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, 1998 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 $444,667,984 based upon the
average bid and asked prices of stock, which was $29.75 on March 12, 1999.
The number of shares of the Registrant's $0.01 par value common stock
outstanding as of March 12, 1999 was 15,189,048.
DOCUMENTS FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement, scheduled to be mailed on or about
April 9, 1999 for the annual meeting of stockholders to be held May 18, 1999,
are incorporated by reference into Part III.
<PAGE>
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
<PAGE>
PART I
CONMED CORPORATION
Item 1. Business
Forward Looking Statements
This Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1998 ("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"--references to
"CONMED" or the "Company" shall be deemed to include the Company's subsidiaries)
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 acquisition; 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 orthopaedics, general
surgery and other medical procedures. The Company's product offerings include
arthroscopic surgery devices and products, electrosurgical systems, powered
instruments for orthopaedic, arthroscopic and other surgical procedures, imaging
products for minimally-invasive surgery, electrocardiogram ("ECG") electrodes
and other general surgical and patient care devices. 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. Approximately
75% of the Company's revenues in 1998 were derived from the sale of single-use,
disposable products. In addition, approximately 21% of the Company's revenues in
1998 were derived from sales outside of the United States.
The Company has used strategic business acquisitions to broaden its
product offerings, to increase its market share in certain product lines and to
realize economies of scale. During the last five years, the Company has
completed six significant business acquisitions. The completed acquisitions,
together with internal growth, have resulted in a compound annual growth rate in
net sales of 55% between 1994 and 1998.
<PAGE>
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.
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 their 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.
<PAGE>
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 its products to surgeons, hospitals, surgery
centers, GPOs and other customers, particularly as institutions seek to reduce
costs and to 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 arthroscopy products a surgeon requires for most
arthroscopic procedures, including instrument and repair sets, implants, shaver
consoles and handpieces, video systems 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 200 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
surgeons, hospital departments, outpatient surgery centers and physician
offices. Additionally, through the December 31, 1997 acquisition of Linvatec
Corporation from Bristol-Myers Squibb Company ("BMS"), the Company has expanded
its international presence through sales subsidiaries and branches located in
key international markets. The Company also maintains distributor relationships
domestically and in numerous countries worldwide.
Vertically-integrated Manufacturing. The Company manufactures most of
its products. The Company's vertically integrated manufacturing process has
allowed it to provide quality products, to react quickly to changes in demand
and to generate manufacturing efficiencies, including purchasing raw materials
used in a variety of disposable products in bulk. The Company believes that its
manufacturing capabilities allow it to contain costs, control quality 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. CONMED has utilized its research
and development capabilities to introduce new products, product enhancements and
new technologies. Research and development expenditures were $12.0 million in
1998. Recent new product introductions include the E9000(R) drive console,
BioStinger(R) miniscal repair device, Vcare(R) (a product for laparoscopic
hysterectomy procedures), Hyfrecator(R) 2000 office-based electrosurgical unit
and System 7500 electrosurgical unit with argon beam coagulation.
<PAGE>
Integrating Acquisitions. Since 1994, the Company has completed six
acquisitions including the 1998 acquisition of Linvatec which more than doubled
the size of the Company. 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 management team has
demonstrated a historical ability to identify complementary acquisitions and to
integrate acquired companies into the Company's operations.
Business Strategy
The Company intends to implement the following business strategies:
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.
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 to 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 into 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.
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 1994, the Company has completed six acquisitions,
expanding its product line to include surgical suction instruments, wound care
products and most recently arthroscopic products and powered surgical
instruments.
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.
<PAGE>
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, 1998,
the Company had $384.9 million of debt outstanding, which represented 67.9% of
total capitalization. In addition, on December 31, 1998, the Company had
approximately $62.0 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 limited or 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 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. 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."
Effects of Acquisitions Generally
An element of the Company's business strategy has been to expand
through acquisitions and the Company may seek to pursue acquisitions in the
future. 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, distributors, 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.
<PAGE>
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 lenders 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
surgeons, hospitals, GPO's 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.
<PAGE>
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 1999
through 2017 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 to compete effectively 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.
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 "Quality System Regulations," 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.
The Company is subject to product recall. The Company's product lines
have experienced a number of product recalls. 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 21% of the Company's 1998 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.
<PAGE>
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."
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,
surgical suction instruments and imaging products used in minimally invasive
surgery. These products are sold to surgeons, hospitals, outpatient surgery
centers and physician offices primarily in the United States. Additionally, the
Company provides repairs and services for its surgical products. Surgical
products represented 85% of 1998 sales.
Arthroscopic Surgery Devices and Products
The Company offers a broad line of devices and products for use in
arthroscopic surgery. Net sales attributable to arthroscopy products represented
36% of the Company's 1998 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 the
knee, although arthroscopic procedures are increasingly performed on smaller
joints and shoulders.
The Company's arthroscopy products include powered resection
instruments, arthroscopes, reconstructive systems, tissue repair sets, fluid
management systems, imaging products, implants and related disposable products.
