory management
purposes, at the hospitals' request, some products are sold to hospitals through
distributors. The sales force is required to work closely with distributors
where applicable and to maintain close relationships with end-users.
Domestically, CONMED's products are sold through local, regional and national
hospital distributors and directly to hospitals.
12
<PAGE> 13
Each Linvatec sales representative has a defined geographic territory and
is compensated on a commission basis. This direct sales force covers virtually
every state in the United States. Linvatec's global marketing effort is managed
from Largo, Florida, where a product management team provides strategic product
direction. Additional marketing support functions such as new business planning,
market development and other marketing services are also based in Largo.
Internationally, CONMED's products have historically been sold primarily
through distributors in over 60 countries. Linvatec historically distributed
both arthroscopy and powered instruments products, depending on the country,
either directly through Zimmer or through distributors affiliated with Zimmer.
In connection with the Linvatec Acquisition, Zimmer has agreed to continue to
distribute Linvatec's arthroscopic and powered instrument products in Japan and
certain Eastern European countries for up to three years. Zimmer will also
continue to distribute Linvatec's large bone powered instruments in eight
countries where it has an established direct sales force. Zimmer has also agreed
to direct the distribution of the Linvatec product line for up to six months in
all other areas of the world while the Company transitions to its own
distribution methodology. In general, the Company plans to contract with the
same independent country distributors who now sell the Linvatec line on Zimmer's
behalf, although in certain countries, such as the United Kingdom, Germany,
Italy, Canada, Korea and Australia, the Company may establish its own direct
sales force.
The Company focuses on keeping its salespeople highly trained and educated
in the applications for its products. CONMED's salespeople call on hospitals,
outpatient surgery centers and physician offices. Linvatec's salespeople call on
orthopedic surgeons and hospital surgery departments. The Company also has a
corporate sales department that is responsible for interacting with GPOs. The
Company believes that it has contracts with most such organizations and that the
lack of any individual group purchasing contract will not adversely impact the
Company's competitiveness in the marketplace. The sale of the Company's products
are accompanied by initial and ongoing in-service training of the end user. The
Company requires that its sales force possess the ability to train doctors and
nursing staff on the techniques needed to take full advantage of the Company's
products. The field sales force is trained in the technical aspects of the
Company's products and their uses, and provides hospital personnel and surgeons
with information relating to the technical features and benefits of the
Company's products.
RESEARCH AND DEVELOPMENT ACTIVITIES
During the three years, 1995, 1996 and 1997 and for pro forma 1997, the
Company spent approximately $2.8 million, $3.0 million, $3.0 million and $11.3
million, respectively, for research and development. The Company's research and
development department consists of approximately 94 employees, including 59
employees as a result of the recent Linvatec Acquisition.
The Company's research and development programs focus on the development of
new products, as well as the enhancement of existing products with the latest
technology and updated designs. The Company is continually seeking to develop
new technologies to improve durability, performance and usability of existing
products. In addition to its own research and development, the Company receives
new product and technology disclosures, especially in procedure-specific areas,
from surgeons, inventors and operating room personnel. For disclosures that the
Company deems promising from a clinical and commercial perspective, the Company
seeks to obtain rights to these ideas by negotiating agreements, which typically
compensate the originator of the idea through royalty payments based on a
percentage of net sales of licensed products.
The Company has rights to numerous U.S. patents and corresponding foreign
patents, covering a wide range of its products. The Company owns a majority of
these patents and has licensed rights to the remainder, both on an exclusive and
non-exclusive basis. In addition, certain Linvatec patents are currently
licensed to third parties on a non-exclusive basis. Due to technological
advancements, the Company does not rely on its patents to maintain its
competitive position, and believes that development of new products and
improvement of existing ones is and will continue to be more important than
patent protection in maintaining its competitive position.
13
<PAGE> 14
COMPETITION
The markets for the Company's surgical systems products and patient care
products are highly competitive, and many of the Company's competitors are
substantially larger and stronger financially than the Company. However, the
Company does not believe that any one competitor competes with the Company
across all its product lines. Major competitors of the Company include Valleylab
(a subsidiary of United States Surgical Corporation), Minnesota Mining and
Manufacturing Company, Smith & Nephew plc and Stryker Corporation.
The Company believes that product design, development and improvement,
customer acceptance, marketing strategy, customer service and price are critical
elements to compete in its industry. Other alternatives, such as medical
procedures or pharmaceuticals, could at some point prove to be interchangeable
alternatives to the Company's products.
GOVERNMENT REGULATION
All the Company's products are classified as medical devices subject to
regulation by the FDA. The Company's new products require FDA clearance under a
procedure known as 510(k) premarketing notification. A 510(k) premarketing
notification clearance indicates FDA agreement with an applicant's determination
that the product for which clearance has been sought is substantially equivalent
to another medical device that was on the market prior to 1976 or that has
received 510(k) premarketing notification clearance. Some products have been
continuously produced, marketed and sold since May 1976 and require no 510(k)
premarketing clearance. The Company's products are all either Class I or Class
II products with the FDA, meaning that the Company's products must meet certain
FDA standards and are subject to the 510(k) premarketing notification clearance
discussed above, but are not required to be approved by the FDA. FDA clearance
is subject to continual review, and later discovery of previously unknown
problems may result in restrictions on a product's marketing or withdrawal of
the product from the market.
The Company has a quality control/regulatory compliance group of 34
employees that is tasked with assuring that all of the Company's products comply
with design specifications and relevant government regulations. The Company and
substantially all of its products are subject to the provisions of the Federal
Food, Drug and Cosmetic Act of 1938, as amended by the Medical Device Amendments
of 1976, and the Safe Medical Device Act of 1990, as amended in 1992.
The Company markets its products in a number of foreign markets.
Requirements pertaining to its products vary widely from country to country,
ranging from simple product registrations to detailed submissions such as those
required by the FDA. The Company's European Community sales are subject to
government regulations known as the "CE" mark certification. The Company's
electronic devices (electrosurgical generators, Hyfrecators(R) and ABC(R) units)
have received a "CE" mark certification. Although a majority of the Company's
products have received "CE" mark certification and the Company believes its
products meet all applicable requirements for "CE" mark certification, there can
be no assurances that all of the Company's products will receive a "CE" mark
certification prior to the date that such certification is required to continue
to market such products. The Company believes that its products currently meet
applicable standards for the countries in which they are marketed.
As a manufacturer of medical devices, the Company's manufacturing processes
and facilities are subject to periodic on-site inspections and continuing review
by the FDA to insure compliance with "Good Manufacturing Practices." Many of the
Company's products are subject to industry-set standards. Industry standards
relating to the Company's products are generally formulated by committees of the
Association for the Advancement of Medical Instrumentation. The Company believes
that its products presently meet applicable standards.
The Company is subject to product recall. In March 1993, the Company
voluntarily recalled certain lots of its TechSwitch(R) electrosurgical pencils
due to a production matter which caused a small percentage of the pencils in the
affected lots to function in an inconsistent manner. Since 1990, the Linvatec(R)
and Hall(R) Surgical product lines have experienced 14 and 5 product recalls,
respectively. Corrective actions were taken to address the causes of the
recalls, and the Company has completed actions to close all these recalls except
one which the Company is currently addressing. No recall or production matter
has had a material effect on the Company's financial condition.
Any change in existing federal, state or foreign laws or regulations, or in
the interpretation or enforcement thereof, or the promulgation or any additional
laws or regulations could have an adverse effect on the Company's financial
condition or results of operations.
EMPLOYEES
As of December 31, 1997, the Company had 2,161 full-time employees, of whom
1,462 were in manufacturing, 94 were in research and development, and the
balance were in sales, marketing, executive and administrative positions. These
employees include 876 employees who joined the Company on December 31, 1997 as a
result of the Linvatec Acquisition. None of the Company's employees are
represented by a union, and the Company considers its employee relations to be
excellent. The Company has never experienced any strikes or work stoppages.
14
<PAGE> 15
Item 2. Properties
FACILITIES
The Company manufactures most of its products. Substantially all of the
Company's property and assets are pledged as collateral under the Credit
Facility. The following table provides information regarding the Company's
facilities. The Company believes its facilities are adequate in terms of space
and suitability for its needs over the next several years. The Company is
currently in the process of moving one of its manufacturing operations from a
leased facility in Lawrence, Kansas to a Company-owned facility in Utica, New
York. The leased facility in Lawrence is approximately 100,000 square feet, and
the lease may be terminated by the Company without cause upon 60 days' notice to
the lessor.
<TABLE>
<CAPTION>
LEASE
LOCATION SQUARE FEET OWN OR LEASE EXPIRATION
- ----------------------------- ----------- ------------ --------------
<S> <C> <C> <C>
Utica, NY (three facilities) 650,000 Own --
Largo, FL 213,000 Lease 2009
Rome, NY 120,000 Own --
Englewood, CO 65,000 Own --
San Dimas, CA 32,000 Lease 2002
Juarez, Mexico 25,000 Lease June 1998
Santa Barbara, CA 18,000 Lease December 1998
El Paso, TX 29,000 Lease 1999
</TABLE>
MANUFACTURING
The Company manufactures most of its products. The Company believes its
vertically integrated manufacturing process allows it to provide quality
products and generate manufacturing efficiencies, including by purchasing raw
materials for its disposable products in bulk. The Company also believes that
its manufacturing capabilities allow it to contain costs, control quality and
maintain security of proprietary processes. The Company uses various manual and
automated equipment for fabrication and assembly of its products and is
continuing to further automate its facilities.
The Company believes its production and inventory practices are generally
reflective of conditions in the industry. The Company's products are not
generally made to order or to individual customer specifications. Accordingly,
the Company schedules production and stocks inventory on the basis of experience
and its knowledge of customer order patterns, and its judgment as to anticipated
demand. Since customer orders must generally be filled promptly for immediate
shipment, backlog of unfilled orders is not significant to an understanding of
the Company's business.
Item 3. Legal Proceedings
From time to time the Company is a defendant in certain lawsuits alleging
product liability or other claims incurred in the ordinary course of business.
These claims are generally covered by various insurance policies, subject to
certain deductible amounts and maximum policy limits. The Company does not
expect that the resolution of any pending claims will have a material adverse
effect on the Company's financial condition or results of operations.
Manufacturers of medical products may face exposure to significant product
liability claims. To date, the Company has not experienced any material product
liability claims, but any such claims arising in the future could have a
material adverse effect on the Company's business or results of operations. The
Company currently maintains commercial product liability insurance of
$25,000,000 per incident and $25,000,000 in the aggregate annually, which the
Company, based on its experience, believes is adequate. This coverage is on a
claims-made basis. There can be no assurance that claims will not exceed
insurance coverage or that such insurance will be available in the future at a
reasonable cost to the Company.
The Company's operations are subject to a number of environmental laws and
regulations governing, among other things, air emissions, wastewater discharges,
the use, handling and disposal of hazardous substances and wastes, soil and
groundwater remediation and employee health and safety. In some jurisdictions
environmental requirements may be expected to become more stringent in the
future. In the United States certain environmental laws can impose liability for
the entire cost of site restoration upon each of the parties that may have
contributed to conditions at the site regardless of fault or the lawfulness of
the party's activities. The Company has contributed to investigation and
remediation costs at certain sites, including a facility formerly operated by
Birtcher and located in an area of regional groundwater contamination which has
been designated as the San Gabriel Valley Superfund Site. See Note 6 to the
Company's Financial Statements.
While the Company does not believe that the present costs of environmental
compliance and remediation are material, there can be no assurance that future
compliance or remedial obligations could not have a material adverse effect on
the Company's financial condition or results of operations.
15
<PAGE> 16
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock, par value $.01 per share, is traded on the Nasdaq
National Market System (symbol - CNMD). At January 28, 1998, there were 1,471
registered holders of the Company's Common Stock and, in addition the Company
has been notified that, on such date, there were approximately 7,700 accounts
held in "street name", excluding Prudential accounts.
The following table shows the high-low last sales prices for the years ended
December 31, 1996 and 1997, as reported by the Nasdaq National Market System.
<TABLE>
<CAPTION>
1996
------------------------------------------
Period High Low
------------------------------------------
<S> <C> <C>
First Quarter $25.63 $20.50
Second Quarter 34.00 24.50
Third Quarter 25.25 13.50
Fourth Quarter 20.88 16.00
<CAPTION>
1997
------------------------------------------
Period High Low
------------------------------------------
<S> <C> <C>
First Quarter 21.63 14.38
Second Quarter 19.25 12.25
Third Quarter 21.50 16.38
Fourth Quarter 29.75 18.50
</TABLE>
The Company did not pay cash dividends on its Common Stock during 1996 and 1997.
The Credit Facility prohibits the payment of cash dividends on the Company's
Common Stock. The Company's Board of Directors presently intends to retain
future earnings to finance the development of the Company's business.
16
<PAGE> 17
Item 6. Selected Financial Data
FIVE - YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Net sales................................... $ 53,641 $ 71,064 $ 99,558 $125,630 $138,270
Cost of sales............................... 30,218 38,799 52,402 65,393 74,220
Selling and administrative expense.......... 17,402 20,979 25,570 31,620 35,299
Research and development expense............ 2,222 2,352 2,832 2,953 3,037
Unusual items(2)............................ 5,700 -- -- -- 37,242
-------- -------- -------- -------- --------
Income (loss) from operations............... (1,901) 8,934 18,754 25,664 (11,528)
Interest income (expense), net.............. (214) (628) (1,991) (217) 823
-------- -------- -------- -------- --------
Income (loss) before income taxes........... (2,115) 8,306 16,763 25,447 (10,705)
Provision (benefit) for income taxes........ (719) 2,890 5,900 9,161 (3,640)
-------- -------- -------- -------- --------
Net income (loss)........................... $ (1,396) $ 5,416 $ 10,863 $ 16,286 $ (7,065)
======== ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE(3):
Basic....................................... $ (0.16) $ 0.60 $ 1.03 $ 1.16 $ (0.47)
======== ======== ======== ======== ========
Diluted..................................... $ (0.16) $ 0.56 $ 0.94 $ 1.12 $ (0.47)
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED
IN CALCULATING(3):
Basic earnings (loss) per share............. 8,987 9,032 10,517 14,045 14,997
======== ======== ======== ======== ========
Diluted earnings (loss) per share........... 8,987 9,624 11,613 14,496 14,997
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amortization............... $ 3,262 $ 3,878 $ 5,015 $ 6,410 $ 6,954
EBITDA(4)................................... 7,061 12,812 23,769 32,074 32,668
Capital expenditures........................ 1,506 2,190 5,195 4,946 8,178
Ratio of earnings to fixed charges(5)....... --(5) 11.73x 8.84x 79.41x --(5)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(6):
Cash and cash equivalents................... $ 1,978 $ 3,615 $ 1,539 $ 20,173 $ 13,452
Total assets................................ 57,338 62,104 119,403 170,083 561,637
Long-term debt (including current
portion)................................. 11,905 9,375 32,340 -- 365,000
Total shareholders' equity.................. 37,490 43,061 75,002 158,635 162,736
</TABLE>
- ---------------
(1) Includes, based on the purchase method of accounting, the results of (i)
CONMED Andover Medical, Inc., the subsidiary formed as a result of the
acquisition of the business and certain assets of Medtronic Andover Medical,
Inc., from July 1993; (ii) an ECG product line from Becton Dickinson
Vascular Access, Inc. from November 1994; (iii) Birtcher Medical Systems,
Inc. ("Birtcher") from March 1995; (iv) the IV controller product line
acquired from Master Medical Corporation ("Master Medical") from May 1995;
(v) NDM, Inc. ("NDM"), the subsidiary formed as a result of the product
lines acquired from New Dimensions in Medicine, Inc., from February 1996;
and (vi) the surgical suction product line acquired from the Davol
subsidiary ("Davol") of C.R. Bard, Inc., from July 1997, in each such
case from the date of acquisition.
(2) Includes for 1993 a litigation charge of $5.0 million relating to a patent
infringement case involving the Company's line of coated electrosurgical
accessory blades and a product restructure charge of $0.7 million for the
write-off of obsolete inventory. Includes for 1997 a $34.0 million non-cash
acquisition charge for the writedown of all of the in-process research and
development products (comprised of products in the development stage)
acquired in the Linvatec Acquisition, $0.9 million of deferred financing
fees resulting from refinancing the Company's loan agreements in connection
with the Linvatec Acquisition, and $2.3 million for the closing of the
Company's Dayton, Ohio manufacturing facility.
(3) All share and per share amounts have been adjusted to give effect to the
Company's three-for-two stock splits in the form of stock dividends paid on
December 27, 1994 and November 30, 1995.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, unusual items and inventory adjustments
pursuant to purchase accounting. EBITDA is included herein because certain
investors consider it to be a useful measure of a company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined in generally accepted accounting principles, and
should not be considered in isolation or as a substitute for net income or
cash flow from operations or as a measure of profitability or liquidity.
(5) The ratio of earnings to fixed charges is calculated by dividing fixed
charges into income from operations before income taxes and extraordinary
items plus fixed charges. Fixed charges include interest expense,
amortization of debt issuance cost and the estimated interest component of
rent expense. In 1993 and 1997, the Company had a deficiency of earnings to
cover fixed charges of $1,755,000 and $11,381,000, respectively.
17
<PAGE> 18
(6) Linvatec is included in the Historical Balance Sheet Data as of December 31,
1997, its date of acquisition, after a one-time non-cash acquisition charge
of $34.0 million.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with Selected
Historical Financial Information (Item 6) and the consolidated financial
statements of CONMED and Linvatec, which are included elsewhere or incorporated
by reference in this Form 10-K.
GENERAL
The Company is a leading developer, manufacturer and supplier of a broad
range of medical instruments and systems used in surgical and other medical
procedures. The Company's net sales have increased approximately 158% from $53.6
million in 1993 to $138.3 million in 1997 primarily as a result of the Company's
acquisitions of the businesses and product lines described below.
In July 1993, the Company acquired the business and certain assets of
Medtronic Andover Medical, Inc., a manufacturer of ECG monitoring and diagnostic
electrodes and ECG cables and lead wires, for a cash purchase price of
approximately $21.8 million plus the assumption of approximately $1.2 million of
liabilities. In November 1994, the Company purchased the assets associated with
a product line involving the manufacture and sale of disposable ECG electrodes
from Becton Dickinson Vascular Access, Inc. for approximately $2.0 million.
These acquisitions expanded the ECG product offering of the Company and have
given the Company the additional market share necessary to become a leading
supplier of ECG disposables to the domestic ECG disposables industry.
In March 1995, the Company acquired Birtcher for approximately 1.6 million
shares of the Company's common stock in a transaction valued at approximately
$21.2 million. With the Birtcher acquisition, the Company added the argon beam
coagulation technology to its existing lines of electrosurgical products and
strengthened the Company's position as a leading supplier of electrosurgical
systems to the medical industry.
In May 1995, the Company acquired the business and certain assets and
liabilities of Master Medical for a cash purchase price of approximately $9.5
million plus the assumption of net liabilities totaling approximately $0.5
million. The Master Medical acquisition added a line of single-use IV fluid drip
rate gravity controllers to the Company's product line.
In February 1996, the Company acquired substantially all the business and
certain assets of NDM for a cash purchase price of approximately $31.6 million
plus the assumption of net liabilities of approximately $3.3 million. Through
the NDM acquisition, the Company acquired the business of NDM relating to the
design, manufacture and marketing of a broad line of ECG electrode products,
disposable electrosurgical products and a broad line of various Hydrogel wound
care products.
On July 1, 1997, the Company completed the acquisition of a surgical
suction instrument and tubing product line from Davol for a cash purchase price
of $24.0 million. This acquisition is being accounted for using the purchase
method of accounting. Accordingly, the results of operations of the acquired
business are included in the consolidated results of the Company from the date
of acquisition. Goodwill associated with the acquisition is being amortized on a
straight-line basis over a 40-year period.
On December 31, 1997, the Company acquired Linvatec and other related
assets from BMS for a cash purchase price of $370.0 million plus the issuance of
a warrant to purchase 1.0 million shares of the Company's common stock plus the
assumption of net liabilities of approximately $16.6 million. The Linvatec
Acquisition is being accounted for using the purchase method of accounting.
Accordingly, the results of operations of Linvatec are included in the
consolidated results of the Company from the date of acquisition. Goodwill
associated with the Linvatec Acquisition is being amortized on a straight-line
basis over a 40-year period. Linvatec is a leading supplier of
minimally-invasive surgical products for arthroscopic surgery, as well as a
leader in the powered surgical instrument market.
The allocations of the purchase price for the Davol Acquisition and the
Linvatec Acquisition are based on management's preliminary estimates; it is
possible that re-allocations will be required as additional information
18
<PAGE> 19
becomes available. Management does not believe that such re-allocations will
have a material effect on the Company's results of operations or financial
position.
The Company has identified measures required to enable its systems to be
Year 2000 compliant. The cost of such measures is not expected to be
significant.
From time to time, the Company explores acquisition opportunities and
conducts discussions and negotiations regarding acquisition proposals. There are
no current acquisition proposals pending and there can be no assurance that any
future acquisitions will result from discussions and negotiations. The Credit
Facility significantly limits the ability of the Company to pursue acquisitions
that have not been approved by the lenders thereunder. See "Risk Factors --
Limitation Imposed by Certain Indebtedness."
CONMED
RESULTS OF OPERATIONS
The following table presents, as a percent of net sales, certain categories
included in CONMED's consolidated statements of income for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of sales....................................................... 52.6 52.1 53.7
----- ----- -----
Gross profit........................................................ 47.4 47.9 46.3
Selling and administrative expense.................................. 25.7 25.2 25.5
Research and development expense.................................... 2.9 2.3 2.2
Unusual items....................................................... -- -- 26.9
----- ----- -----
Income (loss) from operations....................................... 18.8 20.4 (8.3)
Interest income (expense), net...................................... (2.0) (0.2) 0.6
----- ----- -----
Income (loss) before income taxes................................... 16.8 20.2 (7.7)
Provision (benefit) for income taxes................................ 5.9 7.3 (2.6)
----- ----- -----
Net income (loss)................................................... 10.9% 12.9% (5.1)%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Sales for 1997 were $138.3 million, an increase of $12.7 million, or 10.1%,
compared to sales of $125.6 million in 1996. The increase was primarily a result
of the Davol product line acquisition effective July 1, 1997, and the NDM
acquisition that was reflected in 1996 results only from February 23, 1996, the
date of acquisition. Offsetting the incremental sales volume associated with the
acquisitions was the effect of realignment of CONMED's domestic sales force
effective January 1, 1997, the effect of discontinuing certain end of quarter
dealer incentives and lower pricing relative to ECG electrode sales.
Prior to 1997, CONMED maintained separate sales forces, each of which sold
only a portion of CONMED's product offerings. With the January 1, 1997
realignment, each of CONMED's territory managers became responsible for selling
its entire product line. While management believes that this change has enhanced
CONMED's sales efforts, management believes that sales for the first six months
of 1997 were negatively impacted by this change due to training and transition
issues. Additionally, during the second quarter of 1997, CONMED announced that
it would immediately discontinue certain end of quarter dealer incentives that
had previously been offered. Management believes that the termination of such
dealer incentives had a negative effect on CONMED's sales in 1997 by as much as
$2.0 million.
19
<PAGE> 20
Cost of sales increased to $74.2 million in 1997, an increase of $8.8
million, or 13.5%, compared to cost of sales of $65.4 million in 1996. CONMED's
gross margin percentage was 46.3% in 1997 as compared to 47.9% in 1996. Factors
adversely impacting the gross margin percentage in 1997 include the Davol
product line, which currently has a lower gross margin percentage than CONMED's
overall gross margin percentage, and the effects of lower pricing on ECG
electrodes.
Selling and administrative expenses increased to $35.3 million in 1997, an
increase of $3.7 million, or 11.6%, compared to selling and administrative
expenses of $31.6 million in 1996. As a percent of sales, selling and
administrative expenses increased to 25.5% in 1997 from 25.2% in 1996. Selling
and administrative expenses for the first two quarters of 1997 averaged 28.1% of
net sales and were adversely impacted by incremental costs associated with
CONMED's realignment of its domestic sales force which was completed in the
second quarter of 1997. Selling and administrative expense for the last two
quarters of 1997 declined to an average of 24.4% of net sales reflecting the
completion of the sales force realignment and economies of scale resulting from
the Davol product line acquisition effective July 1, 1997.
Research and development expense was $3.0 million in each of 1997 and 1996.
CONMED continues to conduct research and development activities in all of its
product lines, with a particular emphasis on products for minimally invasive
surgery.
In 1997, CONMED recorded $37.2 million of unusual items, including a $34.0
million non-cash acquisition charge for the write-down of all of the in-process
research and development products (comprised of products in the development
stage) acquired in the Linvatec Acquisition, $0.9 million of deferred financing
fees resulting from the refinancing of the Company's loan agreements in
connection with the Linvatec Acquisition and a $2.3 million charge for the
closing of CONMED's Dayton, Ohio manufacturing facility.
In 1997, CONMED had net interest income of $0.8 million, compared to net
interest expense of $0.2 million in 1996. CONMED repaid all then-outstanding
balances under a predecessor credit agreement in 1996 following the completion
of CONMED's offering of 2,998,000 shares of common stock. No further borrowings
were made under any CONMED credit facilities until December 31, 1997, when
$365.0 million was borrowed under the Credit Facility in connection with the
Linvatec Acquisition.
As a result of the unusual items, CONMED recognized an income tax benefit
of $3.6 million in 1997. CONMED's effective tax rate for 1996 was 36.0%
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 29, 1995
Sales for 1996 were $125.6 million, an increase of 26.2% compared to sales
of $99.6 million in 1995. The increase was primarily a result of incremental
sales volume associated with the NDM acquisition, which became effective
February 23, 1996, and the Birtcher and Master Medical acquisitions that were
reflected in 1995 results only from March 14, 1995 and May 19, 1995, their
respective dates of acquisition.
Cost of sales increased to $65.4 million in 1996 as compared to $52.4
million in 1995. CONMED's gross margin percentage was 47.9% in 1996 as compared
to 47.4% in 1995. The effects of the Birtcher and Master Medical acquisitions
had a significant positive impact on the overall corporate gross margin
percentage, which improved to an average of 47.8% for the last three quarters of
1995. During 1996, the NDM acquisition resulted in further manufacturing
efficiencies. However, partially offsetting these gains in gross margin
percentage were the effects of lower pricing on ECG electrodes and the effects
of the inclusion of the NDM product line which generally have lower gross margin
percentages than CONMED's overall gross margin percentage.
Selling and administrative expenses increased to $31.6 million in 1996 as
compared to $25.6 million in 1995. As a percentage of sales, however, selling
and administrative expense decreased from 25.7% in 1995 to 25.2% in 1996 due to
economies of scale resulting from the completed acquisitions.
Research and development expense was $3.0 million in 1996 as compared to
$2.8 million in 1995.
Net interest expense was $0.2 million in 1996 as compared to $2.0 million
in 1995. In connection with the 1995 acquisitions of Birtcher and Master
Medical, CONMED borrowed approximately $23.0 million bringing aggregate 1995
20
<PAGE> 21
borrowing outstanding under its credit agreement to $32.3 million. While an
additional $32.7 million was borrowed in connection with the February 1996
acquisition of NDM, all then-existing indebtedness of CONMED under its credit
agreement was repaid in March 1996 following CONMED's offering of 2,998,000
shares of common stock.
CONMED's effective tax rate for 1996 was 36.0% as compared to 35.2% in
1995.
LINVATEC
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Net sales for 1997 were $228.4 million, an increase of $9.5 million, or
4.3%, compared to net sales of $218.9 million in 1996. This increase relates
primarily to increased sales of arthroscopic imaging products both domestically
and internationally, and increased sales of Linvatec's other arthroscopic
products in its overseas markets. Offsetting the above volume increases were
slight price declines related primarily to Linvatec's disposable products.
Cost of goods sold was $89.1 million in 1997, an increase of $6.1 million,
or 7.4%, compared to cost of goods sold of $83.0 million in 1996. Linvatec's
gross margin percentage was 61.0% in 1997 as compared to 62.1% in 1996. The
decrease in gross margin percentage from 1996 to 1997 was caused primarily by
the effects of unfavorable foreign exchange and price declines on Linvatec's
disposable products.
Selling and administrative expenses were $92.0 million in 1997, an increase
of $7.3 million, or 8.7%, compared to selling and administrative expenses of
$84.7 million in 1996. As a percentage of net sales, 1997 selling and
administrative expenses were 40.3% as compared to 38.7% in 1996. This increase
relates primarily to incremental expense associated with Linvatec's worldwide
marketing efforts.
Research and development expense was $9.2 million in 1997, as compared with
research and development expense of $8.3 million in 1996, a $0.9 million, or
10.8% increase. In 1997, research and development expense increased primarily as
a result of an acquisition in August 1996.
In 1996 and 1997, Linvatec was accounted for as a division of Zimmer.
Linvatec's Statement of Net Sales and Direct Operating Expenses does not include
interest expense or income tax provision in either period.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Net sales for 1996 were $218.9 million, an increase of $0.2 million
compared to sales of $218.7 million in 1995. Primary factors impacting this
sales increase included favorable international sales growth offset partially by
price declines on Linvatec's powered instrument product line.
Cost of goods sold was $83.0 million in 1996, an increase of $1.4 million,
or 1.7%, compared to cost of goods sold of $81.6 million in 1995. Linvatec's
gross margin percentage was 62.1% in 1996 as compared to 62.7% in 1995. The
decline in gross margin percentage was due to price declines on Linvatec's
powered instrument product line and the impact of foreign exchange.
Selling and administrative expenses were $84.7 million in 1996, an increase
of $6.0 million, or 7.6%, compared to selling and administrative expenses of
$78.7 million in 1995. As a percentage of net sales, 1996 selling and
administrative expenses were 38.7% in 1996 as compared to 36.0% in 1995. The
increase related primarily to increased marketing efforts, including the
expansion of physician consulting arrangements.
Research and development expense was $8.3 million in 1996, as compared with
research and development expense of $8.0 million in 1995, a $0.3 million, or
3.8% increase. In 1996, research and development expense increased primarily as
a result of an acquisition in August 1996.
In 1995 and 1996, Linvatec was accounted for as a division of Zimmer.
Linvatec's Statement of Net Sales and Direct Operating Expenses does not include
interest expense or income tax provision in either period.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity are cash flows from operations and
borrowings under its $100 million revolving portion of the Credit Facility, of
which $85 million was available for borrowing on December 31, 1997.
The Company's cash flow from operations for the years 1995, 1996 and 1997
was $5.1 million, $25.9 million and $31.8 million, respectively. Working capital
amounted to $91.3 million at December 31, 1997.
At December 31, 1997, the Company had $85 million available under the
revolving portion of the Credit Facility. The revolving portion of the Credit
Facility expires on December 30, 2002.
On December 31, 1997, the Company borrowed the $350 million in term loans
available under the Credit Facility. Of the term loans, $210 million will be
repayable over a five-year period, commencing March 31, 1998 and $140 million
will be repayable over a seven-year period, commencing March 31, 1998. The
Credit Facility is collateralized by all the Company's 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 indebtedness and
certain other activities, including acquisitions and dispositions. The Company
is also required to make mandatory prepayments from net cash proceeds from any
issue of equity and asset sales and also from any excess cash flow, as defined.
One of the covenants under the Credit Facility requires the Company to complete
by June 30, 1998 a senior subordinated note offering that will generate at least
$125 million of gross proceeds. Such proceeds are required to be applied to
reduce amounts outstanding under the term loans under the Credit Facility. Any
repayments of amounts due under the term loans permanently reduce the term loans
under the Credit Facility.
The Credit Facility (including the term loans and the revolving credit
facility) is guaranteed (the "Subsidiary Guarantees") on a secured basis by all
of the Company's subsidiaries (the "Subsidiary Guarantors"). The Subsidiary
Guarantees provide that each Subsidiary Guarantor will fully and unconditionally
guarantee the Company's obligations under the Credit Facility on a joint and
several basis. Each Subsidiary Guarantor is wholly-owned by the Company. Under
the Credit Facility, the Company's subsidiaries are subject to the same
covenants and restrictions that apply to the Company (except that the Subsidiary
Guarantors are permitted to make dividend payments and distributions, including
cash dividend payments, to the Company or another Subsidiary Guarantor) and all
of the subsidiaries' personal property is pledged as collateral to secure the
Credit Facility.
Prior to the credit agreement outlined above, the Company's credit facility
consisted of a $60.0 million secured revolving line of credit which was to
expire in March 2001. There were no borrowings against this facility at December
31, 1996.
The Company's cash flow used in investing activities for the years 1995,
1996 and 1997 was $14.7 million, $36.6 million and $403.5 million, respectively.
Acquisitions of businesses and product lines totalled $9.5 million in 1995,
$31.7 million in 1996 and $395.3 million in 1997, with the balance of investing
activities in each year attributed to purchases of property, plant and
equipment.
The Company believes that its sources of liquidity set forth above will be
sufficient to fund its working capital requirements, capital expenditures and
required debt service for the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
22
<PAGE> 23
Item 8. Financial Statements and Supplementary Data
The Company's 1997 Financial Statements, together with the report
thereon of Price Waterhouse LLP dated February 10, 1998, are included elsewhere
herein. The Financial Statements of the Linvatec Business Unit, together with
the report thereon of Price Waterhouse LLP dated January 23, 1998, are
incorporated by reference herein from the Company's Current Report on Form 8-K/A
filed on February 17, 1998. See Item 14 for a list of Financial Statements and
Financial Statement Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
The Company and Price Waterhouse LLP have had no disagreements
which would be required to be reported under this Item 9.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Executive Officers
of the Company is incorporated herein by reference to the sections captioned
"Proposal One: Election of Directors" and "Directors and Executive Officers" in
CONMED Corporation's definitive Proxy Statement to be mailed on or about April
3, 1998 for the annual meeting of shareholders to be held on May 19, 1998.
Item 11. Executive Compensation
Information with respect to Executive Compensation is
incorporated herein by reference to the sections captioned "Compensation of
Executive Officers", "Stock Option Plans", and "Pension Plans" in CONMED
Corporation's definitive Proxy Statement to be mailed on or about April 3,
1998 for the annual meeting of shareholders to be held on May 19, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to Security Ownership of Certain
Beneficial Owners and Management is incorporated herein by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 3, 1998 for the annual meeting of shareholders to be held on
May 19, 1998.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions is incorporated herein by reference to the section captioned
"Certain Relationships and Related Transactions" in CONMED Corporation's
definitive Proxy Statement to be mailed on or about April 3, 1998 for the
annual meeting of shareholders to be held on May 19, 1998.
23
<PAGE> 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements:
(a)(1) List of Financial Statements
CONMED Corporation
Report of Independent Accountants
Consolidated Balance Sheets at December 1996 and 1997
Consolidated Statements of Income for the Years Ended
December 1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity for the
Years Ended December 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 1995, 1996 and 1997
Notes to Consolidated Financial Statements
Linvatec Business Unit (a division of Zimmer, Inc., a wholly
owned subsidiary of Bristol-Myers Squibb Company)
Report of Independent Accountants*
Statement of Net Assets Acquired and Liabilities Assumed as
of December 31, 1997 and 1996*
Statement of Net Sales and Direct Operating Expenses for the
Years Ended December 31, 1995, 1996 and 1997*
Notes to Statements of Net Assets Acquired and Liabilities
Assumed and of Net Sales and Direct Operating Expenses*
(2) List of Financial Statement Schedules
CONMED Corporation
Valuation and Qualifying Accounts (Schedule VIII)
Pro Forma Financial Statements giving effect to the
acquisition of Linvatec Corporation.*
All other schedules have been omitted because they are not
applicable, or the required information is shown in the
financial statements or notes thereto.
(3) List of Exhibits
The exhibits listed on the accompanying Exhibit Index on
page 43 below are filed as part of this Form 10-K.
- -----------
* Incorporated by reference from Exhibit 99.1 of the Company's Current Report on
Form 8-K/A filed on February 17, 1998.
(b) Reports on Form 8-K
(1) On January 8, 1998, the Company filed a report on Form 8-K
regarding the acquisition from Bristol-Myers Squibb of
Linvatec Corporation on December 31, 1997.
(2) On February 17, 1998, the Company filed Form 8-K/A which
amended the report on Form 8-K filed on January 8, 1998,
which included the financial statements of the Linvatec
Business Unit and the pro forma financial statements with
respect to the acquisition of Linvatec Corporation.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the date
indicated below.
CONMED CORPORATION
February 19, 1998
By: /s/ Eugene R. Corasanti
__________________________
Eugene R. Corasanti
(Chairman of the Board,
Chief Executive Officer
and President)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrants and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Eugene R. Corasanti Chairman of the Board
- ----------------------- Chief Executive Officer
Eugene R. Corasanti President (Principal
Executive Officer) and
Director February 19, 1998
/s/ Robert D. Shallish, Jr. Vice President-Finance
- ----------------------- and Chief Financial Officer
Robert D. Shallish, Jr. (Principal Financial Officer) February 19, 1998
/s/ Joseph J. Corasanti Vice President-Legal Affairs,
- ----------------------- General Counsel and Director February 19, 1998
Joseph J. Corasanti
/s/ Luke A. Pomilio Controller
- ----------------------- (Principal Accounting Officer) February 19, 1998
Luke A. Pomilio
/s/ Harry Cone Director February 19, 1998
- -----------------------
Harry Cone
/s/ Bruce F. Daniels Director February 19, 1998
- -----------------------
Bruce F. Daniels
/s/ Robert E. Remmell Director February 19, 1998
- -----------------------
Robert E. Remmell
/s/ William D. Matthews Director February 19, 1998
- -----------------------
William D. Matthews
</TABLE>
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of CONMED Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 24 of the Annual Report on
Form 10-K present fairly, in all material respects, the financial position of
CONMED Corporation and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Syracuse, New York
February 10, 1998
F-1
<PAGE> 27
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 1996 AND 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 20,173 $ 13,452
Accounts receivable, less allowance for doubtful accounts of $500 in
1996 and $2,708 in 1997........................................... 26,336 47,188
Income taxes receivable (Note 7)..................................... 766 245
Inventories (Notes 1 and 3).......................................... 23,187 57,915
Deferred income taxes (Note 7)....................................... 626 1,898
Prepaid expenses and other current assets............................ 740 1,186
-------- --------
Total current assets......................................... 71,828 121,884
-------- --------
Property, plant and equipment, net (Notes 1 and 4)..................... 26,458 59,395
Deferred income taxes (Note 7)......................................... 1,246 10,783
Goodwill, net (Notes 1 and 2).......................................... 64,283 153,360
Patents, trademarks and other assets (Note 2).......................... 6,268 216,215
-------- --------
Total assets................................................. $170,083 $561,637
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)........................... $ -- $ 11,000
Accounts payable..................................................... 2,433 9,556
Accrued payroll and withholdings..................................... 2,037 7,014
Other current liabilities............................................ 1,284 3,037
-------- --------
Total current liabilities.................................... 5,754 30,607
Long-term debt (Note 5)................................................ -- 354,000
Deferred compensation.................................................. 1,033 1,235
Long-term leases (Note 6).............................................. 2,924 2,651
Other long-term liabilities (Note 6)................................... 1,737 10,408
-------- --------
Total liabilities............................................ 11,448 398,901
-------- --------
Commitments (Notes 4, 6, 8, 10 and 11)
Shareholders' equity (Notes 1 and 8):
Preferred stock, par value $.01 per share; authorized 500,000 shares,
none outstanding..................................................