It is the Company's standard practice to transfer some of these products, such
as shaver consoles and pumps, to certain customers at no charge. 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,
resection shavers and cartilage repair implants.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Arthroscopic Surgery Devices and Products
- --------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Resection Shavers Shaver consoles and handpieces, 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 surgery; includes Paramax(R)
instrumentation, screws, pins and drills. PinnACL(R)
Tissue Repair Sets Sets of instruments designed to attach specific torn or Spectrum(R)
damaged soft tissue to bone or other tissue in the BioAnchor(R)
knee, shoulder and wrist; includes guides, hooks and Inteq(R)
suture devices.
Fluid Management Systems Disposable tubing sets, disposable and reusable inflow Apex(R)
devices, pumps and suction/waste management systems for PuddleVac(R)
use in arthroscopic and general surgeries. QuickFlow(R)
Imaging Surgical video systems for endoscopic procedures; Apex(R)
includes autoclavable singlechip digital and 8180 Series
threechip camera consoles, heads, endoscopes, light
sources, monitors, VCRs and printers.
Implants Products including bioresorbable and metal interference BioScrew(R)
screws, anchors and staples for attaching tissue to BioStinger(R)
bone in the knee and shoulder. Ultrafix(R)
Revo(R)
Other Instruments and Accessories Forceps, graspers, suction punches, probes, cases and Shutt(R)
other general instruments for arthroscopic procedures. TractionTower(R)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Electrosurgical Systems
During 1996, 1997 and 1998, net sales attributable to electrosurgery
products represented 49%, 45%, and 20% 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, orthopaedic, 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) technology is a special method of electrosurgery,
which allows a faster and more complete coagulation of many tissues as compared
to conventional electrosurgery. Unlike conventional electrosurgery, the
electrical current travels in a beam of ionized argon gas, allowing the current
to be dispersed onto the bleeding tissue without the instrument touching the
tissue. Clinicians have reported notable benefits of ABC(R) over traditional
electrosurgical coagulation in certain clinical situations, including
open-heart, liver, spleen and trauma surgery.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Electrosurgical Systems
- --------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pencils Disposable and reusable instruments designed to deliver Hand-trol(R)
high-frequency electric current to cut and/or coagulate
tissue.
Ground Pads Disposable ground pads to safely return the current to Macrolyte(R)
the generator; available in adult, pediatric and infant Bio-gard(R)
sizes.
Generators Monopolar and bipolar generators for surgical EXCALIBUR Plus PC(R)
procedures performed in a physician's office or clinic SABRE(R)
setting. Hyfrecator Plus(R)
Argon Beam Coagulation Systems Specialized electrosurgical generators, disposable hand ABC(R)
pieces and ground pads for non-contact cutting and Beamer Plus(R)
coagulation of tissue.
Accessories Disposable products such as blades, forceps, adapters CONMED(R)
and cables. Aspen Labs(R)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Powered Instruments
The Company offers a broad line of powered instruments which
represented 20% of the Company's 1998 net sales.
Powered instruments are used to perform orthopaedic, 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 orthopaedic, oral/maxillofacial,
podiatric, plastic, otolaryngologic, 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Powered Instruments
- --------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Small Bone Powered saws, drills and related disposable accessories Hall(R) Surgical
for small bone and joint surgical procedures. E9000(R)
MicroChoice(R)
Surgairtome(R)
Large Bone Powered saws, drills and related disposable accessories Hall(R) Surgical
for use primarily in total knee and hip joint VersiPower(R)
replacements and trauma surgical procedures. Series 4(R)
Specialty Procedure-specific powered saws, drills and related UltraPower(R)
disposable accessories for use in oral/ maxillofacial, Hall Osteon(R)
neurosurgery, otolaryngologic, and thoracic procedures. Orthairtome(R)
Other Powered Instruments Powered sternum saw handpieces and disposable saw Hall(R) Surgical
blades for use by cardiothoracic surgeons during E9000(R)
open-heart procedures. UltraPower(R)
Micro 100
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Other General Surgical Products
The Company's other general surgical products include a variety of
products used in surgical settings. Other general surgical products represented
3%, 12% and 9% of the Company's 1996, 1997 and 1998 net sales, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Other General Surgical Products
- --------------------------------------------------------------------------------------------------------------------
Product Description Brand Name
<S> <C> <C>
Laparoscopic Instruments Specialized trocars, suction/irrigation UNIVERSAL Plus(R)
electrosurgical instrument systems for use in TroGard(R)
laparoscopic surgery; includes disposable handles, Trogard
valve/control assemblies with disposable accessories Finesse(TM)
and monopolar and bipolar scissors, graspers and
loops.
Surgical Suction Instruments and Disposable surgical suction instruments and connecting CONMED(R)
Tubing tubing, including Yankauer, Poole, Frazier and
Sigmoidoscopic instrumentation, for use by
physicians in the majority of open surgical
procedures.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Patient Care Products
During 1996, 1997 and 1998 net sales attributable to patient care
products represented 48%, 43% and 15% 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 cables, CONMED(R)
lead wire products and accessories designed to Ultratrace(R)
transmit ECG signals from the heart to an ECG Cleartrace(R)
monitor or recorder.
Wound Care Disposable transparent wound dressings ClearSite(R)
comprising proprietary hydrogel; able to absorb 2 Hydrogauze(R)
1/2 times its weight in wound exudate.