Common stock, par value $.01 per share; 40,000,000 authorized;
14,988,783 and 15,061,538, issued and outstanding in 1996 and
1997, respectively................................................ 150 151
Paid-in capital...................................................... 111,867 123,451
Retained earnings.................................................... 46,618 39,553
Less 25,000 shares of common stock in treasury, at cost, in 1997..... -- (419)
-------- --------
Total shareholders' equity........................................ 158,635 162,736
-------- --------
Total liabilities and shareholders' equity................... $170,083 $561,637
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 28
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 1995, 1996 AND 1997
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Net sales (Note 9).......................................... $99,558 $125,630 $138,270
------- -------- --------
Cost of sales............................................... 52,402 65,393 74,220
Selling and administrative expense.......................... 25,570 31,620 35,299
Research and development expense............................ 2,832 2,953 3,037
Unusual items (Note 12)..................................... -- -- 37,242
------- -------- --------
80,804 99,966 149,798
------- -------- --------
Income (loss) from operations............................... 18,754 25,664 (11,528)
Interest income (expense), net (Note 5)..................... (1,991) (217) 823
------- -------- --------
Income (loss) before income taxes........................... 16,763 25,447 (10,705)
Provision (benefit) for income taxes (Notes 1 and 7)........ 5,900 9,161 (3,640)
------- -------- --------
Net income (loss)........................................... $10,863 $ 16,286 $ (7,065)
======= ======== ========
Earnings (loss) per share (Note 1):
Basic..................................................... $ 1.03 $ 1.16 $ (.47)
------- -------- --------
Diluted................................................... $ .94 $ 1.12 $ (.47)
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 29
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- PAID-IN RETAINED TREASURY
NUMBER AMOUNT CAPITAL EARNINGS STOCK
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 1994................... 9,057 $ 90 $ 23,502 $ 19,469
Exercise of stock options................ 353 4 2,096
Tax benefit arising from exercise of
stock options......................... 1,223
Stock issued in connection with Birtcher
acquisition (Note 2).................. 1,590 16 17,739
Net income............................... 10,863
------ ---- -------- ------- -----
Balance at December 1995................... 11,000 110 44,560 30,332
Issuance of shares (Note 8).............. 2,998 30 61,705
Exercise of stock options and a warrant
(Note 8).............................. 991 10 4,208
Tax benefit arising from exercise of
stock options......................... 1,394
Net income............................... 16,286
------ ---- -------- ------- -----
Balance at December 1996................... 14,989 150 111,867 46,618
Exercise of stock options................ 73 1 661
Tax benefit arising from exercise of
stock options......................... 298
Issuance of warrants (Note 2)............ 10,625
Purchase of CONMED common stock (Note
8).................................... $ (419)
Net loss................................. (7,065)
------ ---- -------- ------- -----
Balance at December 1997................... 15,062 $151 $123,451 $ 39,553 $ (419)
====== ==== ======== ======= =====
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 30
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 10,863 $ 16,286 $ (7,065)
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation.......................................... 2,861 3,670 3,880
Amortization.......................................... 2,154 2,740 3,074
Write-off of in-process research and development (Note
2).................................................. -- -- 34,000
Increase (decrease) in cash flows from changes in
assets and liabilities, net of effects from
acquisitions (Note 2):
Accounts receivable................................. (3,943) (1,552) (1,499)
Inventories......................................... (4,311) 360 6,295
Prepaid expenses and other current assets........... (25) (264) (228)
Accounts payable.................................... 452 82 (73)
Income tax receivable/payable....................... (2,659) 195 521
Income tax benefit of stock option exercises........ 1,233 1,394 298
Accrued payroll and withholdings.................... (487) (245) 263
Accrued patent litigation........................... (2,360) -- --
Other current liabilities........................... 526 21 1,627
Deferred income taxes............................... 1,398 3,713 (10,809)
Other assets/liabilities (net)...................... (643) (492) 1,476
-------- -------- --------
(5,804) 9,622 38,825
-------- -------- --------
Net cash provided by operations.................. 5,059 25,908 31,760
-------- -------- --------
Cash flows from investing activities:
Acquisitions (Note 2).................................... (9,500) (31,672) (395,273)
Acquisition of property, plant and equipment............. (5,195) (4,946) (8,178)
-------- -------- --------
Net cash used by investing activities............ (14,695) (36,618) (403,451)
-------- -------- --------
Cash flows from financing activities:
Proceeds of long-term debt............................... 26,590 32,660 365,000
Proceeds from issuance of common stock................... 3,328 65,953 662
Purchase of treasury stock (Note 8)...................... -- -- (419)
Payments on long-term debt and other obligations......... (22,358) (69,269) (273)
-------- -------- --------
Net cash provided by financing activities........ 7,560 29,344 364,970
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (2,076) 18,634 (6,721)
Cash and cash equivalents at beginning of year............. 3,615 1,539 20,173
-------- -------- --------
Cash and cash equivalents at end of year................... $ 1,539 $ 20,173 $ 13,452
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.............................................. $ 1,876 $ 941 $ 0
Income taxes.......................................... 2,466 5,347 6,079
</TABLE>
Supplemental non-cash investing and financing activities:
As more fully described in Note 2, the Company acquired a business in 1995
through the exchange of 1,590,000 shares of the Company's common stock and the
assumption of $3,500,000 of net liabilities, and in a 1997 acquisition issued
warrants for the purchase of 1,000,000 common shares with a value of
$10,625,000.
See notes to consolidated financial statements.
F-5
<PAGE> 31
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and operations
The consolidated financial statements include the accounts of CONMED
Corporation and its subsidiaries (the "Company"). All intercompany transactions
have been eliminated. The Company is a leading developer, manufacturer and
supplier of a range of medical instruments and systems used in surgical and
other medical procedures. The Company's product offerings include
electrosurgical systems, electrocardiogram ("ECG") electrodes and accessories,
surgical suction instruments, intravenous ("IV") therapy accessories and wound
care products. Through its acquisition of Linvatec Corporation (Note 2), the
Company has expanded its arthroscopic surgery product line and broadened its
product offerings to include powered surgical instruments and imaging products
for minimally invasive surgery. The Company's products are used in a variety of
clinical settings, such as operating rooms, surgery centers, physicians' offices
and critical care areas of hospitals.
Statement of cash flows
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Fiscal year end
Prior to 1996, the Company's fiscal year ended on the last Friday in
December. Effective in 1996, the Company changed its fiscal year to end on
December 31.
Inventories
The inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out basis.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from four to forty years. Expenditures for repairs and maintenance
are charged to expense as incurred. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resultant gain or loss is recognized.
Goodwill
Goodwill is amortized over periods ranging from 13 to 40 years. Accumulated
amortization of goodwill amounted to $4,074,000 and $6,468,000 at December 1996
and 1997, respectively.
When events and circumstances so indicate, the Company will assess the
recoverability of its goodwill based upon cash flow forecasts (undiscounted and
without interest). No impairment losses have been recognized in any of the
periods presented.
F-6
<PAGE> 32
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings (loss) per share
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share. This standard
requires presentation of basic earnings per share ("EPS"), computed based on the
weighted average number of common shares outstanding for the period, and diluted
EPS, which gives effect to all dilutive potential shares outstanding (i.e.,
options and warrants) during the period. Previously presented EPS amounts have
been restated to reflect the method of computation required by SFAS No. 128.
Income used in the EPS calculation is net income (loss) for each year. Shares
used in the calculation of basic and diluted EPS were (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Shares used in the calculation of Basic EPS
(weighted average shares outstanding).................. 10,517 14,045 14,997
Effect of dilutive potential securities.................. 1,096 451 --
------ ------ ------
Shares used in the calculation of Diluted EPS............ 11,613 14,496 14,997
====== ====== ======
</TABLE>
The 1997 calculation of diluted EPS excluded the effect of dilutive
potential securities aggregating 230,000 shares because to give effect thereto
would have been antidilutive given the net loss for the year. The shares used in
the calculation of dilutive EPS exclude warrants and options to purchase shares
where the exercise price was greater than the average market price of common
shares for the year. Such shares aggregated 7,500, 218,000 and 1,395,000 at
December 31, 1995, 1996 and 1997, respectively.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 -- BUSINESS ACQUISITIONS
On March 14, 1995, the Company acquired Birtcher Medical Systems, Inc.
("Birtcher") through an exchange of the Company's common stock for all of the
outstanding common and preferred stock of Birtcher. In connection with this
transaction, the Company issued 1,590,000 shares of common stock valued at
$17,750,000 and assumed approximately $3,500,000 of net liabilities. The
acquisition was accounted for using the purchase method. Accordingly, the
results of operations of the acquired business are included in the consolidated
results of the Company from the date of acquisition. Goodwill associated with
the acquisition is being amortized on a straight-line basis over a 40 year
period.
On May 22, 1995, the Company acquired the business and certain assets of
the Master Medical Corporation ("Master Medical") for a cash purchase price of
approximately $9,500,000 and the assumption of $500,000 of net liabilities. The
acquisition was accounted for using the purchase method. Accordingly, the
results of operations of the acquired business are included in the consolidated
results of the Company from the date of acquisition. Goodwill associated with
the acquisition is being amortized on a straight-line basis over a 15-year
period.
On February 23, 1996, the Company acquired the business and certain assets
of New Dimensions in Medicine, Inc. ("NDM") for a cash purchase price of
approximately $31.6 million and the assumption of $3.3 million of net
liabilities. The acquisition is being accounted for using the purchase method.
Accordingly, the results of operations of the acquired business are included in
the consolidated results of the Company from the date of acquisition. Goodwill
F-7
<PAGE> 33
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
associated with the acquisition is being amortized on a straight-line basis over
a 40-year period.
On July 1, 1997, the Company completed the acquisition of a product line
from Davol, Inc., a subsidiary of C.R. Bard, Inc., for a cash purchase price of
$24,000,000. This acquisition is being accounted for using the purchase method.
Accordingly, the results of operations of the acquired product line are included
in the consolidated results of the Company from the date of acquisition.
Goodwill associated with the acquisition is being amortized on a straight-line
basis over a 40 year period.
On December 31, 1997, the Company acquired the business and certain assets
of Linvatec Corporation, a wholly-owned subsidiary of Bristol-Myers Squibb
Company, for a cash purchase price of $370,000,000 (Note 5) and the assumption
of $16,608,000 of liabilities. Bristol-Myers Squibb Company also received a
warrant to purchase 1,000,000 shares of the Company's common stock at $34.23 per
share. This warrant expires December 31, 2007, and was valued at $10,625,000.
This acquisition is being accounted for using the purchase method. The
allocation of purchase price resulted in identifiable intangible assets,
including patents and technology ($9,500,000), trademarks and tradenames
($96,000,000) and customer relationships ($97,000,000), aggregating
$204,000,000, which will be amortized over periods from 5 to 40 years. Goodwill
associated with the Linvatec acquisition approximated $70,000,000 and will be
amortized on a straight-line basis over a 40-year period. Additionally, a
portion of the purchase price was allocated to purchased in-process research and
development ("R&D"). Purchased in-process R&D includes the value of products in
the development stage and not considered to have reached technological
feasibility. In accordance with applicable accounting rules, purchased
in-process R&D is required to be expensed. Accordingly, $34,000,000 of the
acquisition cost was expensed on December 31, 1997. As the acquisition was not
consummated until December 31, 1997, the Company's consolidated results of
operations for 1997 do not include any Linvatec results of operations.
In connection with the Linvatec acquisition, the Company entered into
agreements with Zimmer, Inc., a wholly-owned subsidiary of Bristol-Myers Squibb
Company, pursuant to which Zimmer has agreed to distribute certain of Linvatec's
products for periods ranging from six months to three years.
The allocation of the purchase price for the Davol and Linvatec
acquisitions are based on management's preliminary estimates. It is possible
that re-allocation will be required as additional information becomes available.
Management does not believe that such re-allocations will have a material effect
on the Company's financial position or results of operations.
On an unaudited pro forma basis, assuming the NDM, Davol and Linvatec
acquisitions had occurred as of the beginning of the periods presented, the
consolidated results of the Company would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
---------------------
1996 1997
-------- --------
<S> <C> <C>
Pro forma revenues............................................. $335,805 $341,395
======== ========
Pro forma net income (loss).................................... $ (3,311) $ (8,800)
======== ========
Pro forma earnings (loss) per share:
Basic........................................................ $ (.24) $ (.59)
Diluted...................................................... $ (.24) $ (.59)
======== ========
</TABLE>
The unaudited pro forma financial information presented above gives effect
to purchase accounting adjustments which have resulted or are expected to result
from the acquisitions. This pro forma information is not necessarily indicative
of the results that would actually have been obtained had the companies been
combined for the periods presented.
F-8
<PAGE> 34
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVENTORIES
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials.................................................... $ 7,079 $28,097
Work in process.................................................. 7,541 6,569
Finished goods................................................... 8,567 23,249
------- -------
$23,187 $57,915
======= =======
</TABLE>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
Details of property, plant and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land and improvements.......................................... $ 1,007 $ 2,011
Building and improvements...................................... 14,873 21,952
Machinery and equipment........................................ 27,250 56,386
Construction in progress....................................... 722 314
-------- --------
43,852 80,663
Less: Accumulated depreciation............................ (17,394) (21,268)
-------- --------
$ 26,458 $ 59,395
======== ========
</TABLE>
Rental expense on operating leases was approximately $445,000, $327,000 and
$489,000 for the years ended December 1995, 1996 and 1997, respectively. The
aggregate future minimum lease commitments for operating leases at December 31,
1997 are as follows:
Year ending December 31 (in thousands):
<TABLE>
<S> <C>
1998........................................... $ 2,581
1999........................................... 2,011
2000........................................... 2,030
2001........................................... 2,100
2002........................................... 2,149
Thereafter..................................... 14,267
-------
$25,138
=======
</TABLE>
NOTE 5 -- LONG-TERM DEBT
On December 30, 1997, in connection with the Linvatec acquisition (Note 2),
the Company entered into a credit agreement with several banks providing for a
$450,000,000 credit facility. The $450,000,000 credit facility is comprised of
three sub-facilities: (i) a $210,000,000 five-year term loan with quarterly
principal repayments; (ii) a $140,000,000 seven-year term loan with quarterly
principal repayments; and (iii) a $100,000,000 revolving credit facility. The
revolving credit facility expires on December 30, 2002. During the commitment
period, the Company is obligated to pay a fee of .25% per annum on the unused
portion of the revolving credit facility. At December 31, 1997, $210,000,000 was
borrowed under the five-year term loan facility, $140,000,000 was borrowed under
the seven-year term loan facility, and $15,000,000 was borrowed under the
revolving credit facility.
The interest rates at December 31, 1997 were 7.97%, 8.22% and 7.97% for the
five-year term loan, the seven year term loan and the revolving credit facility,
respectively. The term debt and revolving credit facility are collateralized
F-9
<PAGE> 35
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by all the Company's personal property. The agreement contains covenants
and restrictions which, among other things, requires maintenance of certain
working capital levels and financial ratios, prohibit dividend payments and
restrict the incurrence of indebtedness and certain other activities, including
acquisitions and dispositions. The Company is also required to make mandatory
prepayments from net cash proceeds from any issue of equity and asset sales and
also from any excess cash flow, as defined. Mandatory prepayments will first be
applied to the prepayment of the term loans and then to reduce borrowings under
the revolving credit facility.
A covenant under the credit facility requires the Company to complete by
June 30, 1998, a senior subordinated note offering that will generate at least
$125 million of gross proceeds, which are required to be applied to reduce
amounts under the term loans. Upon completion of this transaction, the interest
rate on amounts borrowed under the credit facility will be reduced by .25%. The
scheduled maturities of long-term debt outstanding at December 31, 1997 are as
follows: 1998 -- $11,000,000; 1999 -- $36,000,000; 2000 -- $51,000,000; 2001 --
$56,000,000; 2002 -- $76,000,000; thereafter -- $135,000,000.
The credit facility (including the term loans and the revolving credit
facility) is guaranteed (the "Subsidiary Guarantees") on a secured basis by all
of the Company's subsidiaries (the "Subsidiary Guarantors"). The Subsidiary
Guarantees provide that each Subsidiary Guarantor will fully and unconditionally
guarantee the Company's obligations under the credit facility on a joint and
several basis. Each Subsidiary Guarantor is wholly-owned by the Company.
Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined such
financial statements and other disclosures are not material to investors. The
combined condensed financial information of the Company's Subsidiary Guarantors
is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
------- --------
<S> <C> <C>
Current assets.................................................. $ 4,733 $ 54,799
Non-current assets.............................................. 43,459 327,751
Current liabilities............................................. 1,407 15,339
Non-current liabilities......................................... 5,907 345,826
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------------------
1997 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues............................................. $46,574 $53,015 $ 51,376
Operating Income (Loss).............................. 14,425 16,731 (16,452)
Net Income (Loss).................................... 9,244 10,708 (10,529)
</TABLE>
Prior to the Company's entry into the credit agreement outlined above, the
Company's credit facility consisted of a $60,000,000 secured revolving line of
credit which was to expire in March 2001. There were no borrowings against this
facility at December 31, 1996.
NOTE 6 -- LEASES AND OTHER LONG-TERM LIABILITIES
Upon the Company's acquisition of Birtcher (Note 2), use of certain
manufacturing and administrative facilities previously occupied by Birtcher was
discontinued. A liability was established in connection with the purchase
accounting for the Birtcher acquisition representing the aggregate future rental
payments net of committed sublease income at the date of acquisition.
F-10
<PAGE> 36
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental commitments, net of sublease income, for such leases
at December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
MINIMUM MINIMUM
RENTAL RENTAL
PAYMENTS INCOME NET
-------- ------- ------
<S> <C> <C> <C>
1998................................................... $1,474 $ 453 $1,021
1999................................................... 1,534 590 944
2000................................................... 1,081 395 686
------ ------ ------
$4,089 $1,438 $2,651
====== ====== ======
</TABLE>
Prior to its acquisition by the Company, Birtcher voluntarily began
participation in an environmental investigation at a former facility located in
El Monte, California. The former facility is located in the El Monte Operable
Unit of the San Gabriel Valley Superfund Site. The Environmental Protection
Agency has not named Birtcher as a Potentially Responsible Party in this matter.
Based on estimates prepared by the Company's environmental consultants, the
Company established a liability for site clean-up in connection with purchase
accounting for Birtcher. This liability is reflected in other long-term
liabilities in the Consolidated Balance Sheets.
NOTE 7 -- FEDERAL AND STATE INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
Current tax expense:
Federal.............................................. $4,493 $6,398 $ 6,677
State................................................ 356 311 492
------ ------ --------
4,849 6,709 7,169
Deferred income tax expense (benefit).................. 1,051 2,452 (10,809)
------ ------ --------
Provision (benefit) for income taxes................. $5,900 $9,161 $ (3,640)
====== ====== ========
</TABLE>
A reconciliation between income taxes computed at the statutory federal
rate and the provision for income taxes follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Tax provision at statutory rate based on income before
taxes................................................. $5,817 $8,906 $(3,747)
Foreign sales corporation............................... (285) (318) (300)
State taxes............................................. 234 202 313
Nondeductible intangible amortization................... 168 280 224
Other, net.............................................. (34) 91 (130)
------ ------ -------
$5,900 $9,161 $(3,640)
====== ====== =======
</TABLE>
F-11
<PAGE> 37
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities at December 1996 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Assets:
Receivables.................................................... $ 177 $ 315
Inventory...................................................... 352 518
Deferred compensation.......................................... 361 432
Employee benefits.............................................. 218 210
Other.......................................................... 439 682
Leases......................................................... 1,183 928
Goodwill and intangible assets................................. 892 12,168
Birtcher net operating losses.................................. 5,529 5,105
Valuation allowance for deferred tax assets.................... (5,417) (5,105)
------- --------
3,734 15,253
------- --------
Liabilities:
Depreciation................................................... 1,261 1,745
Interest charge DISC........................................... 84 57
Other.......................................................... 517 770
------- --------
1,862 2,572
------- --------
$ 1,872 $12,681
======= ========
</TABLE>
Birtcher net operating losses are subject to certain limitations and expire
over the period 2008 to 2010. Management has established a valuation allowance
of $5,105,000 to reflect the uncertainty of realizing the benefit of certain of
these carry forwards. Further utilization of Birtcher operating loss carry
forwards will serve to decrease goodwill associated with the Birtcher
acquisition.