Intravenous Therapy Disposable IV drip rate gravity controller and VENI-GARD(R)
disposable catheter stabilization dressing designed to MasterFlow(R)
hold and secure an IV needle or catheter for use in IV Stat 2(R)
therapy.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Marketing
CONMED markets its products domestically through a sales force
consisting of approximately 200 sales people. In order to provide a high level
of expertise to medical specialties served, the Company's overall sales force is
separated into dedicated groups for 1) arthroscopy, 2) power instruments and 3)
electrosurgical systems, other general surgical products and patient care
products. Each sales representative has a defined geographic area and is
compensated on a commission basis or through a combination of salary and
commission. The sales force is supervised and supported by area directors. Home
office sales and marketing management provide the overall direction for the
sales of the Company's products.
<PAGE>
CONMED's salespeople call on surgeons, hospitals, outpatient surgery
centers and physician offices. The Company also has a corporate sales department
that is responsible for interacting with GPO's. 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 is accompanied by initial
and ongoing in-service training of the end user. The field sales force is
trained in the technical aspects of the Company's products and their uses, and
provides surgeons and medical personal with information relating to the
technical features and benefits of the Company's products. 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.
The Company's international sales accounted for 21% of total revenues
in 1998. Products are sold in over 100 foreign countries. International sales
efforts are coordinated through local country dealers or with direct sales
efforts. CONMED distributes its products through sales subsidiaries and branches
with offices located in Australia, Belgium, Canada, France, Germany, Hong Kong,
Spain and the United Kingdom.
In connection with the Linvatec acquisition, Zimmer, a subsidiary of
BMS specializing in orthopaedic implant products, agreed to continue
distribution of the Company's large bone powered instruments in the United
States and eight international countries for three years. Additionally, Zimmer
has agreed to distribute the Company's arthroscopic and powered instrument in
Japan and certain Eastern European countries for up to three years. Sales under
these distribution agreements approximated 9% of the Company's 1998 net sales.
Research and Development Activities
During the three years, 1996, 1997 and 1998, the Company spent
approximately $3.0 million, $3.0 million and $12.0 million, respectively, for
research and development. The Company's research and development departments
consist of 99 employees.
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 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.
<PAGE>
Competition
The markets for the Company's 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 Smith & Nephew plc, Stryker Corporation, Valleylab and Graphic
Controls (units of Tyco International Ltd.) and Minnesota Mining and
Manufacturing Company.
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
Most if not all of the Company's products are classified as medical
devices subject to regulation by the FDA. The Company's new products generally
require FDA clearance under a procedure known as 510(k) premarketing
notification. A 510(k) premarketing notification clearance indicates FDA
agreement with an applicant's determination that the product for which clearance
has been sought is substantially equivalent to another medical device that was
on the market prior to 1976 or that has received 510(k) premarketing
notification clearance. Some products have been continuously produced, marketed
and sold since May 1976 and require no 510(k) premarketing clearance. The
Company's products generally are 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 85
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.
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 Quality System
Regulations as specified in Title 21, Code of Federal Regulation (CFR) part 820.
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 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 believes that its products currently meet applicable
standards for the countries in which they are marketed.
<PAGE>
The Company is subject to product recall. All Company recalls prior to
1998 have been closed. The Company initiated three recalls during 1998 in the
Hall Surgical product line. Corrective actions were taken to address the cause
of the recalls. 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, 1998, the Company had 2,392 full-time employees, of
whom 1,635 were in manufacturing, 99 in research and development, and the
balance were in sales, marketing, executive and administrative positions. 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.
<PAGE>
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.
<TABLE>
<CAPTION>
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 --
Juarez, Mexico 25,000 Lease December 2000
Santa Barbara, CA 18,000 Lease December 2001
El Paso, TX 29,000 Lease April 2002
</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
0automated 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.
<PAGE>
Item 3. Legal Proceedings
From time to time the Company is a defendant in certain lawsuits
alleging product liability, patent infringement, or other claims incurred in the
ordinary course of business. These claims are generally covered by various
insurance policies, subject to certain deductible amounts and maximum policy
limits. When there is no insurance coverage, the Company establishes sufficient
reserves to cover losses associated with such claims. 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.
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.
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, 1998.
<PAGE>
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 March 12, 1999, there were
1,376 registered holders of the Company's Common Stock and, in addition, the
Company has been notified that, on such date, there were approximately 6,742
accounts held in "street name".
The following table shows the high-low last sales prices for the years
ended December 31, 1997 and 1998, as reported by the Nasdaq National Market
System. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down and commission and may not necessarily
represent actual transactions.
<TABLE>
<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>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Period High Low
-------------------------------------------------------
<S> <C> <C>
First Quarter $25.75 $21.50
Second Quarter 26.00 21.13
Third Quarter 24.88 20.31
Fourth Quarter 33.00 21.88
</TABLE>
The Company did not pay cash dividends on its Common Stock during 1997
and 1998. 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.