NOTE 8 -- SHAREHOLDERS' EQUITY
The shareholders have authorized 500,000 shares of preferred stock, par
value $.01 per share, which may be issued in one or more series by the Board of
Directors without further action by the shareholders. As of December 31, 1997,
no preferred stock had been issued.
In March 1996, the Company completed a public offering of 2,998,000 shares
of its common stock with net proceeds to the Company amounting to $61,735,000.
Through the Company's 1989 acquisition of Aspen Laboratories, Inc.,
Bristol-Myers Squibb Company received a warrant to purchase 698,470 shares of
the Company's common stock at $4.29 per share. This warrant was exercised in
March 1996 with proceeds to the Company amounting to $3,000,000. In connection
with the Linvatec acquisition (Note 2), the Company issued to Bristol-Myers
Squibb Company a ten-year warrant to purchase 1.0 million shares of the
Company's common stock at a price of $34.23 per share.
During 1997, the Company authorized the repurchase of up to $30,000,000 of
its common stock in the open market or in private transactions. The Company
repurchased 25,000 shares of common stock in 1997 at an aggregate price of
$419,000. The new credit agreement (Note 5) prohibits future repurchases of
common stock during its term.
The Company has reserved shares of common stock for issuance to employees
and directors under three Stock Option Plans (the "Plans"). The option price on
all outstanding options is equal to the estimated fair
F-12
<PAGE> 38
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value of the stock at the date of grant. Stock options are
non-transferable other than on death and are exercisable beginning one year from
date of grant but for not more than ten years from date of grant.
The following is a summary of incentive stock option activity under the
Plans (in thousands except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------ ---------
<S> <C> <C>
Outstanding at December 1994..................................... 1,254 $ 7.16
Granted during 1995............................................ 251 19.79
Forfeited...................................................... (12) 8.67
Exercised...................................................... (253) 5.13
----- ------
Outstanding at December 1995..................................... 1,240 10.12
Granted during 1996............................................ 197 23.07
Forfeited...................................................... (10) 8.10
Exercised...................................................... (292) 4.14
----- ------
Outstanding at December 1996..................................... 1,135 13.92
Granted during 1997............................................ 153 22.99
Forfeited...................................................... (10) 10.09
Exercised...................................................... (73) 9.01
----- ------
Outstanding at December 1997 1,205 $ 15.39
===== ======
Exercisable:
December 1995.................................................. 922 $ 6.42
December 1996.................................................. 559 9.96
December 1997.................................................. 690 11.51
</TABLE>
At December 31, 1997, the number of stock options outstanding with exercise
prices less than $10, between $10 and $20, and greater than $20 were 174,000,
701,000 and 330,000, respectively. The weighted average price per share and
remaining life for options in these categories were $5.64 and 5 years, $12.62
and 7 years, and $26.46 and 9 years, respectively. The number of shares
exercisable at December 31, 1997 and the related weighted average price per
share for options in these categories were 155,000 shares at $5.64, 462,000
shares at $11.15 and 73,000 shares at $26.21, respectively.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 123 defines a fair
value based method of accounting for an employee stock option whereby
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period. A company may elect to adopt
SFAS No. 123 or elect to continue accounting for its stock option or similar
equity awards using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees",
where compensation cost is measured at the date of grant based on the excess of
the market value of the underlying stock over the exercise price. The Company
has elected to continue to account for its stock-based compensation plans under
the provisions of APB 25 and, accordingly, no compensation expense has been
recognized in the accompanying financial statements relative to the Company's
stock option plans.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The weighted average fair value of options granted in 1995, 1996 and
1997 was $10.25, $12.95 and $11.87, respectively. The fair value of these
options was estimated at the date of grant using a Black-Scholes options pricing
model with the following weighted-average assumptions for
F-13
<PAGE> 39
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options granted in 1995, 1996 and 1997, respectively: Risk-free interest rates
of 6.02%, 6.45% and 5.96%; volatility factors of the expected market price of
the Company's common stock of 51.09%, 54.31% and 51.31%; a weighted-average
expected life of the option of five years; and that no dividends would be paid
on common stock.
For purposes of the pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net earnings (loss) -- as reported................... $10,863 $16,286 $ (7,065)
Net earnings (loss) -- pro forma..................... 10,389 15,299 (7,427)
EPS -- as reported:
Basic.............................................. 1.03 1.16 (0.47)
Diluted............................................ 0.94 1.12 (0.47)
EPS -- pro-forma:
Basic.............................................. 0.99 1.09 (0.50)
Diluted............................................ 0.89 1.06 (0.50)
</TABLE>
The pro-forma disclosures include only options granted after January 1,
1995.
NOTE 9 -- MAJOR CUSTOMERS AND EXPORT SALES
The Company uses medical supply distributors to distribute products to
their end users (Note 1). Sales to one distributor totaled 14.5% and 15.3% of
the Company's sales in 1996 and 1997, respectively. Sales to another distributor
totaled 12.3% and 12.2% of the Company's sales in 1995 and 1996, respectively.
Sales outside of the United States accounted for approximately 15.5% of the
Company's total sales in 1995, 14.5% in 1996 and 12.9% in 1997.
NOTE 10 -- PENSION PLANS
The Company maintains defined benefit plans covering substantially all
employees. The Company makes annual contributions to the plans equal to the
maximum deduction allowed for federal income tax purposes.
Net pension cost for 1995, 1996 and 1997 included the following components
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Service cost -- benefits earned during the period......... $ 758 $ 766 $ 925
Interest cost on projected benefit obligation............. 353 402 436
Actual gain on plan assets................................ (959) (442) (655)
Net amortization and deferral............................. 685 138 304
----- ----- ------
Net pension cost........................................ $ 837 $ 864 $1,010
===== ===== ======
</TABLE>
F-14
<PAGE> 40
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation
Vested benefits.................................................. $4,057 $5,083
Non-vested benefits.............................................. 241 274
------ ------
Accumulated benefits obligations................................. 4,298 5,357
Additional amounts related to projected pay increases............ 1,814 2,136
------ ------
Projected benefit obligations for service rendered to date......... 6,112 7,493
Plan assets at fair value, consisting of debt and equity
securities....................................................... 4,405 5,962
------ ------
Plan benefit obligations in excess of plan assets.................. 1,707 1,531
Unrecognized net obligation at December 1986 being recognized over
25 years......................................................... (76) (72)
Unrecognized prior service cost.................................... (195) (184)
Unrecognized net loss from past experience different from that
assumed.......................................................... (827) (806)
------ ------
Accrued pension cost recognized in the balance sheet............. $ 609 $ 469
====== ======
</TABLE>
For 1995, 1996 and 1997, actuarial calculation purposes, the weighted
average discount rate was 7.0%, the expected long term rate of return was 8.0%
and the rate of increase in future compensation levels was 4.0%.
NOTE 11 -- LEGAL MATTERS
From time to time, the Company has been named as a defendant in certain
lawsuits alleging product liability or other claims incurred in the ordinary
course of business. These claims are generally covered by various insurance
policies, subject to deductible amounts and maximum policy limits. Ultimate
liability with respect to these contingencies, if any, is not considered to be
material to the consolidated financial statements of the Company.
NOTE 12 -- UNUSUAL ITEMS
The unusual items for the year ended December 31, 1997 consist of the
following (in thousands):
<TABLE>
<S> <C>
Write-off of purchased in-process R&D (Note 2)............................. $34,000
Facility consolidations.................................................... 2,328
Write-off of deferred financing costs (Notes 2 and 5)...................... 914
-------
$37,242
=======
</TABLE>
During the first quarter of 1997, the company recorded a charge of
$2,328,000 related to the closure of the Company's Dayton, Ohio manufacturing
facility. Operations of the Dayton facility, which were acquired in connection
with the 1996 acquisition of NDM (Note 2), were transferred to the Company's
Utica and Rome, New York facilities. The components of the charge consisted
primarily of costs associated with employee severance and termination, and the
impairment of the carrying value of fixed assets.
F-15
<PAGE> 41
CONMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1996 and 1997 are as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
------- ------- --------- --------
<S> <C> <C> <C> <C>
1996
Net sales................................. $29,200 $31,790 $31,432 $ 33,208
Gross profit.............................. 14,033 15,285 14,963 15,956
Net income................................ 3,272 4,224 4,033 4,757
Earnings per share:
Basic................................... 0.29 0.28 0.27 0.32
Diluted................................. 0.26 0.28 0.27 0.31
</TABLE>
<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER
------- ------- --------- --------
<S> <C> <C> <C> <C>
1997
Net sales................................. $31,472 $30,707 $38,581 $ 37,510
Gross profit.............................. 14,997 14,448 16,980 17,625
Unusual item.............................. 2,328 -- -- 34,914
Net income (loss)......................... 2,460 3,473 4,518 (17,516)
Earnings (loss) per share:
Basic................................... 0.16 0.23 0.30 (1.17)
Diluted................................. 0.16 0.23 0.30 (1.17)
</TABLE>
F-16
<PAGE> 42
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
-----------------------------
ADDITIONS
COLUMN B -----------------------------
------------ (1) COLUMN E
COLUMN A BALANCE AT CHARGED TO (2) COLUMN D --------------
- ----------------------------- BEGINNING OF COSTS AND CHARGED TO ---------- BALANCE AT END
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------- ------------ ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for bad debts.... $ 500 $887 $1,808 $ (487) $2,708
Inventory reserves......... $ 462 $277 $6,672 $7,411
Deferred tax asset
valuation allowance..... $5,417 $ (312) $5,105
1996
Allowance for bad debts.... $ 400 $337 $ (237) $ 500
Inventory reserves......... $ 504 $267 $ (309) $ 462
Deferred tax asset
valuation allowance..... $5,417 $5,417
1995
Allowance for bad debts.... $ 343 $ 85 $ (28) $ 400
Inventory reserves......... $ 703 $245 $ (444) $ 504
Deferred tax asset
valuation allowance..... $5,417 $5,417
</TABLE>
F-17
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Instrument Page Number
- ----------- ------------------------- -----------
<S> <C> <C>
2.1 - Plan and Agreement of Merger dated as of December 5,
1994 among the Company, CONMED Acquisition Corporation
and Birtcher Medical Systems, Inc. -- incorporated herein
by reference to appendix A of the Company's
Registration Statement on S-4 (File No. 33-87746).
2.2 - Asset Purchase Agreement by and between New Dimensions
In Medicine, Inc. and CONMED Corporation dated as of
the 18th day of October 1995 -- incorporated herein by
reference to New Dimensions In Medicine, Inc's.
(Commission File No. 1-09156) Report on Form 8-K dated
October 18, 1995.
2.3 - Purchase Agreement, dated as of May 28, 1997, by and between
Davol, Inc. and CONMED Corporation -- incorporated by reference
to Exhibit 2 in the Company's Current Report on Form 8-K,
filed on July 11, 1997.
2.4 - Stock and Asset Purchase Agreement dated as of
November 26, 1997, between Bristol-Myers Squibb
company and CONMED Corporation, as amended by an
amendment dated as of December 31, 1997 -
incorporated herein by reference to Exhibit 2.1(a) in
the Company's Current Report on Form 8-K, filed on
January 8, 1998.
2.5 - Amendment dated as of December 31, 1997, between
Bristol-Myers Squibb Company and CONMED Corporation,
to the Stock and Asset Purchase Agreement, dated as
of November 26, 1997 between Bristol-Myers Squibb
company and CONMED - incorporated herein by reference
to Exhibit 2.1(b) in the Company's Current Report on
Form 8-K, filed on January 8, 1998.
3.1 - Amended and Restated By-Laws, as adopted by the Board of
Directors on December 26, 1990 - incorporated herein by
reference to the exhibit in the Company's Current Report on
Form 8-K, dated March 7, 1991 (File No. 0-16093).
3.2 - 1992 Amendment to Certificate of Incorporation and Restated
Certificate of Incorporation of CONMED Corporation -
incorporated herein by reference to the exhibit in the
Company's Annual Report on Form 10-K for the year ended
December 25, 1992.
3.3 - 1996 Amendment to Certificate of Incorporation and Restated
Certificate of Incorporation of CONMED Corporation -
incorporated herein by reference to the exhibit in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
4.1 - See Exhibit 3.1.
4.2 - See Exhibit 3.2.
4.3 - Warrant, dated as of December 31, 1997, issued to Bristol-Myers
Squibb Company - incorporated herein by reference to Exhibit
4.1 in the Company's Current Report on Form 8-K, filed on
January 8, 1998.
4.4 - Credit Agreement, dated as of December 29, 1997, among CONMED
Corporation, the several banks and other financial institutions
of entities from time to time parties to the Agreement, Chase
Securities Inc., Salomon Brothers Holding Company, Inc, and The
Chase Manhattan Bank - incorporated herein by reference to
Exhibit 10.1 in the Company's Current Report on Form 8-K, filed
on January 8, 1998.
4.5 - Guarantee and Collateral Agreement, dated as of
December 31, 1997, made by CONMED Corporation and
certain of its subsidiaries in favor of The Chase
Manhattan Bank - incorporated herein by reference to
Exhibit 10.2 in the Company's Current Report on Form
8-K filed on January 8, 1998.
10.1 - Employment Agreement between the Company and Eugene R.
Corasanti, dated December 16, 1996 - incorporated herein by
reference to the exhibit in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
10.2 - Amended and Restated Employee Stock Option Plan (including form
of Stock Option Agreement) -- incorporated herein by reference
to the exhibit in the Company's Annual Report on Form 10-K for
the year ended December 25, 1992 - incorporated herein by
reference to the exhibit in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
</TABLE>
<PAGE> 44
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description of Instrument Page Number
- ----------- ------------------------- -----------
<S> <C> <C>
10.3 (a) Eugene R. Corasanti disability income plans with
Northwestern Mutual Life Insurance Company, dated
January 14, 1980 and March 7, 1981 -- policy
specification sheets -- incorporated herein by
reference to Exhibit 10.0(a) of the Company's
Registration Statement on Form S-2 (File No. 33-40455).
(b) William W. Abraham disability income plan with
Northwestern Mutual Life Insurance Company, dated
March 24, 1981 -- policy specification sheet --
incorporated herein by reference to Exhibit 10.0(b)
of the Company's Registration Statement on Form S-2
(File No. 33-40455).
(c) Eugene R. Corasanti life insurance plan with
Northwestern Mutual Life Insurance Company, dated
October 6, 1979 -- policy specification sheet --
incorporated herein by reference to Exhibit 10.9(c)
of the Company's Registration Statement on Form S-2
(File No. 33-40455).
(d) Eugene R. Corasanti life insurance plans with
Northwestern Mutual Life Insurance Company dated
August 25, 1991 -- Statements of Policy Cost and
Benefit Information, Benefits and Premiums,
Assignment of Life Insurance Policy as Collateral --
incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended
December 27, 1991.
10.4 - 1992 Stock Option Plan (including form of Stock Option
Agreement). -- incorporated herein by reference to the
exhibit in the Company's Annual Report on Form 10-K for
the year ended December 25, 1992.
10.5 - Stock Option Plan for Non-Employee Directors of CONMED
Corporation - incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December
31, 1996.
10.6 - Amendment to 1992 Stock Option Plan - incorporated
by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
10.7 - See 4.4.
10.8 - See 4.5.
10.9 - Transition and Distribution Services Agreement, dated
December 31, 1997, among Zimmer, Inc., Linvatec
Corporation and CONMED Corporation.
10.10 - Distribution Agreement, dated December 31, 1997,
among Zimmer, Inc., Linvatec Corporation and
CONMED Corporation.
11 - Statement re: Computation of Per Share Earnings.
12 - Statement re: Computation of Ratios of Earnings to Fixed
Charges.
21 - Subsidiaries of the Registrant.
23 - Consent, dated February 23, 1998, of Price Waterhouse
LLP, independent auditors for CONMED Corporation.
27 - Financial Data Schedule
99.1 - The Registrant's Current Report on Form 8-K/A filed on
February 17, 1998 (incorporated herein by reference
thereto.)
</TABLE>
<PAGE> 1
EXHIBIT 10.9
- ------------
================================================================================
TRANSITION AND DISTRIBUTION SERVICES AGREEMENT
Dated as of December 31, 1997
Among
ZIMMER, INC.,
LINVATEC CORPORATION
AND
CONMED CORPORATION
================================================================================
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
Definitions
SECTION 1.1. Definitions ................................................ 1
SECTION 1.2. Interpretation and Schedules ............................... 3
ARTICLE II
Appointment as Exclusive Distributor
SECTION 2.1. Appointment of Zimmer as Exclusive Distributor ............. 4
SECTION 2.2. Transfer Price ............................................. 4
SECTION 2.3. Repurchase of Inventory .................................... 4
SECTION 2.4. Handling of Inventory ...................................... 5
SECTION 2.5. U.S. Arthroscopy ........................................... 5
ARTICLE III
Other Services from Zimmer
SECTION 3.1. Marketing .................................................. 5
SECTION 3.2. Supply of Products ......................................... 5
SECTION 3.3. Product Pricing ............................................ 5
SECTION 3.4. Regulatory ................................................. 5
SECTION 3.5. Purchase of Demonstration Equipment ........................ 6
SECTION 3.7. Product Literature; Exhibits, Trade Shows, Etc.; Videotapes 6
ARTICLE IV
U.S. Transition Services
SECTION 4.1 Convention; Commissions and Administrative Fees of Group
Purchasing Contracts ....................................... 7
<PAGE> 3
2
ARTICLE V
Other Linvatec Obligations
SECTION 5.1. Warranties and Return ...................................... 8
SECTION 5.2. Information; Technical and Regulatory Support .............. 8
SECTION 5.3. Insurance .................................................. 8
ARTICLE VI
Miscellaneous
SECTION 6.1. Intellectual Property ...................................... 9
SECTION 6.2. Further Assurances ......................................... 9
SECTION 6.3. Indemnity .................................................. 9
SECTION 6.4. Confidentiality ............................................ 10
SECTION 6.5. Exclusive Appointment ...................................... 11
SECTION 6.6. Amendments ................................................. 11
SECTION 6.7. Notices .................................................... 11
SECTION 6.8. Counterparts ............................................... 13
SECTION 6.9. Entire Agreement ........................................... 13
SECTION 6.10. Severability ............................................... 13
SECTION 6.11. Governing Law .............................................. 13
SECTION 6.12. Assignment ................................................. 13
SECTION 6.13. Term and Termination ....................................... 13
SECTION 6.14. Performance of Zimmer Obligations .......................... 15
SECTION 6.15. Force Majeure .............................................. 15
SECTION 6.16. Limitation of Liability .................................... 15
SECTION 6.17. Restrictions on Solicitation and Hiring .................... 16
SECTION 6.18. Arbitration ................................................ 17
<PAGE> 4
TRANSITION AND DISTRIBUTION SERVICES AGREEMENT, dated as
of December 31, 1997 (the "Agreement"), among LINVATEC
CORPORATION, a Florida corporation ("Linvatec"), CONMED
CORPORATION, a New York corporation ("Buyer"), and ZIMMER,
INC., a Delaware corporation ("Zimmer").