<PAGE>
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
Statements of Operations Data(1):
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ 71,064 $ 99,558 $ 125,630 $ 138,270 $ 336,442
--------- --------- --------- --------- ---------
Cost of sales (2)................................ 38,799 52,402 65,393 74,220 169,599
Selling and administrative expense .............. 20,979 25,570 31,620 35,299 93,647
Research and development expense ................ 2,352 2,832 2,953 3,037 12,029
Unusual items (3) ............................... - - - 37,242 -
--------- --------- --------- --------- ---------
Income (loss) from operations ................... 8,934 18,754 25,664 (11,528) 61,167
Interest income (expense), net .................. (628) (1,991) (217) (823) (30,891)
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item ........................ 8,306 16,763 25,447 (10,705) 30,276
Provision (benefit) for income taxes ............ 2,890 5,900 9,161 (3,640) 10,899
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ......... 5,416 10,863 16,286 (7,065) 19,377
Extraordinary item, net of income taxes(4)....... - - - - (1,569)
--------- --------- --------- --------- ---------
Net income (loss) ............................... $ 5,416 $ 10,863 $ 16,286 $ (7,065) $ 17,808
========= ========= ========== ========== =========
Earnings (Loss) Per Share Before Extraordinary Item:
Basic ........................................... $ 0.60 $ 1.03 $ 1.16 $ (0.47) $ 1.28
========= ========= ========== ========== =========
Diluted.......................................... $ 0.56 $ 0.94 $ 1.12 $ (0.47) $ 1.26
========= ========= ========== ========== =========
Earnings (Loss) Per Share:
Basic............................................ $ 0.60 $ 1.03 $ 1.16 $ (0.47) $ 1.18
========= ========= ========== ========== =========
Diluted.......................................... $ 0.56 $ 0.94 $ 1.12 $ (0.47) $ 1.16
========= ========= ========== ========== =========
Weighted Average Number of Common Shares
In Calculating (5):
Basic earnings (loss) per share ................. 9,032 10,517 14,045 14,997 15,085
========= ========= ========== ========== =========
Diluted earnings (loss) per share ............... 9,624 11,613 14,496 14,997 15,321
========= ========= ========== ========== =========
Other Financial Data:
Depreciation and amortization .................. $ 3,878 $ 5,015 $ 6,410 $ 6,954 $ 23,601
EBITDA(6)........................................ 12,812 23,769 32,074 32,668 86,576
Capital expenditures............................. 2,190 5,195 4,946 8,178 12,924
Ratio of earnings to fixed charges (7) ......... 11.73x 8.84x 79.30x (7) 1.95
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data(8):
Cash and cash equivalents ....................... $ 3,615 $ 1,539 $ 20,173 $ 13,452 $ 5,906
Total assets .................................... 62,104 119,403 170,083 561,637 628,784
Long-term debt (including current portion) ...... 9,375 32,340 - 365,000 384,872
Total shareholders' equity ...................... 43,061 75,002 158,635 162,736 182,168
(footnotes on following page)
</TABLE>
(1) Includes, based on the purchase method of accounting, the results of (i)
Birtcher Medical Systems, Inc. ("Birtcher") from March 1995; (ii) the IV
controller product line acquired from Master Medical Corporation ("Master
Medical") from May 1995; (iii) NDM, Inc. ("NDM"), the subsidiary formed as
a result of the product lines acquired from New Dimensions in Medicine,
Inc., from February 1996; (iv) the surgical suction product line acquired
from the Davol subsidiary ("Davol") of C.R. Bard, Inc., from July 1997 and
(v) Linvatec Corporation from December 31, 1997, in each such case from the
date of acquisition.
(2) Includes for 1998, $3.0 million of incremental expense related to the
excess of the fair value at the acquisition date of Linvatec inventory over
the cost to produce.
(3) Includes for 1997 a $34.0 million non-cash acquisition charge for the
write-off 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 write-off of deferred financing fees resulting
from refinancing the Company's loan agreements in connection with the
Linvatec Acquisition, and $2.3 million charge for the closing of the
Company's Dayton, Ohio manufacturing facility.
(4) In March 1998, the Company recorded an extraordinary item of $2.5
million ($1.6 million net of income taxes) related to the write-off of
deferred financing fees.
<PAGE>
(5) 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.
(6) 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.
(7) The ratio of earnings to fixed charges is calculated by dividing fixed
charges into income before income taxes and extraordinary items plus fixed
charges. Fixed charges include interest expense, amortization of debt
issuance cost and the estimated interest component of rent expense. In
1997, the Company had a deficiency of earnings to cover fixed charges of
$10,558,000.
(8) 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.
<PAGE>
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 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 orthopaedics, general surgery and
other medical procedures. On December 31, 1997, the Company acquired Linvatec
Corporation from Bristol-Myers Squibb Company, more than doubling the revenues
of the Company and positioning CONMED as a leading orthopaedic supplier of
minimally invasive surgical products for arthroscopic surgery, as well as a
leader in the powered surgical instrument market.