WHEREAS the Bristol-Myers Squibb Company ("Seller") and Buyer have
entered into a Stock and Asset Purchase Agreement dated as of November 26, 1997,
as amended by the Amendment dated as of December 31, 1997 (the "Stock Purchase
Agreement");
WHEREAS Zimmer and Linvatec are entering into a Distribution
Agreement dated the date hereof (the "Distribution Agreement") with respect to
the distribution of Linvatec's Hall(R) Surgical branded large bone products,
small bone/specialty products and all products manufactured by or for Linvatec
in certain markets;
WHEREAS it is a condition to the consummation of the transactions
contemplated by the Stock Purchase Agreement that the parties execute and
deliver this Agreement;
WHEREAS Linvatec wishes during the term of this Agreement (a) to
appoint Zimmer as the exclusive distributor of Products in certain markets
during the applicable Term and (b) to have certain other services performed by
Zimmer for Linvatec in connection with such distribution; and
WHEREAS Zimmer wishes to accept such appointment and perform such
services through its worldwide distribution network.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
Definitions
<PAGE> 5
2
SECTION 1.1. Definitions. (a) Capitalized terms used but not defined
herein shall have meanings set forth in the Stock Purchase Agreement.
(b) For purposes of this Agreement, the following terms shall have
the following meanings:
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; and for the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Arthroscopy Products" means all products manufactured by or for
Linvatec at any time during the applicable Term other than the Hall(R) Surgical
branded products manufactured by or for Linvatec at any time during the
applicable Term.
"Arthroscopy U.S. Distributors" means the distributors of
Arthroscopy Products in the United States listed on Schedule 1(a).
"Direct Markets" means the countries set forth on Schedule 1(b).
"Distributors" means the Persons with which Zimmer has entered into
a distribution agreement with respect to the Products in the Markets.
"Global Marketing Services" means, with respect to any Product in
any Market, market research, competitive analysis, product training, new product
development and development of opinion leaders.
"Large Bone Products" means all Hall(R) Surgical branded large bone
product lines, including revision instrumentation, adaptors and couplers and
vacuum hoses manufactured by or for Linvatec at any time during the applicable
Term but not including any large bone product being manufactured by Linvatec on
behalf of Zimmer under the Manufacturing Agreement dated the date hereof between
Linvatec and Zimmer (e.g., acetabular reamers) and any other large bone product
that may be manufactured by Linvatec on behalf of Zimmer on an original
equipment manufacturer (OEM) basis from time to time.
"Linvatec Products" means all products manufactured by or for
Linvatec at any time during the applicable Term.
<PAGE> 6
3
"Local Marketing Services" means, with respect to any Market,
customer service, sales support, support of individual local surgeons,
participation or sponsorship of medical society or other medical organization
meetings and participation in medical symposia, workshops, exhibits and trade
shows, in each case consistent with Zimmer's past practice in such Market. Such
services include providing the administrative and logistical support necessary
for sponsorship or participation in such meetings, exhibits and such similar
events.
"Markets" means the United States and the countries in the Direct
Markets and Transition Markets.
"Person" means any individual, firm, corporation, partnership,
limited liability company, trust, joint venture, governmental entity or other
entity.
"Products" means (i) with respect to the Direct Markets and United
States, the Small Bone/Specialty Products and Arthroscopy Products and (ii) with
respect to the Transition Markets, the Linvatec Products.
"Product Category" means (i) with respect to the Direct Markets and
the United States, the Small Bone/Specialty Products category and (ii) with
respect to the Transition Markets, the Large Bone Products, the Small
Bone/Specialty Products and the Arthroscopy Products categories.
"Small Bone/Specialty Products" means all Hall(R) Surgical branded
small bone and specialty product lines manufactured by or for Linvatec at any
time during the applicable Term.
"Term" means (i) with respect to Small Bone/Specialty Products in
the United States, the period from and including the date hereof to and
including the date twelve months from the date hereof, unless terminated prior
to such time pursuant to the terms set forth in Section 6.13; (ii) with respect
to (A) Small Bone/Specialty Products and Arthroscopy Products in the Direct
Markets and (B) Large Bone Products, Small Bone/Specialty Products and
Arthroscopy Products in the Transition Markets, the period from and including
the date hereof to and including the date six months from the date hereof,
unless terminated prior to such time pursuant to the terms set forth in Section
6.13; and (iii) with respect to Arthroscopy Products in the U.S., the period
from and including the date hereof to and including the date twelve months from
the date hereof, unless terminated prior to such time pursuant to the terms set
forth in Section 6.13.
"Transition Markets" means the countries set forth on Schedule 1(c).
<PAGE> 7
4
(b) The following terms have the meanings set forth in the Sections
listed below:
Term Section
---- -------
Actual Non-U.S. Inventory Amount 2.2(b)
Agreement Preamble
Buyer Preamble
Closing Date Non-U.S. Inventory Amount 2.2(b)
Commissions 4.1(b)
Confidential Linvatec Information 6.4(b)
Confidential Zimmer Information 6.4(a)
Distribution Agreement Preamble
Force Majeure Event 6.15
indemnified party 6.3(b)
Linvatec Preamble
Product Literature 3.7(a)
Seller Preamble
Stock Purchase Agreement Preamble
Third Party Claim 6.3(b)
Transfer Prices 2.2(a)
Transition Distributor Agreement 6.13(i)
Zimmer Preamble
SECTION 1.2. Interpretation and Schedules. (a) The headings
contained in this Agreement, in any Schedule hereto and in the table of contents
to this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. All references to the term
"including" shall be deemed to be followed by "without limitation".
(b) All Schedules annexed hereto or referred to herein are hereby
incorporated in and made a part of this Agreement as if set forth in full
herein. Any capitalized term used in any Schedule but not otherwise defined
therein, shall have the meaning as defined in this Agreement.
<PAGE> 8
5
ARTICLE II
Appointment as Exclusive Distributor
SECTION 2.1. Appointment of Zimmer as Exclusive Distributor. (a)
During the applicable Term, Linvatec hereby appoints Zimmer, and Zimmer hereby
accepts the appointment, as Linvatec's exclusive distributor of the Linvatec
Products in the Transition Markets of the Small Bone/Specialty Products and
Arthroscopy Products in the Direct Markets, of the Small Bone/Specialty Products
in the U.S. and of the Arthroscopy Products with respect to the accounts listed
on Schedule 2.1(a) and any new accounts developed by the Arthroscopy U.S.
Distributors in geographic proximity to their current accounts (to the extent
such new accounts are not already covered by the direct sales force of
Linvatec).
(b) It is acknowledged and agreed that Zimmer shall perform its
obligations as exclusive distributor of the Products in the relevant Markets, in
its sole discretion through a direct sales force, Distributors or a combination
of a direct sales force and Distributors.
SECTION 2.2. Transfer Price. (a) During the applicable Term,
Linvatec agrees to sell the Products, including any new Products, to Zimmer for
sale in the Markets and Zimmer agrees to buy the Products, including any new
Products, from Linvatec, for Zimmer's own account, at the transfer prices (the
"Transfer Prices") set forth on Schedule 2.2(a).
(b) Zimmer shall pay Linvatec the full amount of the transfer prices
applicable to each shipment of Products ordered by Zimmer (other than Non-U.S.
Inventory) within 45 calendar days after receipt of the invoice. On the Closing
Date, Zimmer shall pay to Linvatec $15,795,000 (the "Closing Date Non-U.S.
Inventory Amount"), which represents the estimated full amount of the transfer
prices for the Non-U.S. Inventory being distributed under this Agreement and
under the Distribution Agreement. If it is determined under Section 2.3(b) of
the Stock and Asset Purchase Agreement that the Estimated Non-U.S. Inventory
Purchase Price exceeds or is less than the Non-U.S. Inventory Purchase Price,
then the difference between the Closing Date Non-U.S. Inventory Amount and the
amount of the transfer prices due under this Agreement and the Distribution
Agreement with respect to Non-U.S. Inventory as calculated based on the Non-U.S.
Inventory Purchase Price that is binding on Seller and Buyer under Section 2.3
of the Stock Purchase Agreement plus the applicable percentage mark-up for such
Non-U.S. Inventory included in the Transfer Prices under this Agreement and the
Distribution Agreement (such amount, the "Actual Non-U.S. Inventory Amount")
shall be paid to Zimmer by Linvatec (if the Closing Date Non-U.S.
<PAGE> 9
6
Inventory Amount exceeds the Actual Non-U.S. Inventory Amount) or paid to
Linvatec by Zimmer (if the Closing Date Non-U.S. Inventory Amount is less than
the Actual Non-U.S. Inventory Amount), as the case may be . The amount of any
such difference shall be paid by Zimmer or Linvatec, as the case may be, on the
date that the related adjustment is paid under Section 2.3(b) of the Stock and
Asset Purchase Agreement. All payments of transfers prices by Zimmer to Linvatec
shall be in U.S. dollars.
SECTION 2.3. Repurchase of Inventory. Upon expiration or termination
of the Term with respect to any Product Category in any Market, Linvatec shall
repurchase Zimmer's inventory of Products in such Product Category in such
Market within 60 calendar days of such expiration or termination at the transfer
prices applicable to such inventory, net of reserves for obsolete and
slow-moving goods (as determined in accordance with Zimmer's accounting
policies), plus freight charges and expenses (and with respect to Markets other
than the United States, duty and customs charges and expenses). Delivery of such
inventory returned to Linvatec shall be F.O.B. the storage location of such
inventory. In the event Linvatec defaults in its obligations to repurchase
Zimmer's inventory of Products, without prejudice to any of Zimmer's other
remedies, Zimmer shall be entitled to sell such inventory in any manner it deems
appropriate. In any case, after expiration or termination of the applicable
Term, Zimmer shall be entitled to sell any Products for which it has accepted
firm orders, consistent with past practice.
SECTION 2.4. Handling of Inventory. Zimmer shall not, and shall
cause the Distributors not to, alter or tamper with any labels, descriptive
marks, packing, promotional materials, bottles or containers in which or with
which the Products are supplied, or make any modification of the Products except
as required for compliance with local law or otherwise consistent with past
practice. Zimmer shall permit Linvatec at reasonable times to enter any one of
the warehouses at which the Products are stored for purposes of inspection,
sampling or testing of the Products.
SECTION 2.5. U.S. Arthroscopy. During the applicable Term, Zimmer
and Linvatec shall cooperate to continue the distribution arrangement as it
exists as of the date hereof with respect to distribution of the Arthroscopy
Products by certain Distributors in the United States or as it will exist upon
execution of a letter agreement substantially in the form attached hereto as
Exhibit 2.5 with each such Distributor; provided that Linvatec shall terminate
any direct distribution contracts between Linvatec and any of Zimmer's
Distributors in the United States other than such letter agreements.
<PAGE> 10
7
ARTICLE III
Other Services from Zimmer
SECTION 3.1. Marketing. (a) It is acknowledged and agreed that in
the Markets other than the United States., Linvatec shall provide all Global
Marketing Services, and Zimmer shall provide all Local Marketing Services in
such Markets. Linvatec shall cooperate with Zimmer in connection with the Local
Marketing Services, in each case consistent with past practice. It is
acknowledged and agreed that in the United States, Linvatec shall provide for
(i) all Global Marketing Services and (ii) on a national level, participation or
sponsorship of medical society or other medical organization meetings and
participation in medical symposia, workshops, exhibits and trade shows, in each
case consistent with past practice, and Zimmer shall provide Local Marketing
Services, except the services referred to in Section 3.1(a)(ii), consistent with
past practice. Each party shall bear its own costs and expenses in providing
such services.
(b) Furthermore, Zimmer shall consult with Linvatec periodically as
reasonably requested by Linvatec regarding activities of third-party competition
and such other facts and data relating to the distribution of Products hereunder
as may reasonably be requested by Linvatec, provided that such consultation does
not unreasonably disrupt the normal operations of Zimmer.
SECTION 3.2. Supply of Products. Linvatec agrees to supply Zimmer
and the Distributors, as applicable, Products consistent with past practice.
With respect to Products delivered to the warehouses of Zimmer, Linvatec shall
be responsible for delivery of the Products F.O.B. the source plant of the
Products. Zimmer shall pay all costs and expenses associated with such delivery,
including shipping, freight, insurance, transfer taxes, duty and customs
expenses. Title and risk of loss to the Products shall pass to Zimmer upon
delivery to Zimmer at the source plant of the Products.
SECTION 3.3. Product Pricing. Zimmer shall determine prices for
Products in the Markets in its sole discretion.
SECTION 3.4. Regulatory. Zimmer and Linvatec shall cooperate (i) to
maintain and obtain any necessary registrations of the Products with local
health or other regulatory authorities of the Markets other than the U.S. that
may be required under applicable law in such Markets and (ii) to comply with all
other regulatory requirements in the such Markets. Linvatec shall be responsible
for all Product registration and regulatory compliance in the United States, CE
marking in Europe and local language
<PAGE> 11
8
labeling in all the Markets and such other compliance matters as are consistent
with past practice.
SECTION 3.5. Purchase of Demonstration Equipment. Linvatec shall
sell to Zimmer or the Distributors at standard cost demonstration Products from
time to time during the applicable Term ordered by Zimmer or the Distributors,
consistent with past practice.
SECTION 3.6. Repairs. (a) In the United States, Linvatec shall make
available repair services for Linvatec Products. In Markets other than the
United States, Zimmer will make available repair services to all customers in
such Markets for Products at Zimmer's current service centers or at service
centers that Linvatec may be notified of in writing from time to time, and such
services shall be substantially similar to the repair services provided by
Zimmer immediately prior to the date hereof (e.g., with similar turn around
times and covering the same geographic areas); provided that Linvatec will
continue to make available repair services outside the United States in certain
Markets consistent with past practice and further provided that Linvatec shall
make repairs for Linvatec Products to the extent Linvatec establishes repair
facilities in the Markets other than the United States. Linvatec shall provide
repair services for Linvatec Products to Zimmer at the transfer prices set forth
on Schedule 3.6(a) for repair services in the United States and outside the
United States. During the applicable Term, Linvatec shall sell to Zimmer
replacement parts for Products for use in Zimmer's repair services in Markets
outside the United States at the transfer prices set forth on Schedule 3.6(a)
applicable to such Product in such Market sold to Zimmer by Linvatec. Linvatec
shall be responsible for delivery of such parts F.O.B. the source plant of such
parts. Zimmer shall pay all costs and expenses associated with such delivery,
including shipping, freight, insurance, transfer taxes, duty and customs
expenses. In its sole discretion, Zimmer may change or add a location of a
service center, or consolidate service centers; provided, that after such change
or consolidation, repair turn around times and geographical areas covered by
Zimmer's service centers are substantially the same as exist on the date hereof.
(b) During the applicable Term and for six months thereafter, in the
event Linvatec discontinues the manufacture of any of the Products, Linvatec
shall continue, for a period of time after such discontinuance consistent with
past practice, to make available to Zimmer repair services and replacement parts
for such discontinued Products on the terms set forth in Section 3.6 (a), to the
extent reasonably anticipated by Linvatec to be necessary to service such
discontinued Products previously supplied by Linvatec pursuant to the terms of
this Agreement.
SECTION 3.7. Product Literature; Exhibits, Trade Shows, Etc.;
Videotapes. (a) Product Literature. With respect to the Products, Linvatec shall
from
<PAGE> 12
9
time to time furnish to Zimmer, at Linvatec's expense, in reasonable quantities,
literature, catalogs and technical brochures in English (collectively, "Product
Literature") for the Markets. Zimmer shall arrange reprinting of local language
literature, catalogs and technical brochures, as necessary, as well as provide
local language translation services, as necessary, in each case at its own
expense. Linvatec shall cooperate with Zimmer with respect to such reprinting or
translation efforts. During the Term, Zimmer shall provide Product Literature
distribution services for the Large Bone Products and Small Bone/Specialty Bone
Products. Zimmer shall provide Product Literature distribution services for all
other Linvatec Products consistent with past practice, until such Product
Literature is transferred from its New Jersey location to Linvatec. After such
transfer, Linvatec will be responsible for distribution of such Product
Literature.
(b) Exhibits, Trade Shows, Etc. Linvatec shall cooperate with Zimmer
to provide necessary personnel for the exhibits, trade shows, meetings and other
activities in connection with Zimmer's Local Marketing Services, as well as the
technical information and other services reasonably requested by Zimmer.
(c) Videotapes. Linvatec will provide English language videotapes
with respect to Products or the Linvatec business to Zimmer, consistent with
past practice.
ARTICLE IV
U.S. Transition Services
SECTION 4.1. Convention; Commissions and Administrative Fees of
Group Purchasing Contracts. In the United States, Zimmer shall provide the
following services:
(a) Convention. Zimmer shall provide Linvatec services and
incur out-of-pocket expenses associated therewith in connection with the
American Academy of Orthopedic Surgeons Convention necessary for
Linvatec's participation in such convention, including rental of floor
space, build-out of displays, storage and shipment of such displays and
provision of products and samples. Zimmer shall issue an invoice to
Linvatec for all charges, costs and out-of-pocket expenses applicable to
Linvatec associated with such convention. Within 30 calendar days of
receipt of such invoice, Linvatec shall pay Zimmer the full amount set
forth on such invoice;
(b) Commissions. Linvatec shall reimburse Zimmer in full for
all commissions on sales of Products in the U.S. by the Distributors of
Arthroscopy
<PAGE> 13
10
Products that are paid by Zimmer on behalf of Linvatec to such
Distributors (the "Commissions"). Zimmer shall issue an invoice to
Linvatec for all such Commissions. Within 5 business days of receipt of
such invoice, Linvatec shall pay Zimmer the full amount set forth on such
invoice; and
(c) Administrative Fees of Group Purchasing Contracts.
Linvatec shall reimburse Zimmer in full for the administration fees on
group purchasing contracts paid by Zimmer on behalf of Linvatec. Zimmer
shall issue an invoice to Linvatec for such administrative fees. Within 5
business days of receipt of such invoice, Linvatec shall pay Zimmer the
full amount set forth on such invoice.
ARTICLE V
Other Linvatec Obligations
SECTION 5.1. Warranties and Return. (a) Linvatec shall warrant the
Products in accordance with Linvatec's standard worldwide warranty in effect
from time to time; provided, however, that Linvatec shall not change the terms
of the Product warranties in effect at the Closing Date with respect to Products
sold in any Market if such change would render Zimmer unable to sell Products in
such Market in accordance with applicable law or regulation or commercial
custom. Zimmer will deliver, consistent with past practice, to Linvatec a
statement setting forth the types and quantities of Products sold by it in each
Market showing the serial numbers of the Products, if any, and all other
information required in order to permit Linvatec's warranty to be honored.
(b) Linvatec shall accept all returns of defective Products that are
returned in a reasonable amount of time and credit Zimmer for such returns.
Linvatec shall pay all costs and expenses associated with such return, including
shipping, freight, insurance, transfer taxes, duty and customs expenses.
(c) Zimmer shall not have any reimbursement obligation for Products
(whether sold before, on or after the Closing Date) which are returned pursuant
to a Product warranty or guarantee. If a Product returned pursuant to a Product
warranty or guarantee results in a credit against an accounts receivable
maintained by Zimmer with respect to a Product sold by Zimmer prior to the
Closing Date, Linvatec shall reimburse Zimmer for the price paid by Zimmer to
Linvatec for such Product.
(d) During the applicable Term, in the event Products sold by Zimmer
are returned by a customer directly to Linvatec, Linvatec shall notify Zimmer of
such return within 5 calendar days. After the applicable Term, Zimmer shall
continue to be
<PAGE> 14
11
responsible for all refunds or the costs of any exchange of Products sold by it
prior to the Closing Date that are not covered by a warranty or guarantee of
Linvatec.
SECTION 5.2. Information; Technical and Regulatory Support. Linvatec
shall make available on a timely basis to Zimmer all information that Zimmer
reasonably requests to perform Zimmer's obligations hereunder. Linvatec shall
provide to Zimmer, at Linvatec's expense, such regulatory and technical
assistance as Zimmer may reasonably request for the promotion, sale and
servicing of the Products.