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
-----------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales.................................................. 52.1 53.7 50.4
Gross profit................................................ 47.9 46.3 49.6
Selling and administrative expense............................. 25.2 25.5 27.8
Research and development expense .............................. 2.3 2.2 3.6
Unusual items.................................................. 26.9
------ ------ ------
Income (loss) from operations.................................. 20.4 (8.3) 18.2
Interest income (expense), net................................. (0.2) 0.6 (9.2)
Income (loss) before income taxes and extraordinary item....... 20.2 (7.7) 9.0
Provision (benefit) for income taxes........................... 7.3 (2.6) 3.2
------ ------ ------
Income (loss) before extraordinary item................... 12.9% (5.1)% 5.8%
====== ====== ======
</TABLE>
Years Ended December 31, 1998 and December 31, 1997
Sales for 1998 were $336,442,000, an increase of 143% compared to sales
of $138,270,000 in 1997. The increase was principally the result of the
acquisitions of Linvatec on December 31, 1997 and the surgical suction
instrument and tubing product line from Davol on July 1, 1997.
<PAGE>
Cost of sales increased to $169,599,000 in 1998 as compared to the
$74,220,000 in 1997 as a result of increased sales volume. The increase in gross
profit percentage is primarily a result of the Linvatec products which have a
higher gross profit percentage than the Company's overall gross profit
percentage. The Company's gross profit percentage was 49.6% in 1998 as compared
to 46.3% in 1997. In connection with purchase accounting for the Linvatec
acquisition, the Company increased the acquired value of inventory by $3.0
million over its production cost. This inventory was sold during the quarter
ended March 1998 and, accordingly, this non-recurring adjustment served to
reduce the Company's 1998 gross profit percentage by 0.8 percentage points.
Additionally, certain of the Company's orthopaedic sales for the first six
months were distributed through Zimmer, Inc., a wholly-owned subsidiary of
Bristol-Myers Squibb Company under provisions of distribution and transition
agreements entered into in connection with the Linvatec acquisition. This
arrangement served to adversely impact the Company's gross profit percentage for
the first six months of 1998. As a result of the above factors, the Company's
gross profit percentage was 52.0% in the second half of 1998 and 47.0% in the
first half of 1998.
Selling and administrative costs increased to $93,647,000 in 1998 as
compared to $35,299,000 in 1997, primarily as a result of the Linvatec
acquisition. As a percentage of sales, selling and administrative expense was
27.8% in 1998 and 25.5% in 1997. This increase reflects the overall higher
selling and administrative efforts associated with the sales of the orthopaedic
products acquired in connection with the Linvatec acquisition.
Research and development expense was $12,029,000 in 1998 as compared to
$3,037,000 in 1997. The increase reflects expense related to Linvatec research
and development activities.
There were no unusual charges recorded in 1998. As discussed below, in
1997 CONMED recorded $37.2 million of unusual items, including a $34.0 million
non-cash acquisition charge for the write-off of the in-process research and
development (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.
Interest expense for 1998 was $30,891,000 compared to interest income
of $823,000 in 1997. As discussed under Liquidity and Capital Resources, the
Company acquired Linvatec Corporation on December 31, 1997 and borrowed $365
million under its credit facility. The Company had no borrowings outstanding
during 1997, except the acquisition related borrowings on December 31, 1997. The
Company completed an offering of subordinated notes during the quarter ended
March 1998 and used the net proceeds to repay a portion of the Company's term
loans under its credit facility. Deferred financing fees relating to the portion
of the credit facility repaid amounting to $2.5 million ($1.6 million net of
income taxes) were written-off as an extraordinary item in 1998.
<PAGE>
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.
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.
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 profit percentage was 46.3% in 1997 as compared to 47.9% in 1996. Factors
adversely impacting the gross profit percentage in 1997 include the Davol
product line, which has a lower gross profit percentage than CONMED's overall
gross profit percentage, and the effects of lower pricing on ECG electrodes.
Selling and administrative expense increased to $35.3 million in 1997,
an increase of $3.7 million, or 11.6%, compared to selling and administrative
expense of $31.6 million in 1996. As a percent of sales, selling and
administrative expense increased to 25.5% in 1997 from 25.2% in 1996. Selling
and administrative expense 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.
<PAGE>
In 1997, CONMED recorded $37.2 million of unusual items, including a
$34.0 million non-cash acquisition charge for the write-off of the in-process
research and development (R & D) 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.
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. The value assigned to purchased in-process R & D, based
on a valuation prepared by an independent third-party appraisal company, was
determined by identifying research projects in areas for which technological
feasibility had not been established, including arthroscopic resection and
procedure specific surgical instruments ($10,112,000), imaging technology for
minimally invasive surgical procedures ($11,706,000), specialty surgical powered
instruments ($8,386,000), and other ($3,797,000). The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 13%. At the date of acquisition, remaining costs to complete
these projects were $162,000 for arthroscopic resection and procedure specific,
$281,000 for imaging technology, $424,000 for specialty surgical powered
instruments and $840,000 for other projects. During 1998, these projects were
either completed or abandoned. These projects ranged from 60% to 90% complete at
the date of acquisition. Costs to complete these projects consist primarily of
direct salaries and wages. Revenues from certain of these projects began in
1998. The closure of the Dayton facility was completed in 1997 and the
components of the charge consisted primarily of employee severance and the
write-down of the carrying value of fixed assets.
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%
Liquidity and Capital Resources
Net cash provided by operations was $20,962,000 in 1998 as compared to
$31,760,000 in 1997. Depreciation and amortization increased in 1998 primarily
as a result of the completed acquisitions. Additionally, during the first
quarter of 1998, the Company recorded a non-cash extraordinary charge related to
the write-off of deferred financing fees. Operating cash flow for 1998 was
positively impacted by increases in accounts payable and accrued interest, and a
reduction in the net deferred income tax asset. Adversely impacting operating
cash flows in 1998 was an increase in accounts receivable and inventories
primarily as a result of the timing of CONMED's assumption of Linvatec's
international operations previously managed by Zimmer. In connection with the
Linvatec acquisition, CONMED assumed responsibility for the majority of
Linvatec's international operation on July 1, 1998. Accordingly, the receivables
and inventory of the international operations were not acquired or funded by
CONMED until the second half of 1998.
<PAGE>
Net cash used by investing activities in 1998 included $17.5 million
paid related to the arthroscopy product line acquisition from Minnesota Mining
and Manufacturing Company and $14.4 million of payments related to the Linvatec
and Davol acquisitions. Components of the Linvatec acquisition related payments
include investment banking and professional fees related to the acquisition
($6.3 million), payments associated with the closure of Linvatec's San Dimas,
California facility ($2.5 million), payments to Zimmer, Inc. to acquire
demonstration equipment ($1.4 million) and other acquisition related payments
($2.5 million). Cash payments related to the Davol acquisition amounted to $1.7
million, of which $1.2 million represented severance costs associated with
closure of the Company's Kansas manufacturing operation. Net cash used by
investing activities in 1997 includes $24.0 million related to the acquisition
of the surgical suction instrument and tubing product line from Davol, Inc.
Capital expenditures for 1998 and 1997 amounted to $12.9 million and $8.2
million, respectively.
Financing activities during 1998 involved the completion of a
subordinated note (the "Notes") offering in the aggregate principal amount of
$130.0 million in March 1998. Net proceeds from the offering amounting to $126.1
million were used to repay a portion of the Company's term loans under its
credit facility. In addition to the net proceeds of the subordinated note
offering, the Company made payments on loans under its credit facility
aggregating $7.0 million during 1998.
In connection with the Linvatec acquisition, the Company borrowed
$350.0 million in term loans under its credit facility. Upon the application of
mandatory principal payments including the subordinated note proceeds, the
Company's term loans at December 31, 1998 aggregated $216.9 million and are
repayable quarterly over remaining terms of four and six years. The Company's
credit facility also includes a $100 million revolving credit facility which
expires December 2002, of which $62.0 million was available on December 31,
1998. The borrowings under the credit facility carry interest rates based on a
spread over LIBOR or an alternative base interest rate. The covenants of the
credit facility provide for increase and decrease to this interest rate spread
based on the operating results of the Company. Additionally, certain events of
default under the credit facility limit interest rate options available to the
Company. The weighted average interest rates at December 31, 1998 under the term
loans and the revolving credit facility were 7.32% and 7.39%, respectively.
Additionally, during the commitment period, the Company is obligated to pay a
fee of 0.5% per annum on the unused portion of the revolving credit facility.
The Company does not use derivative financial instruments for trading
or other speculative purposes. Interest rate swaps, a form of derivative, are
used to manage interest rate risk. Currently, the Company has entered into two
interest rate swaps expiring in June 2001 which convert $100 million of floating
rate debt under the Company's credit facility into fixed rate debt at rates
ranging from 7.18% to 8.25%. Provisions in one of the interest rate swaps
cancels such agreement when LIBOR exceeds 7.35%.
<PAGE>
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
certain indebtedness and 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 in the credit agreement. The Company's 1998
operating results will meet excess cash flow provisions of the credit agreement
and, accordingly, the Company expects to make mandatory prepayments on the term
loans of approximately $16 million by March 31, 1999. The significant portion of
the prepayment amount will be borrowed under the Company's revolving credit
facility. Coincident with this mandatory prepayment, it is expected that the
interest rate on the term loans and revolving credit facility will be reduced by
0.25%.
The Notes are in aggregate principal amount of $130 million and have a
maturity date of March 15, 2008. The Notes bear interest at 9.0% per annum which
is payable semi-annually. The indenture governing the Notes has certain
restrictive covenants and provides for, among other things, mandatory and
optional redemptions by the Company.
The credit facility and Notes are guaranteed (the "Subsidiary
Guarantees") by each of the Company's subsidiaries in existence on the closing
dates of the credit facility and the Notes (the "Subsidiary Guarantors"). The
Subsidiary Guarantees provide that each Subsidiary Guarantor will fully and
unconditionally guarantee the Company's obligations on a joint and several
basis. Each Subsidiary Guarantor is wholly-owned by the Company. Under the
credit facility and subordinated note indenture, 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).
Management believes that cash generated from operations, its current
cash resources and funds available under its credit facility will provide
sufficient liquidity to ensure continued working capital for operations, debt
service and funding of capital expenditures in the foreseeable future.
<PAGE>
Year 2000
The Company and its subsidiaries use information technology ("IT") and
non-IT systems that contain embedded technology throughout their businesses.