SECTION 5.3. Insurance. Linvatec shall at all times from the date
hereof to the last to end of the Terms maintain, at no cost to Zimmer, annual
product liability insurance covering all Products supplied by Linvatec pursuant
to the terms of this Agreement with aggregate annual coverage of at least
$25,000,000 (which policy shall name Zimmer as an additional insured and shall
cover all claims incurred or arising out of or relating to events that occurred
during the period from the date hereof to the last to end of the Terms).
ARTICLE VI
Miscellaneous
SECTION 6.1. Intellectual Property. During the applicable Term,
Linvatec hereby grants to Zimmer a nonexclusive license to use the Intellectual
Property to the extent necessary to satisfy its obligations under this
Agreement.
SECTION 6.2. Further Assurances. The parties agree to execute and
deliver all such documents and instruments and shall take all such further other
actions as may be reasonably necessary or desirable to consummate the
transactions contemplated hereby.
SECTION 6.3. Indemnity. (a) Product Liability. Linvatec shall
indemnify Zimmer, its Affiliates (including Seller) and each of their respective
officers, directors, employees, stockholders, agents and representatives against
and hold them harmless from any loss, liability, claim, damage or expense
(including reasonable legal fees and expenses) suffered or incurred by any such
indemnified party for any claims arising from or in connection with the design,
manufacture or use of the Products sold by Zimmer during the applicable Term,
including claims for injury or death to any Person or damage to property, except
to the extent that such claims and expenses result from the gross negligence of
Zimmer.
<PAGE> 15
12
(b) Procedures Relating to Indemnification for Third Party Claims.
In order for a party (the "indemnified party") to be entitled to any
indemnification provided for under Section 6.3(a) in respect of, arising out of
or involving a claim or demand made by any Person against the indemnified party
(a "Third Party Claim"), such indemnified party must notify the indemnifying
party in writing, and in reasonable detail, of the Third Party Claim within 30
calendar days after receipt by such indemnified party of written notice of the
Third Party Claim; provided, however, that failure to give such notification
shall not affect the indemnification provided hereunder except to the extent the
indemnifying party shall have been actually prejudiced as a result of such
failure (except that the indemnifying party shall not be liable for any expenses
incurred during the period in which the indemnified party failed to give such
notice). Thereafter, the indemnified party shall deliver to the indemnifying
party, promptly after the indemnified party's receipt thereof, copies of all
notices and documents (including court papers) received by the indemnified party
relating to the Third Party Claim.
If a Third Party Claim is made against an indemnified party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges its obligation to indemnify the indemnified
party therefor, to assume the defense thereof with counsel selected by the
indemnifying party; provided that such counsel is not reasonably objected to by
the indemnified party. Should the indemnifying party so elect to assume the
defense of a Third Party Claim, the indemnifying party shall not be liable to
the indemnified party for legal fees and expenses subsequently incurred by the
indemnified party for separate counsel in connection with the defense thereof.
If the indemnifying party assumes such defense, the indemnified party shall have
the right to participate in the defense thereof and to employ counsel (not
reasonably objected to by the indemnifying party), at its own expense, separate
from the counsel employed by the indemnifying party, it being understood that
the indemnifying party shall control such defense. The indemnifying party shall
be liable for the fees and expenses of counsel employed by the indemnified party
for any period during which the indemnifying party has failed to assume the
defense thereof (other than during the period prior to the time the indemnified
party shall have given notice of the Third Party Claim as provided above).
If the indemnifying party so elects to assume the defense of any
Third Party Claim, all of the indemnified parties shall cooperate with the
indemnifying party in the defense or prosecution thereof, subject to the other
party's confidentiality obligations under this Agreement. Such cooperation shall
include the retention and (upon the indemnifying party's request) the provision
to the indemnifying party of records and information which are reasonably
relevant to such Third Party Claim, and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. Whether or not the indemnifying party
<PAGE> 16
13
shall have assumed the defense of a Third Party Claim, the indemnified party
shall not admit any liability with respect to, or settle, compromise or
discharge, such Third Party Claim without the indemnifying party's prior written
consent (which consent shall not be unreasonably withheld).
SECTION 6.4. Confidentiality. (a) Linvatec and Buyer agree that each
of them shall keep confidential and not disclose to any third party, except as
it is necessary in carrying out the purpose of this Agreement, during the period
from the date hereof and to the last to end of the Terms and for three years
thereafter the terms of this Agreement or any information of a proprietary
nature relating to the business or operations of Zimmer or its Affiliates,
including technology, specifications, product information, data, inventions,
processes, know-how, trade secrets and information disclosed pursuant hereto
(together, "Confidential Zimmer Information") furnished to Buyer or Linvatec by
Zimmer in connection with this Agreement, except Confidential Zimmer Information
that:
(i) at the time of disclosure is in the public domain or publicly
known or available (other than as a result of a disclosure directly or
indirectly by Linvatec or Buyer or any of their Affiliates in violation of
the terms of any confidentiality agreement involving Linvatec or Buyer or
any of their Affiliates on the one hand and Zimmer or any of its
Affiliates on the other hand);
(ii) was available to Linvatec or Buyer on a non-confidential basis
from a third party; provided that the Confidential Zimmer Information was
not obtained by such third party from Linvatec or Buyer or their
Affiliates; or
(iii) Linvatec or Buyer derives independently of such furnishment of
Confidential Zimmer Information.
In the event that Linvatec or Buyer become legally compelled (by
deposition, interrogatory, request for documents, subpoena, civil investigative
demand or similar process or otherwise) to disclose any of the Confidential
Zimmer Information, Linvatec or Buyer shall provide the counsel of Zimmer with
prompt written notice of such requirement so that Zimmer may seek a protective
order or other appropriate remedy and/or waive compliance with the terms of this
agreement. In the event that such protective order or other remedy is not
obtained, or that Zimmer waives compliance with the provisions hereof, Linvatec
or Buyer agrees to furnish only that portion of the Confidential Zimmer
Information which Linvatec or Buyer is advised by opinion of counsel is legally
required and to exercise best efforts to obtain assurance that confidential
treatment will be accorded such Confidential Zimmer Information.
<PAGE> 17
14
(b) Zimmer agrees that it shall keep confidential and not disclose
to any third party, except as it is necessary in carrying out the purpose of
this Agreement, during the period from the date hereof and to the last to end of
the Terms and for three years thereafter the terms of this Agreement or any
information of a proprietary nature relating to Linvatec's business or
operations, including technology, specifications, product information, data,
inventions, processes, know-how, trade secrets and information disclosed
pursuant hereto (together, "Confidential Linvatec Information") furnished to
Zimmer by Linvatec in connection with this Agreement, except Confidential
Linvatec Information that:
(i) at the time of disclosure is in the public domain or publicly
known or available (other than as a result of a disclosure directly or
indirectly by Zimmer or any of its Affiliates in violation of the terms of
any confidentiality agreement involving Linvatec or Buyer or any of their
Affiliates on the one hand and Zimmer or any of its Affiliates on the
other hand);
(ii) was available to Zimmer on a non-confidential basis from a
third party; provided that the Confidential Linvatec Information was not
obtained by such third party from Zimmer or its Affiliates; or
(iii) Zimmer derives independently of such furnishment of
Confidential Linvatec Information.
In the event that Zimmer becomes legally compelled (by deposition,
interrogatory, request for documents, subpoena, civil investigative demand or
similar process or otherwise) to disclose any of the Confidential Linvatec
Information, Zimmer shall provide the counsel of Linvatec with prompt written
notice of such requirement so that Linvatec may seek a protective order or other
appropriate remedy and/or waive compliance with the terms of this agreement. In
the event that such protective order or other remedy is not obtained, or that
Linvatec waives compliance with the provisions hereof, Zimmer agrees to furnish
only that portion of the Confidential Linvatec Information which Zimmer is
advised by opinion of counsel is legally required and to exercise best efforts
to obtain assurance that confidential treatment will be accorded such
Confidential Linvatec Information.
SECTION 6.5. Exclusive Appointment. During the applicable Term in
the relevant Markets, Linvatec shall not appoint any distributor or agent (or
similar entity) other than Zimmer or supply Products to any Person other than
Zimmer or the Distributors whether for use or resale.
<PAGE> 18
15
SECTION 6.6. Amendments. No amendment to this Agreement shall be
effective unless it shall be in writing and signed by the party against whom
enforcement is sought.
SECTION 6.7. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given when delivered personally or sent
by prepaid telex, cable or telecopy, or sent, postage prepaid, by registered,
certified or express mail (return receipt requested) or reputable overnight
courier service and shall be deemed given when so delivered by hand, telexed,
cabled or telecopied, or if mailed, 3 calendar days after mailing (one business
day in the case of express mail or overnight courier service) to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
(i) if to Linvatec,
Linvatec Corporation
11311 Concept Boulevard
Largo, FL 33773
Attention: President
with a copy to:
CONMED Corporation
310 Broad Street
Utica, NY 13501
Attention: General Counsel
(ii) if to Buyer,
CONMED Corporation
310 Broad Street
Utica, NY 13501
Attention: General Counsel
(iii) if to Zimmer,
Zimmer, Inc.
345 East Main Street
<PAGE> 19
16
Warsaw, IN 46581
Attention: General Counsel
with a copy to:
Bristol-Myers Squibb Company
345 Park Avenue
New York, New York 10154
Attention: General Counsel
and a copy to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019-7415
Attention: Susan Webster, Esq.
SECTION 6.8. Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more such counterparts have been signed
by each of the parties and delivered to the other parties. Counterparts may be
delivered by facsimile.
SECTION 6.9. Entire Agreement. This Agreement, together with the
Stock Purchase Agreement, contains the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings. Nothing in this Agreement
shall be deemed to amend, modify or in any way affect the Stock Purchase
Agreement.
SECTION 6.10. Severability. If any provision of this Agreement (or
any portion thereof) or the application of any such provision (or any portion
thereof) to any Person or circumstance shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof (or the remaining portion thereof) or the application of such provision
to any other Persons or circumstances.
SECTION 6.11. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York
applicable to agreements made and to be performed entirely within such state.
<PAGE> 20
17
SECTION 6.12. Assignment. Neither party may assign its rights or
obligations under this Agreement to any party without the prior written consent
of the other party; provided, however, that either party may assign its rights
or obligations under this Agreement to a wholly owned subsidiary or an Affiliate
of such party.
SECTION 6.13. Term and Termination. (a) Linvatec's rights of
termination pursuant to this Section shall be exercisable (i) only with respect
to an entire Product Category and not with respect to each Product and (ii) only
with respect to an entire country and not with respect to any subdivision
thereof.
(b) During the period from and including the date hereof to and
including the date one month from the date hereof, Linvatec shall have the right
to terminate, upon 15 days prior written notice, the rights and obligations
pursuant to Articles II and III (except for those rights and obligations which
refer to periods thereafter) with respect to Small Bone/Specialty Products and
Arthroscopy Products in the Direct Markets and all Products Categories in the
Transition Markets.
(c) During the remainder of the Term applicable to the Small
Bone/Specialty Products and Arthroscopy Products in the Direct Markets and all
Products Categories in the Transition Markets referred to in this paragraph (c)
following the one month period referred to in paragraph (b) of this Section,
Linvatec shall have the right to terminate, upon 60 days prior written notice,
the rights and obligations pursuant to Articles II and III (except for those
rights and obligations which refer to periods thereafter).
(d) During the period from and including the date hereof to the end
of the Term of the Small Bone/Specialty Products in the U.S., Linvatec shall
have the right to terminate, upon 90 days prior written notice, the rights and
obligations pursuant to Articles II and III (except for those rights and
obligations which refer to periods thereafter) with respect to Small
Bone/Specialty Products in the U.S.
(e) During the period from and including the date hereof to the end
of the Term of the Arthroscopy Products in the U.S., Linvatec shall have the
right to terminate, upon 90 days prior written notice, the rights and
obligations pursuant to Articles II and III (except for those rights and
obligations which refer to periods thereafter) with respect to the Arthroscopy
Products in the U.S.
(f) Shortly before and a reasonable time after the expiration or
termination of the Term with respect to any Product Category in any Market,
Zimmer shall cooperate with Linvatec in connection with the transfer of the
distribution function from Zimmer to Linvatec or to such entities as Linvatec
shall designate in the Markets, including
<PAGE> 21
18
transferring (i) all artwork and sales literature used exclusively in connection
with the sale of the Products in such terminated or expired Market, (ii) the
applicable customer lists in Zimmer's possession that relate solely to the sale
of Products in the Markets and (iii) the necessary licenses, permits and
registrations to Linvatec or an entity designated by Linvatec; provided,
however, Zimmer will not be obligated to assign all or any part of the
distributor agreements with Zimmer's distributors in the U.S. and Canada.
(g) Upon the end of the Term with respect to any Product Category in
any Market, Linvatec shall purchase all demonstration Products with respect to
such Product Category in such Market then owned by Zimmer at net book value
(determined in accordance with Zimmer's accounting policies) of such Products.
(h) At any time prior to the end of all applicable Terms, at
Linvatec's request, Zimmer shall transfer to Linvatec, in its then "AS IS, WHERE
IS WITH ALL FAULTS" condition, any repair equipment then used by Zimmer to
repair Products distributed by Zimmer hereunder, except repair equipment in
Japan and any other repair equipment required to fulfill Zimmer's obligations
pursuant to the Distribution Agreement. Linvatec will bear the full cost of any
such transfer. Linvatec acknowledges and agrees that Zimmer shall have no
liability whatsoever to Linvatec arising from possession of such repair
equipment. Linvatec further acknowledges that no repair equipment may be
available for transfer at the time of Linvatec's request.
(i) Effective upon the end of the applicable Term in the Transition
Markets, Zimmer shall assign to Linvatec all or part of each distributor
agreement relating to the sale of Products in the Transition Markets (a
"Transition Distributor Agreement"), to the extent each such distributor
agreement relates to the distribution of Products and to the extent each such
Transition Distributor Agreement is assignable without consent of the other
party; provided that Zimmer shall not be required to give up any benefit
relating to distribution of products other than Products in connections
therewith. Zimmer and Linvatec shall jointly cooperate in attempting to obtain
the agreement of the other party to each applicable Transition Distributor
Agreement to consent to assignment, without payment of any amounts to such other
party in respect of such assignment, of all or part of the applicable Transition
Distributor Agreement to Linvatec (with respect only to agreements requiring
such consent as a condition to assignment); provided that such cooperation shall
not include any requirement of Zimmer to commence litigation or offer or grant
any accommodation (financial or otherwise) to any third party. Zimmer and
Linvatec will jointly cooperate to eliminate any liability of either Zimmer or
Linvatec in respect of Transition Distributor Agreements for which it is not
possible to obtain the agreement of the other party to consent to assignment
without payment of any amounts. Such cooperation by Linvatec will include (i)
enabling Zimmer to perform its obligations
<PAGE> 22
19
(relating to Products) with respect to such Transition Distributor Agreements
and (ii) repurchasing any Products previously sold to distributors.
(j) Except as otherwise set forth above, the rights and obligations
pursuant to Articles II and III shall terminate and expire on the last day of
the applicable Term except for those rights and obligations which refer to
periods thereafter.
SECTION 6.14. Performance of Zimmer Obligations. Linvatec
acknowledges and agrees that Zimmer may perform its obligations under this
Agreement through one or more of its subsidiaries, Distributors and Affiliates
of Zimmer, including the Seller Entities, consistent with past practice in
connection with the International Business and the Domestic Hall Surgical
Business.
SECTION 6.15. Force Majeure. In case performance of any terms or
provisions hereof shall be delayed or prevented, in whole or in part, because of
or related to compliance with any law, decree, request or order of any
governmental agency or authority, either local, state, federal or foreign, or
because of riots, war, public disturbance, strike, lockout, fire, explosion,
storm, flood, acts of God, accidents of navigation, breakdown or failure of
transportation or of transportation, manufacturing, distribution, storage or
processing facilities, or for any other reason which is not within the control
of the party whose performance is interfered with and which by the exercise of
reasonable diligence such party is unable to prevent (each, a "Force Majeure
Event"), the party so suffering may at its option suspend deliveries or receipts
or discontinue performance of services during the period such cause continues,
and no liability shall attach against either party on account thereof. If a
Force Majeure Event occurs, Linvatec may apportion its available supply of
Products among its customers on an equitable basis without incurring liability
for failure to perform this Agreement. No party shall be excused from
performance if such party fails to use reasonable diligence to remedy the
situation and remove the cause and effect of the Force Majeure Event in an
adequate manner and with reasonable dispatch; provided, however, that nothing
contained herein shall require the settlement of strikes or labor controversies
by acceding to the demands of the opposing party or parties. Notwithstanding the
foregoing, Zimmer shall not be relieved of the obligation to pay for Products
title to which have passed to Zimmer.
SECTION 6.16. Limitation of Liability. None of the parties hereto
(or its Affiliates) or its respective directors, officers, employees or agents
shall be liable to the other for indirect, consequential or punitive damages in
connection with the performance of this Agreement, even if it has been advised
of the possibility of such damages, and each party hereby waives any claim for
such damages, including any claim for property damage or lost profits, whether
arising in contract, tort or otherwise.
<PAGE> 23
20
SECTION 6.17. Restrictions on Solicitation and Hiring. (a) From the
date hereof to and including the second anniversary of this Agreement, in the
United States and Canada, Buyer and Linvatec shall not, directly or indirectly,
solicit for employment, solicit to be a distributor or hire (i) any employee of
Zimmer or its Affiliates (other than pursuant to Section 9.14 of the Stock
Purchase Agreement) or (ii) any Distributor in the U.S. and Canada, whether or
not such Person would commit a breach of his, her or its contract of service in
leaving such employment or of such Person's distribution agreement with any
Person (except that solicitations for employment by general advertisements in
periodicals of broad circulation shall not constitute a breach of this
sentence).
(b) From the date hereof to and including the second anniversary of
this Agreement, in the United States and Canada, Zimmer shall not, directly or
indirectly, solicit for employment, solicit to be a distributor or hire (i) any
employee of Buyer, Linvatec or its Affiliates or (ii) any of Linvatec's or
Buyer's exclusive distributors in the U.S. and Canada, whether or not such
Person would commit a breach of his, her or its contract of service in leaving
such employment or of such Person's distribution agreement with any Person
(except that solicitations for employment by general advertisements in
periodicals of broad circulation shall not constitute a breach of this
sentence).
<PAGE> 24
21
SECTION 6.18. Arbitration. Any dispute between the parties hereto
shall be subject to binding arbitration under the Commercial Arbitration Rules
of the American Arbitration Association in a mutually agreeable, neutral
location.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed as of the date first written above.
CONMED CORPORATION,
(a signatory only with respect to Section
6.4 and 6.17)
by /s/ Joseph J. Corasanti
-----------------------
Name: Joseph J. Corasanti
Title: Vice President -- Legal Affairs
LINVATEC CORPORATION,
by /s/ George P. Kempsell
-----------------------
Name: George P. Kempsell
Title: President
ZIMMER, INC.,
by /s/ David Zabor
-----------------------
Name: David Zabor
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.10
- -------------
DISTRIBUTION AGREEMENT
Dated as of December 31, 1997
Among
ZIMMER, INC.,
LINVATEC CORPORATION
AND
CONMED CORPORATION
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
Definitions
SECTION 1.1. Definitions......................................................1
SECTION 1.2. Interpretation and Schedules.....................................3
ARTICLE II
Appointment as Exclusive Distributor
SECTION 2.1. Appointment of Zimmer as Exclusive Distributor...................4
SECTION 2.2. Transfer Price...................................................4
SECTION 2.3. Repurchase of Inventory..........................................4
SECTION 2.4. Handling of Inventory............................................4
SECTION 2.5. Performance Standards............................................5
SECTION 2.6. Renewal of the Term..............................................5
ARTICLE III
Other Services from Zimmer
SECTION 3.1. Marketing........................................................6
SECTION 3.2. Product Literature; Exhibits, Trade Shows, Etc.; Videotapes......6
SECTION 3.3. Supply of Products...............................................6
SECTION 3.4. Product Pricing..................................................7
SECTION 3.5. Regulatory.......................................................7
SECTION 3.6. Repairs..........................................................7
SECTION 3.7. Purchase of Demonstration Equipment..............................7
ARTICLE IV
Other Linvatec Obligations
SECTION 4.1. Warranties and Return............................................8
SECTION 4.2. Information; Technical and Regulatory Support....................8
SECTION 4.3. Insurance........................................................8
<PAGE> 3
2
ARTICLE V
Miscellaneous
SECTION 5.1. Intellectual Property............................................9
SECTION 5.2. Further Assurances...............................................9
SECTION 5.3. Indemnity........................................................9
SECTION 5.4. Confidentiality.................................................10
SECTION 5.5. Exclusive Appointment...........................................11
SECTION 5.6. Amendments......................................................12
SECTION 5.7. Notices.........................................................12
SECTION 5.8. Counterparts....................................................13
SECTION 5.9. Entire Agreement................................................13
SECTION 5.10. Severability...................................................13
SECTION 5.11. Governing Law..................................................13
SECTION 5.12. Assignment.....................................................13
SECTION 5.13. Term and Termination...........................................13
SECTION 5.14. Performance of Zimmer Obligations..............................15
SECTION 5.15. Force Majeure..................................................15
SECTION 5.16. Limitation of Liability........................................15
SECTION 5.17. Arbitration....................................................16
<PAGE> 4
DISTRIBUTION AGREEMENT, dated as of December 31, 1997
(the "Agreement"), among LINVATEC CORPORATION, a Florida
corporation ("Linvatec"), ZIMMER, INC., a Delaware corporation
("Zimmer") and CONMED CORPORATION, a New York corporation
("Buyer").
WHEREAS the Bristol-Myers Squibb Company ("Seller") and Buyer have
entered into a Stock and Asset Purchase Agreement dated as of November 26, 1997,
as amended by the Amendment dated as of December 31, 1997 (the "Stock Purchase
Agreement");
WHEREAS, Zimmer and Linvatec have entered into a Transition and
Distribution Services Agreement dated as of the date hereof (the "Transition and
Distribution Services Agreement") to provide for certain sales and distribution
of Linvatec's products that are not covered by this Agreement and certain
transition services;
WHEREAS it is a condition to the consummation of the transactions
contemplated by the Stock Purchase Agreement that the parties execute and
deliver this Agreement;
WHEREAS Linvatec wishes during the applicable term of this Agreement
(a) to appoint Zimmer as the exclusive distributor of Linvatec's Hall(R)
Surgical branded large bone product lines in the U.S. and certain other Markets,
(b) to appoint Zimmer as the exclusive distributor in Japan and the CEE Markets
of all products manufactured by or for Linvatec and (c) to have certain other
services performed by Zimmer for Linvatec in connection with such distributions;
and
WHEREAS Zimmer wishes to accept such appointment and perform such
services through its worldwide distribution network.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
Definitions
SECTION 1.1. Definitions. (a) Capitalized terms used but not defined
herein shall have the meanings assigned to such terms in the Stock Purchase
Agreement:
<PAGE> 5
2
"Affiliate" means, with respect to any specified person, any other
person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person; and for the purposes of this
definition, "control" when used with respect to any specified person means the
power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Arthroscopy Products" means all products manufactured by or for
Linvatec at any time during the applicable Term other than the Hall(R) Surgical
branded products manufactured by or for Linvatec at any time during the
applicable Term.
"CEE Markets" means the countries and territories set forth on
Schedule 1(a).
"Direct Markets" means the countries or territories set forth on
Schedule 1(b).
"Distributors" means the Persons with which Zimmer has entered into
a distribution agreement with respect to the Products in the Markets at any time
during the applicable Term.
"Global Marketing Services" means, with respect to any Product in
any Market, market research, competitive analysis, product training, new product
development and development of opinion leaders.
"Large Bone Products" means all Hall(R) Surgical branded large bone
product lines, including revision instrumentation, adaptors and couplers and
vacuum hoses manufactured by or for Linvatec at any time during the applicable
Term but not including any large bone products being manufactured by Linvatec on
behalf of Zimmer under the Manufacturing Agreement dated the date hereof between
Linvatec and Zimmer (e.g., acetabular reamers) or any other large bone products
that may be manufactured by Linvatec on behalf of Zimmer on an original
equipment manufacturer (OEM) basis from time to time.
"Linvatec Products" means all products manufactured by or for
Linvatec at any time during the applicable Term.
"Local Marketing Services" means, with respect to any Market,
customer service, sales support, support of individual local surgeons,
participation or sponsorship of medical society or other medical organization
meetings and participation in medical symposia, workshops, exhibits and trade
shows, in each case consistent with Zimmer's
<PAGE> 6
3
past practice in such Market. Such services include providing the administrative
and logistical support necessary for sponsorship or participation in such
meetings, exhibits and such similar events.
"Markets" means the United States, Japan and the countries in the
CEE Markets and Direct Markets.
"Person" means any individual, firm, corporation, partnership,
limited liability company, trust, joint venture, governmental entity or other
entity.
"Products" means (i) with respect to the United States and Direct
Markets, Large Bone Products and (ii) with respect to Japan and CEE Markets,
Linvatec Products.
"Product Category" means (i) with respect to the United States and
Direct Markets, the Large Bone Products category and (ii) with respect to Japan
and the CEE Markets, the Large Bone Products, the Small Bone/Specialty Products
and the Arthroscopy Products categories.
"Small Bone/Specialty Products" means all Hall(R) Surgical branded
small bone and specialty product lines manufactured by or for Linvatec at any
time during the applicable Term.
"Term" means (a) with respect to (i) Large Bone Products in the
U.S., Japan and CEE Markets and (ii) Small Bone/Specialty Products and
Arthroscopy Products in Japan and the CEE Markets, the period from and including
the date hereof to and including the date three years from the date hereof,
unless terminated prior to such time pursuant to the terms set forth in Section
5.13; and (b) with respect to Large Bone Products in the Direct Markets, the
period from and including the date hereof to and including the date two years
from the date hereof, unless terminated prior to such time pursuant to the terms
set forth in Section 5.13.
(b) The following terms have the meanings set forth in the Sections
listed below:
Term Section
---- -------
Agreement Preamble
Buyer Preamble
Confidential Linvatec Information 5.4(b)
Confidential Zimmer Information 5.4(a)
Force Majeure Event 5.15
indemnified party 5.3(b)
<PAGE> 7
4
Linvatec Preamble
New Transfer Prices 2.6
Performance Standards 2.5
Product Literature 3.2(a)
Renewal Term 2.6
Seller Preamble
Statement 3.1(b)
Stock Purchase Agreement Preamble
Third Party Claim 5.3(b)
Transition and Distribution
Services Agreement Preamble
Zimmer Preamble
SECTION 1.2. Interpretation and Schedules. (a) The headings
contained in this Agreement, in any Schedule hereto and in the table of contents
to this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. All references to the term
"including" shall be deemed to be followed by "without limitation".
(b) All Schedules annexed hereto or referred to herein are hereby
incorporated in and made a part of this Agreement as if set forth in full
herein. Any capitalized term used in any Schedule but not otherwise defined
therein, shall have the meaning as defined in this Agreement.
ARTICLE II
Appointment as Exclusive Distributor
SECTION 2.1. Appointment of Zimmer as Exclusive Distributor. (a)
Linvatec hereby appoints Zimmer, and Zimmer hereby accepts the appointment, as
Linvatec's exclusive distributor during the applicable Term of (i) the Large
Bone Products in the Markets and (ii) the Small Bone/Specialty Products and the
Arthroscopy Products in Japan and the CEE Markets.
(b) It is acknowledged and agreed that Zimmer shall perform its
obligations as exclusive distributor pursuant to Section 2.1(a) in its sole
discretion through a direct sales force, Distributors or a combination of a
direct sales force and Distributors.
SECTION 2.2. Transfer Price. (a) During the applicable Term,
Linvatec agrees to sell the Products to Zimmer for sale in the applicable
Markets, and Zimmer
<PAGE> 8
5
agrees to buy the Products from Linvatec for Zimmer's own account, at the
transfer prices set forth on Schedule 2.2(a).
(b) Zimmer shall pay Linvatec the full amount of the transfer prices
applicable to each shipment of Products ordered by Zimmer (other than the
Non-U.S. Inventory) within 45 calendar days after receipt of the invoice.
Payment of the transfer prices for the Non-U.S. Inventory being distributed
under this Agreement shall be made pursuant to Section 2.2(b) of the Transition
and Distribution Services Agreement. All payments of transfers prices by Zimmer
to Linvatec shall be in U.S. dollars.
SECTION 2.3. Repurchase of Inventory. Upon expiration or termination
of the Term with respect to any Product Category in any Market, Linvatec shall
repurchase Zimmer's inventory of Products in such Product Category in such
Market within 60 calendar days of such expiration or termination at the transfer
prices applicable to such inventory, net of reserves for obsolete and
slow-moving goods (as determined in accordance with Zimmer's accounting
policies), plus freight charges and expenses (and with respect to Markets other
than the United States, duty and customs charges and expenses). Delivery of such
inventory returned to Linvatec shall be F.O.B. the storage location of such
inventory. In the event Linvatec defaults in its obligations to repurchase
Zimmer's inventory of Products, without prejudice to any of Zimmer's other
remedies, Zimmer shall be entitled to sell such inventory in any manner it deems
appropriate. In any case, after expiration or termination of the applicable
Term, Zimmer shall be entitled to sell any Products for which it has accepted
firm orders, consistent with past practice.
SECTION 2.4. Handling of Inventory. Zimmer shall not, and shall
cause the Distributors not to, alter or tamper with any labels, descriptive
marks, packing, promotional materials, bottles or containers in which or with
which the Products are supplied, or make any modification of the Products except
as required for compliance with local law or otherwise consistent with past
practice. Zimmer shall permit Linvatec at reasonable times to enter any one of
the warehouses at which the Products are stored for purposes of inspection,
sampling or testing of the Products.
<PAGE> 9
6
SECTION 2.5. Performance Standards. In the event that Zimmer does
not maintain aggregate sales for the Large Bone Products in the U.S. and
Linvatec Products in Japan in the amounts indicated next to each of the years as
set forth in the chart below (the "Performance Standards"), Linvatec shall have
the right to terminate pursuant to Section 5.13(f); provided that a failure to
meet the performance standards set forth in the chart below resulting from
reasons beyond the control of Zimmer shall not be deemed a breach of the
Performance Standards:
United States Japan(1)
- --------------------------------------------------------------------------------
Year Aggregate Zimmer Year Aggregate Zimmer
Sales of Products Sales of Products
- --------------------------------------------------------------------------------
1998 Same as sales in 1998 6% increase in
1997 based on the sales over the sales
Statement for 1997 in 1997 stated in
the Statement for
1997
- --------------------------------------------------------------------------------
1999 10% increase in 1999 6% increase in
sales over the sales sales over the sales
in 1997 stated in in 1998 stated in
the Statement for the Statement for
1997 1998
- --------------------------------------------------------------------------------
SECTION 2.6. Renewal of the Term. (a) With respect to all the
Markets except the Direct Markets, at any time one year before the end of the
applicable Term, Zimmer and Linvatec shall negotiate in good faith the renewal
term (the "Renewal Term") for this Agreement and any modifications to the
transfer prices (the "New Transfer Prices") set forth in this Agreement. If the
parties hereto do not reach agreement on the Renewal Term and the New Transfer
Prices on or prior to the date one year before the end of the applicable Term,
this Agreement shall automatically expire upon the end of the applicable Term.
(b) With respect to the Direct Markets, at any time six months
before the end of the applicable Term, Zimmer and Linvatec shall negotiate in
good faith the Renewal Term and any modifications to the New Transfer Prices. If
the parties hereto do not reach agreement on the Renewal Term and the New
Transfer Prices on or prior to the date six months before the end of the
applicable Term, this Agreement shall automatically expire upon the end of the
applicable Term.
- ----------
(1) Aggregate sales of Products calculated based on sales to customers by
Zimmer in Yen.
<PAGE> 10
7
ARTICLE III
Other Services from Zimmer
SECTION 3.1. Marketing. (a) It is acknowledged and agreed that in
the Markets other than the United States, Linvatec shall provide all Global
Marketing Services, and Zimmer shall provide all Local Marketing Services.
Linvatec shall cooperate with Zimmer in connection with the Local Marketing
Services, in each case consistent with past practice. It is acknowledged and
agreed that in the U.S., Linvatec shall provide for (i) all Global Marketing
Services and (ii) on a national level, participation or sponsorship of medical
society or other medical organization meetings and participation in medical
symposia, workshops, exhibits and trade shows, in each case consistent with past
practice. Zimmer shall provide Local Marketing Services, except the services
referred to in Section 3.1(a)(ii), consistent with past practice. Each party
shall bear its own costs and expenses in providing such services.
(b) Zimmer shall provide to Linvatec within 90 calendar days of June
30 and December 31 each calendar year a semi-annual statement (a "Statement") of
its Product sales for the Markets during the previous six months. In addition,
Zimmer shall provide Linvatec with a Statement for the twelve month period
ending December 31, 1997. Furthermore, Zimmer shall consult with Linvatec
periodically as reasonably requested by Linvatec regarding activities of
third-party competition and such other facts and data relating to the
distribution of Products hereunder as may reasonably be requested by Linvatec,
provided that such consultation does not unreasonably disrupt the normal
operations of Zimmer.
SECTION 3.2. Product Literature; Exhibits, Trade Shows, Etc.;
Videotapes. (a) Product Literature. With respect to the Products, Linvatec shall
from time to time furnish to Zimmer, at Linvatec's expense, in reasonable
quantities, literature, catalogs and technical brochures in English
(collectively, "Product Literature") for the Markets. Zimmer shall arrange
reprinting of local language literature, catalogs and technical brochures, as
necessary, as well as provide local language translation services, as necessary,
in each case at its own expense. Linvatec shall cooperate with Zimmer with
respect to such reprinting or translation efforts. Zimmer shall provide Product
Literature distribution services for the Products in the Markets.
(b) Exhibits, Trade Shows, Etc. Linvatec shall cooperate with Zimmer
to provide necessary personnel for the exhibits, trade shows, meetings and other
activities in
<PAGE> 11
8
connection with Zimmer's Local Marketing Services, as well as the technical
information and other services reasonably requested by Zimmer.
(c) Videotapes. Linvatec will provide English language videotapes
with respect to Products or the Linvatec business to Zimmer, consistent with
past practice. Linvatec shall cooperate with Zimmer in providing local language
translation of such videotapes, at Zimmer's expense, as Zimmer deems necessary
or desirable.
SECTION 3.3. Supply of Products. Linvatec agrees to supply Zimmer
and the Distributors, as applicable, Products consistent with past practices;
provided that with respect to Products delivered to the warehouses of Zimmer,
Linvatec shall be responsible for delivery of the Products F.O.B. the source
plant of the Products. Zimmer shall pay all costs and expenses associated with
such delivery, including shipping, freight, insurance, transfer taxes, duty and
customs expenses. Title and risk of loss to the Products shall pass to Zimmer
upon delivery to Zimmer at the source plant of the Products.
SECTION 3.4. Product Pricing. Zimmer shall determine prices for
Products in the Markets in its sole discretion.
SECTION 3.5. Regulatory. Zimmer and Linvatec shall cooperate (a) to
maintain and obtain any necessary registrations of the Products with local
health or other regulatory authorities of the Markets other than the U.S. that
may be required under applicable law in such Markets and (b) to comply with all
other regulatory requirements in the such Markets, in each case consistent with
past practice. Linvatec shall be responsible for all Product registration and
regulatory compliance in the United States, CE marking in Europe, local language
labeling in all the Markets and such other compliance matters as are consistent
with past practice.
SECTION 3.6. Repairs. (a) In the United States, Linvatec shall make
available repair services for Linvatec Products. In Japan, Zimmer will make
available repair services to all customers at prices that it shall determine in
its sole discretion from time to time; provided that Linvatec will continue to
make available repair services outside the United States in certain Markets
consistent with past practice and further provided that Linvatec shall make
repairs for Linvatec Products to the extent Linvatec establishes repair
facilities in the Markets other than the United States and Japan, in each case
at prices that it shall determine in its sole discretion from time to time.
During the applicable Term, Linvatec shall sell to Zimmer repair replacement
parts for Products for use in Zimmer's repair services in Markets outside the
United States at the transfer prices set forth on Schedule 2.2(a) applicable to
such Product in such Market at the time such repair replacement parts are
bought. Linvatec shall be responsible for delivery of such parts F.O.B. the
source plant of such parts. Zimmer shall pay all costs and expenses
<PAGE> 12
9
associated with such delivery, including shipping, freight, insurance, transfer
taxes, duty and customs expenses. Title and risk of loss to the repair and
replacement parts for the Products shall pass to Zimmer upon delivery to Zimmer
at the source plant of such repair or replacement parts.
(b) During the applicable Term and for six months thereafter, in the
event Linvatec discontinues the manufacture of any of the Products, Linvatec
shall continue, for a period of time after such discontinuance, consistent with
past practice, to make available to Zimmer repair services and replacement parts
for such discontinued Products on the terms set forth in Section 3.6(a), to the
extent reasonably anticipated by Linvatec to be necessary to service such
discontinued Products previously supplied by Linvatec pursuant to the terms of
this Agreement.
SECTION 3.7. Purchase of Demonstration Equipment. Linvatec shall
sell to Zimmer or the Distributors at standard cost demonstration equipment for
Products from time to time during the applicable Term as reasonably ordered by
Zimmer or the Distributors, consistent with past practice.
ARTICLE IV
Other Linvatec Obligations
SECTION 4.1. Warranties and Return. (a) Linvatec shall warrant the
Products in accordance with Linvatec's standard worldwide warranty in effect
from time to time; provided, however, that Linvatec shall not change the terms
of the Product warranties in effect at the date hereof with respect to Products
sold in any Market if such change would render Zimmer unable to sell Products in
such Market in accordance with applicable law or regulation or commercial
custom. Zimmer will deliver to Linvatec not later than the last day of each
month a statement setting forth the types and quantities of Products sold by it
in each Market during the preceding month and showing the serial numbers of the
Products, if any, and all other information required in order to permit
Linvatec's warranty to be honored.
(b) Linvatec shall accept all returns of defective Products that are
returned in a reasonable amount of time and credit Zimmer for such returns.
Zimmer shall pay all costs and expenses associated with such return, including
shipping, freight, insurance, transfer taxes, duty and customs expenses.
Linvatec shall promptly reimburse Zimmer for any such costs or expenses incurred
by Zimmer within 45 calendar days of receiving an invoice therefor. Title and
risk of loss to such returned defective Products shall pass to Zimmer upon
delivery to Linvatec at the location from which such defective Products are
shipped.
<PAGE> 13
10
(c) Zimmer shall not have any reimbursement obligation for Products
(whether sold before, on or after the date hereof) which are returned pursuant
to a Product warranty or guarantee. If a Product returned pursuant to a Product
warranty or guarantee results in a credit against an accounts receivable
maintained by Zimmer with respect to a Product sold by Zimmer prior to the date
hereof, Linvatec shall reimburse Zimmer for the price paid by Zimmer to Linvatec
for such Product.
(d) During the applicable Term, in the event Products sold by Zimmer
are returned by a customer directly to Linvatec, Linvatec shall notify Zimmer of
such return within 5 calendar days. After the applicable Term, Zimmer shall
continue to be responsible for all refunds or the costs of any exchange of
Products sold by it prior to the date hereof that are not covered by a warranty
or guarantee of Linvatec or otherwise expressly required to be paid by Linvatec
under this Agreement.