Third parties with which the Company has material relationships also use such
systems. After December 31, 1999, these systems will face a potentially serious
problem if they are not able to recognize and correctly process dates beyond
December 31, 1999. All of the Company's products, operations and information
technology systems have been inventoried and those that are not Year 2000 ready
have been identified. The upgrading and testing of those which are not Year 2000
ready is on schedule to be completed by June 30, 1999. The Company is also in
the process of contacting its vendors and customers to ascertain their
preparation for the Year 2000 issue and is in the process of identifying
critical business partners for which the need for additional due diligence will
be assessed. The costs of the Company's Year 2000 assessment and remediation
program have not been and are not expected to be material. Although the Company
does not expect the Year 2000 issue to have a material effect on its results of
operations, liquidity or financial condition, failure of critical IT and non-IT
systems could have a material adverse effect on the Company's results of
operations, liquidity or financial condition. Further, the Company cannot
eliminate the risk that revenue will be lost or costs will be incurred as a
result of the failure by third parties to properly remediate their Year 2000
issues. Because the Company has not identified any areas of its own or its third
parties IT and non-IT systems that will not be Year 2000 compliant, it has not
yet developed any necessary contingency plans.
Foreign Operations
The Company's foreign operations are subject to special risks inherent
in doing business outside the United States, including governmental instability,
war and other international conflicts, civil and labor disturbances,
requirements of local ownership, partial or total expropriation,
nationalization, currency devaluation, foreign exchange controls and foreign
laws and policies, each of which may limit the movement of assets or funds or
result in the deprivation of contract rights or the taking of property without
fair compensation.
An additional risk with respect to the Company's European operations
relates to the conversion of certain European countries to a common currency
which began January 1, 1999 (the "Euro Conversion"). The Company has formed an
internal task force to evaluate the risks and implement any required actions
with respect to the Euro Conversion. Based on the analysis of this task force,
the Company does not believe that the costs to the Company to convert to a
common currency will be material. Additionally the Company does not believe that
there will be any material impact from a competitive point of view with respect
to the impact of the Euro Conversion on the sales of products.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The Company's 1998 Financial Statements, together with the report
thereon of PricewaterhouseCoopers LLP dated February 9, 1999, are included
elsewhere herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
The Company and PricewaterhouseCoopers 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, Executive Officers and Senior
Officers" in CONMED Corporation's definitive Proxy Statement to be mailed on or
about April 9, 1999 for the annual meeting of shareholders to be held on May 18,
1999.
Item 11. Executive Compensation
Information with respect to Executive Compensation is incorporated
herein by reference to the sections captioned "Compensation of Executive
Officers", "Stock Option Plans", "Pension Plans" and "Board of Directors
Interlocks and Insider Participation; Certain Relationships and Related
Transactions" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 9, 1999 for the annual meeting of shareholders to be held on May
18, 1999.
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
9, 1999 for the annual meeting of shareholders to be held on May 18, 1999.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
incorporated herein by reference to the section captioned "Board of Directors
Interlocks and Insider Participation; Certain Relationships and Related
Transactions" in CONMED Corporation's definitive Proxy Statement to be mailed on
or about April 9, 1999 for the annual meeting of shareholders to be held on May
18, 1999.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Index to Financial Statements:
(a)(1) List of Financial Statements Form 10-K Page
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 1997 and 1998 F-2
Consolidated Statements of Income for the Years Ended
December 1996, 1997 and 1998 F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 1996, 1997 and 1998 F-5
Notes to Consolidated Financial Statements F-7
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule VIII) F-23
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
33 below are filed as part of this Form 10-K.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the date indicated
below.
CONMED CORPORATION
March 30, 1999
By: /s/ Eugene R. Corasanti
--------------------------
Eugene R. Corasanti
(Chairman of the Board, Chief Executive Officer
and President)
<PAGE>
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrants and
in the capacities and on the dates indicated.
Signature Title Date
Chairman of the Board
Chief Executive Officer
President (Principal
Executive Officer) and
/s/ EUGENE R. CORASANTI Director March 30, 1999
--------------------------
Eugene R. Corasanti
Vice President-Finance
/s/ ROBERT D. SHALLISH JR. and Chief Financial Officer
--------------------------- (Principal Financial Officer) March 30, 1999
Robert D. Shallish, Jr.
/s/ JOSEPH J. CORASANTI Executive Vice President
-------------------------- General Manager and Director March 30, 1999
Joseph J. Corasanti
/s/ LUKE A. POMILIO Controller
-------------------------- (Principal Accounting Officer) March 30, 1999
Luke A. Pomilio
/s/ BRUCE F. DANIELS Director March 30, 1999
--------------------------
Bruce F. Daniels
/s/ ROBERT E. REMMELL Director March 30, 1999
--------------------------
Robert E. Remmell
/s/ WILLIAM D. MATTHEWS Director March 30, 1999
- ---------------------------
William D. Matthews
/s/ STUART J. SCHWARTZ Director
- ---------------------------
Stuart J. Schwartz
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Instrument
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.
2.6 Asset Purchase Agreement between Linvatec Corporation and Minnesota
Mining & Manufacturing Company dated October 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 - 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 - 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.
4.4 - 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.
<PAGE>
4.5 - Indenture, dated as of March 5, 1998, by an among CONMED Corporation,
the Subsidiary Guarantors named therein and First Union National Bank,
as Trustee--incorporated by reference to the exhibit in the Company's
Registration Statement on Form S-8 filed on March 26, 1998 (File No.