SECTION 4.2. Information; Technical and Regulatory Support. Linvatec
shall make available on a timely basis to Zimmer all information that Zimmer
reasonably requests to perform Zimmer's obligations hereunder. Linvatec shall
provide to Zimmer, at Linvatec's expense, such regulatory and technical
assistance as Zimmer may reasonably request for the promotion, sale and
servicing of the Products.
SECTION 4.3. Insurance. Linvatec shall at all times from the date
hereof to the last to end of the Terms maintain, at no cost to Zimmer, annual
product liability insurance covering all Products supplied by Linvatec pursuant
to the terms of this Agreement with aggregate annual coverage of at least
$25,000,000 (which policy shall name Zimmer as an additional insured and shall
cover all claims incurred or arising out of or relating to events that occurred
during the period from the date hereof to the last to end of the Terms).
ARTICLE V
Miscellaneous
SECTION 5.1. Intellectual Property. During the applicable Term,
Linvatec hereby grants to Zimmer a nonexclusive license to use the Intellectual
Property to the extent necessary to satisfy its obligations under this
Agreement.
SECTION 5.2. Further Assurances. The parties agree to execute and
deliver all such documents and instruments and shall take all such further other
actions as may be reasonably necessary or desirable to consummate the
transactions contemplated hereby.
<PAGE> 14
11
SECTION 5.3. Indemnity. (a) Product Liability. Linvatec shall
indemnify Zimmer, its Affiliates (including Seller) and each of their respective
officers, directors, employees, stockholders, agents and representatives against
and hold them harmless from any loss, liability, claim, damage or expense
(including reasonable legal fees and expenses) suffered or incurred by any such
indemnified party for any Third party claims arising from or in connection with
the design, manufacture or use of the Products sold by Zimmer during the
applicable Term, including claims for injury or death to any person or damage to
property, except to the extent that such claims and expenses result from the
gross negligence of Zimmer.
(b) Procedures Relating to Indemnification for Third Party Claims.
In order for a party (the "indemnified party") to be entitled to any
indemnification provided for under Section 5.3(a) in respect of, arising out of
or involving a claim or demand made by any person against the indemnified party
(a "Third Party Claim"), such indemnified party must notify the indemnifying
party in writing, and in reasonable detail, of the Third Party Claim within 30
calendar days after receipt by such indemnified party of written notice of the
Third Party Claim; provided, however, that failure to give such notification
shall not affect the indemnification provided hereunder except to the extent the
indemnifying party shall have been actually prejudiced as a result of such
failure (except that the indemnifying party shall not be liable for any expenses
incurred during the period in which the indemnified party failed to give such
notice). Thereafter, the indemnified party shall deliver to the indemnifying
party, promptly after the indemnified party's receipt thereof, copies of all
notices and documents (including court papers) received by the indemnified party
relating to the Third Party Claim.
If a Third Party Claim is made against an indemnified party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges its obligation to indemnify the indemnified
party therefor, to assume the defense thereof with counsel selected by the
indemnifying party; provided that such counsel is not reasonably objected to by
the indemnified party. Should the indemnifying party so elect to assume the
defense of a Third Party Claim, the indemnifying party shall not be liable to
the indemnified party for legal fees and expenses subsequently incurred by the
indemnified party for separate counsel in connection with the defense thereof.
If the indemnifying party assumes such defense, the indemnified party shall have
the right to participate in the defense thereof and to employ counsel (not
reasonably objected to by the indemnifying party), at its own expense, separate
from the counsel employed by the indemnifying party, it being understood that
the indemnifying party shall control such defense. The indemnifying party shall
be liable for the fees and expenses of counsel employed by the indemnified party
for any period during which the indemnifying party has failed to assume the
defense thereof (other than during the period prior to the time the indemnified
party shall have given notice of the Third Party Claim as provided above).
<PAGE> 15
12
If the indemnifying party so elects to assume the defense of any
Third Party Claim, all of the indemnified parties shall cooperate with the
indemnifying party in the defense or prosecution thereof, subject to the other
party's confidentiality obligations under this Agreement. Such cooperation shall
include the retention and (upon the indemnifying party's request) the provision
to the indemnifying party of records and information which are reasonably
relevant to such Third Party Claim, and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. Whether or not the indemnifying party shall have
assumed the defense of a Third Party Claim, the indemnified party shall not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the indemnifying party's prior written consent (which
consent shall not be unreasonably withheld).
SECTION 5.4. Confidentiality. (a) Linvatec and Buyer agree that each
of them shall keep confidential and not disclose to any third party, except as
it is necessary in carrying out the purpose of this Agreement, during the period
from the date hereof and to the last to end of the Terms and for three years
thereafter the terms of this Agreement or any information of a proprietary
nature relating to the business or operations of Zimmer or its Affiliates,
including technology, specifications, product information, data, inventions,
processes, know-how, trade secrets and information disclosed pursuant hereto
(together, "Confidential Zimmer Information") furnished to Buyer or Linvatec by
Zimmer in connection with this Agreement, except Confidential Zimmer Information
that:
(i) at the time of disclosure is in the public domain or publicly
known or available (other than as a result of a disclosure directly or
indirectly by Linvatec or Buyer or any of their Affiliates in violation of
the terms of any confidentiality agreement involving Linvatec or Buyer or
any of their Affiliates on the one hand and Zimmer or any of its
Affiliates on the other hand);
(ii) was available to Linvatec or Buyer on a non-confidential basis
from a third party; provided that the Confidential Zimmer Information was
not obtained by such third party from Linvatec or Buyer or their
Affiliates; or
(iii) Linvatec or Buyer derives independently of such furnishment of
Confidential Zimmer Information.
In the event that Linvatec or Buyer become legally compelled (by
deposition, interrogatory, request for documents, subpoena, civil investigative
demand or similar process or otherwise) to disclose any of the Confidential
Zimmer Information, Linvatec or Buyer shall provide the counsel of Zimmer with
prompt written notice of such requirement so that Zimmer may seek a protective
order or other appropriate remedy
<PAGE> 16
13
and/or waive compliance with the terms of this agreement. In the event that such
protective order or other remedy is not obtained, or that Zimmer waives
compliance with the provisions hereof, Linvatec or Buyer agrees to furnish only
that portion of the Confidential Zimmer Information which Linvatec or Buyer is
advised by opinion of counsel is legally required and to exercise best efforts
to obtain assurance that confidential treatment will be accorded such
Confidential Zimmer Information.
(b) Zimmer agrees that it shall keep confidential and not
disclose to any third party, except as it is necessary in carrying out the
purpose of this Agreement, during the period from the date hereof and to the
last to end of the Terms and for three years thereafter the terms of this
Agreement or any information of a proprietary nature relating to Linvatec's
business or operations, including technology, specifications, product
information, data, inventions, processes, know-how, trade secrets and
information disclosed pursuant hereto (together, "Confidential Linvatec
Information") furnished to Zimmer by Linvatec in connection with this Agreement,
except Confidential Linvatec Information that:
(i) at the time of disclosure is in the public domain or
publicly known or available (other than as a result of a disclosure
directly or indirectly by Zimmer or any of its Affiliates in violation
of the terms of any confidentiality agreement involving Linvatec or
Buyer or any of their Affiliates on the one hand and Zimmer or any of
its Affiliates on the other hand);
(ii) was available to Zimmer on a non-confidential basis from
a third party; provided that the Confidential Linvatec Information was
not obtained by such third party from Zimmer or its Affiliates; or
(iii) Zimmer derives independently of such furnishment of
Confidential Linvatec Information.
In the event that Zimmer becomes legally compelled (by
deposition, interrogatory, request for documents, subpoena, civil investigative
demand or similar process or otherwise) to disclose any of the Confidential
Linvatec Information, Zimmer shall provide the counsel of Linvatec with prompt
written notice of such requirement so that Linvatec may seek a protective order
or other appropriate remedy and/or waive compliance with the terms of this
agreement. In the event that such protective order or other remedy is not
obtained, or that Linvatec waives compliance with the provisions hereof, Zimmer
agrees to furnish only that portion of the Confidential Linvatec Information
which Zimmer is advised by opinion of counsel is legally required and to
exercise best efforts to obtain assurance that confidential treatment will be
accorded such Confidential Linvatec Information.
<PAGE> 17
14
SECTION 5.5. Exclusive Appointment. During the applicable
Term, in the relevant Markets, Linvatec shall not appoint any distributor or
agent (or similar entity) other than Zimmer or supply Products to any Person
other than Zimmer or the Distributors whether for use or resale.
SECTION 5.6. Amendments. No amendment to this Agreement shall
be effective unless it shall be in writing and signed by the party against whom
enforcement is sought.
SECTION 5.7. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given when delivered
personally or sent by prepaid telex, cable or telecopy, or sent, postage
prepaid, by registered, certified or express mail (return receipt requested) or
reputable overnight courier service and shall be deemed given when so delivered
by hand, telexed, cabled or telecopied, or if mailed, 3 calendar days after
mailing (one business day in the case of express mail or overnight courier
service) to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(i) if to Linvatec,
Linvatec Corporation
11311 Concept Boulevard
Largo, FL 33773
Attention: President
with a copy to:
CONMED Corporation
310 Broad Street
Utica, NY 13501
Attention: General Counsel
(ii) if to Buyer,
CONMED Corporation
310 Broad Street
Utica, NY 13501
Attention: General Counsel
<PAGE> 18
15
(iii) if to Zimmer,
Zimmer, Inc.
345 East Main Street
Warsaw, IN 46581
Attention: General Counsel
with a copy to:
Bristol-Myers Squibb Company
345 Park Avenue
New York, New York 10154
Attention: General Counsel
and a copy to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019-7415
Attention: Susan Webster, Esq.
SECTION 5.8. Counterparts. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more such counterparts have
been signed by each of the parties and delivered to the other parties.
Counterparts may be delivered by facsimile.
SECTION 5.9. Entire Agreement. This Agreement, together with
the Stock Purchase Agreement, contains the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings. Nothing in this Agreement
shall be deemed to amend, modify or in any way affect the Stock Purchase
Agreement.
SECTION 5.10. Severability. If any provision of this Agreement
(or any portion thereof) or the application of any such provision (or any
portion thereof) to any person or circumstance shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof (or the remaining portion thereof) or the application of such provision
to any other persons or circumstances.
<PAGE> 19
16
SECTION 5.11. Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of New York
applicable to agreements made and to be performed entirely within such state.
SECTION 5.12. Assignment. Neither party may assign its rights
or obligations under this Agreement to any party without the prior written
consent of the other party; provided, however, that either party may assign its
rights or obligations under this Agreement to a wholly owned subsidiary or an
Affiliate of such party.
SECTION 5.13. Term and Termination. (a) This Agreement may be
terminated (i) by either Zimmer or Linvatec (A) upon the commencement by any
party of an involuntary proceeding or the filing by any party of an involuntary
petition seeking (1) liquidation, reorganization or other relief in respect of
such party or its debts, or of a substantial part of its assets, under any
Federal, state or foreign bankruptcy, insolvency, receivership or similar law
now or hereafter in effect or (2) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for such party for a
substantial part of their assets, and, in any such case, such proceeding or
petition shall continue undismissed for 60 days or an order or decree approving
or ordering any of the foregoing shall be entered, (B) if such other party shall
(1) voluntarily commence any proceeding or file any petition seeking
liquidation, reorganization or other relief under any Federal, state or foreign
bankruptcy, insolvency, receivership or similar law now or hereafter in effect,
(2) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or petition described in the preceding clause
(A), (3) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for such party for a
substantial part of its assets, (4) file an answer admitting the material
allegations of a petition filed against it in any such proceedings, (5) make a
general assignment for the benefit of creditors or (6) take any action for the
purpose of effecting any of the foregoing; or (ii) by either Zimmer or Linvatec
if the other party (or by Zimmer if Buyer) is in material breach of any
provision of this Agreement (the failure by Zimmer to satisfy the performance
standards set forth in Section 2.5 in the relevant Market required for any year
being deemed by the parties hereto a material breach of this Agreement by Zimmer
unless Linvatec is in material breach of this Agreement at such time); provided,
however, that in the case of clause (i), the Agreement shall automatically
terminate upon the occurrence of any event specified therein and in the case of
clause (ii) (A) the party seeking to terminate this Agreement shall notify such
other party in writing of such breach (a "Notice of Breach"), (B) such other
party shall have 30 days from the receipt of such Notice of Breach to commence
remedying such breach and (C) if such party does not commence remedying such
breach within such 30 days or if, at the end of such 30 day period, it is not
reasonably likely that such breach is capable of being cured within 60 days
thereafter, the party seeking to terminate this Agreement may terminate this
Agreement with respect to any Product Category (and not with respect to a
Product) or any Market (and not with respect to any
<PAGE> 20
17
subdivision thereof) with respect to which the other party is in breach at any
time thereafter by giving such other party, (1) in the case of the Large Bone
Products category in the United States and Large Bone Products, Small
Bone/Specialty Products and Arthroscopy Products categories in the CEE Markets
and Japan, three months written notice of such termination and (2) in the case
of the Large Bone Products category in the Direct Markets, three months written
notice of such termination, in each case unless such breach shall have been
cured prior to the receipt of such written notice by such other party; and
provided, further, however, that in the case of clause (ii), if Zimmer is only
in material breach under Section 2.5 as described in the parenthetical in clause
(ii) with respect to either the United States or Japan but not both, Linvatec
may only terminate this Agreement with respect to distribution in the United
States or Japan, whichever it is in breach with respect to.
(b) Shortly before and a reasonable time after the expiration
or termination of the Term with respect to any Market, Zimmer shall cooperate
with Linvatec in connection with the transfer of the distribution function from
Zimmer to Linvatec or to such entities as Linvatec shall designate in the
Markets, including transferring (i) all artwork and sales literature used
exclusively in connection with the sale of the Products in such terminated or
expired Market, (ii) the applicable customer lists in Zimmer's possession that
relate solely to the sale of Products in the Markets and (iii) the necessary
licenses, permits and registrations, to Linvatec or an entity designated by
Linvatec; provided, however, that Zimmer will not be obligated to assign all or
any part of the distributor agreements with Zimmer's distributors in the U.S.
and Canada.
(c) Upon the end of the Term in any Market, Linvatec shall
purchase all demonstration Products in such Market then owned by Zimmer at the
net book value (determined in accordance with Zimmer's accounting policies) of
such Products.
(d) Except as otherwise set forth above, the rights and
obligations pursuant to Articles II and III shall terminate and expire on the
last day of the applicable Term except for those rights and obligations which
refer to periods thereafter.
SECTION 5.14. Performance of Zimmer Obligations. Linvatec
acknowledges and agrees that Zimmer may perform its obligations under this
Agreement through one or more of its subsidiaries, Distributors and Affiliates.
SECTION 5.15. Force Majeure. In case performance of any terms
or provisions hereof shall be delayed or prevented, in whole or in part, because
of or related to compliance with any law, decree, request or order of any
governmental agency or authority, either local, state, federal or foreign, or
because of riots, war, public disturbance, strike, lockout, fire, explosion,
storm, flood, acts of God, accidents of navigation, breakdown or failure of
transportation or of transportation, manufacturing,
<PAGE> 21
18
distribution, storage or processing facilities, or for any other reason which is
not within the control of the party whose performance is interfered with and
which by the exercise of reasonable diligence such party is unable to prevent
(each, a "Force Majeure Event"), the party so suffering may at its option
suspend deliveries or receipts or discontinue performance of services during the
period such cause continues, and no liability shall attach against either party
on account thereof. If a Force Majeure Event occurs, Linvatec may apportion its
available supply of Products among its customers on an equitable basis without
incurring liability for failure to perform this Agreement. No party shall be
excused from performance if such party fails to use reasonable diligence to
remedy the situation and remove the cause and effect of the Force Majeure Event
in an adequate manner and with reasonable dispatch; provided, however, that
nothing contained herein shall require the settlement of strikes or labor
controversies by acceding to the demands of the opposing party or parties.
Notwithstanding the foregoing, Zimmer shall not be relieved of the obligation to
pay for Products title to which have passed to Zimmer.
SECTION 5.16. Limitation of Liability. None of the parties
hereto (or its Affiliates) or its respective directors, officers, employees or
agents shall be liable to the other for indirect, consequential or punitive
damages in connection with the performance of this Agreement, even if it has
been advised of the possibility of such damages, and each party hereby waives
any claim for such damages, including any claim for property damage or lost
profits, whether arising in contract, tort or otherwise.
<PAGE> 22
19
SECTION 5.17. Arbitration. Any dispute between the parties
hereto shall be subject to binding arbitration under the Commercial Arbitration
Rules of the American Arbitration Association in a mutually agreeable, neutral
location.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed as of the date first written above.
CONMED CORPORATION
(a signatory only with respect to Section 5.4),
by /s/ Joseph J. Corasanti
----------------------------------
Name: Joseph J. Corasanti
Title: Vice President -- Legal Affairs
LINVATEC CORPORATION,
by /s/ George P. Kempsell
----------------------------------
Name: George P. Kempsell
Title: President
ZIMMER, INC.,
by /s/ David Zabor
----------------------------------
Name: David Zabor
Title: Senior Vice President
<PAGE> 1
EXHIBIT 11
Computation of Weighted Average Number of Shares of Common Stock
<TABLE>
<CAPTION>
Year Ended December
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Shares outstanding at beginning of period........ 9,057 11,000 14,989
Weighted average shares issued................... 1,460 3,045 8
Incremental shares of common stock outstanding
giving effect to stock options and warrant.... 1,096 451 230
------ ------ ------
Weighted average shares for earnings per share... 11,613 14,496 15,227
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 12
CONMED Corporation
Statement Showing Computations of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Net Income $ (1,396) $ 5,416 $ 10,863 $16,286 $ (7,065)
Provision (benefit) for income taxes (719) 2,890 5,900 9,161 (3,640)
---------------------------------------------------------------------
Income (loss) before income taxes (2,115) 8,306 16,763 25,447 (10,705)
Interest (income) expense, net 214 628 1,991 217 (823)
Income loss from operations (1,901) 8,934 18,754 25,664 (11,528)
Portion of rentals deemed representative
of interest factor 146 146 146 108 147
---------------------------------------------------------------------
Earnings before income
taxes and fixed charges $(1,756) $ 9,080 $ 18,900 $25,772 $(11,381)
=====================================================================
Fixed Charges
interest expense $ 214 $ 628 $ 1,991 $ 217 $ --
Portion of rentals deemed representative
of interest factor 146 146 146 108 147
---------------------------------------------------------------------
$ 360 $ 774 $ 2,137 $ 325 $ 147
=====================================================================
</TABLE>
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
Name State of Incorporation
---- ----------------------
Aspen Laboratories, Inc. Colorado
Consolidated Medical Equipment International, Inc. New York
CONMED Andover Medical, Inc. New York
Birtcher Medical Systems, Inc. California
Envision Medical Corporation California
Linvatec Corporation Florida
NDM, Inc. New York
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-23514, 33-49422 and 33-49526) of CONMED
Corporation of our report dated February 10, 1998 appearing on page F-1 of the
1997 Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Syracuse, New York
February 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,452
<SECURITIES> 0
<RECEIVABLES> 49,896
<ALLOWANCES> (2,708)
<INVENTORY> 57,915
<CURRENT-ASSETS> 121,884
<PP&E> 80,663
<DEPRECIATION> (21,268)
<TOTAL-ASSETS> 561,637
<CURRENT-LIABILITIES> 30,607
<BONDS> 0
0
0
<COMMON> 151
<OTHER-SE> 162,585
<TOTAL-LIABILITY-AND-EQUITY> 561,637
<SALES> 138,270
<TOTAL-REVENUES> 138,270
<CGS> 74,220
<TOTAL-COSTS> 149,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (823)
<INCOME-PRETAX> (10,705)
<INCOME-TAX> (3,640)
<INCOME-CONTINUING> (7,065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,065)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