333-48693).
10.1 - Employment Agreement between the Company and Eugene R. Corasanti,
dated December 16, 1996-- incorporated herein by reference to the
exhibit in 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.
10.2 (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.
10.3 - 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.
10.4 - 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.
10.5 - 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.
10.6 - See 4.4.
10.7 - See 4.5.
<PAGE>
10.8 - See 4.6
10.9 - Transition and Distribution Services Agreement, dated December 31,
1997, among Zimmer, Inc., Linvatec Corporation and CONMED Corporation-
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
10.10 - Distribution Agreement, dated December 31, 1997, among Zimmer, Inc.,
Linvatec Corporation and CONMED Corporation - incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
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 March 30, 1999, of PricewaterhouseCoopers LLP,
independent auditors for CONMED Corporation.
27 - Financial Data Schedule.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of CONMED Corporation
In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 14 (a)(i) and (2) on Page 28 present
fairly, in all material respects, the financial position of CONMED Corporation
and its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, 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.
PricewaterhouseCoopers LLP
Syracuse, New York
February 9, 1999
<PAGE>
CONMED CORPORATION
CONSOLIDATED BALANCE SHEETS
December 1997 and 1998
(In thousands except share amounts )
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 13,452 $ 5,906
Accounts receivable, less allowance for doubtful accounts of $2,708 in 1997
and $2,213 in 1998...................................................... 47,188 66,819
Income taxes receivable (Note 6)............................................ 245 1,441
Inventories (Notes 1 and 3)................................................. 61,971 78,058
Deferred income taxes (Note 6).............................................. 1,898 2,776
Prepaid expenses and other current assets.................................. 1,186 4,620
--------- ---------
Total current assets............................................. 125,940 159,620
--------- ---------
Property, plant and equipment, net (Notes 1 and 4).............................. 55,339 60,787
Deferred income taxes (Note 6).................................................. 10,783 3,900
Goodwill, net (Notes 1 and 2)................................................... 153,360 192,947
Patents, trademarks and other assets (Note 2)................................... 216,215 211,530
--------- ---------
Total assets..................................................... $ 561,637 $ 628,784
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5).................................. $ 11,000 $ 22,995
Accounts payable............................................................ 9,556 19,594
Accrued payroll and withholdings............................................ 7,014 9,665
Accrued interest............................................................ - 6,069
Other current liabilities................................................... 3,037 7,873
--------- ---------
Total current liabilities........................................ 30,607 66,196
--------- ---------
Long-term debt (Note 5)......................................................... 354,000 361,877
Other long-term liabilities..................................................... 14,294 18,543
--------- ---------
Total liabilities................................................ 398,901 446,616
--------- ---------
Commitments (Notes 4, 7, 9, and 10)
Shareholders' equity (Notes 1 and 7):
Preferred stock, par value $.01 per share; authorized 500,000 shares, none
outstanding............................................................. -- --
Common stock, par value $.01 per share; 40,000,000 authorized; 15,061,538
and 15,182,811, issued and outstanding in 1997 and 1998, respectively... 151 152
Paid-in capital............................................................. 123,451 125,039
Retained earnings........................................................... 39,553 57,361
Cumulative translation adjustments.......................................... - 35
Less 25,000 shares of common stock in treasury, at cost..................... (419) (419)
--------- ---------
Total shareholders' equity.............................................. 162,736 182,168
--------- ---------
Total liabilities and shareholders' equity....................... $ 561,637 $ 628,784
========= =========
</TABLE>
<PAGE>
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 1996, 1997 and 1998
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales (Note 8)............................................. $125,630 $138,270 $336,442
-------- -------- --------
Cost of sales.................................................. 65,393 74,220 169,599
Selling and administrative expense............................. 31,620 35,299 93,647
Research and development expense............................... 2,953 3,037 12,029
Unusual items (Note 11)........................................ - 37,242 -
-------- -------- --------
99,966 149,798 275,275
-------- -------- --------
Income (loss) from operations.................................. 25,664 (11,528) 61,167
Interest income (expense), net (Note 5)........................ (217) 823 (30,891)
-------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................................... 25,447 (10,705) 30,276
Provision (benefit) for income taxes (Notes 1 and 6)........... 9,161 (3,640) 10,899
-------- -------- --------
Income (loss) before extraordinary item........................ 16,286 (7,065) 19,377
Extraordinary item, net of income taxes (Note 5)............... - - (1,569)
-------- -------- --------
Net income (loss).............................................. $ 16,286 $ (7,065) $ 17,808
======== ======== ========
Per share data:
Income (loss) before extraordinary item
Basic............................................... $ 1.16 (.47) $ 1.28
Diluted............................................. 1.12 (.47) 1.26
Extraordinary item
Basic............................................... - - (.10)
Diluted............................................. - - (.10)
Net income (loss)
Basic.............................................. 1.16 (.47) 1.18
Diluted............................................ 1.12 (.47) 1.16
</TABLE>
<PAGE>
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Cumulative Total
Common Stock Paid-in Retained Translation Treasury Shareholders'
Number Amount Capital Earnings Adjustments Stock Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1995 .............. $ 11,000 $ 110 $ 44,560 $ 30,332 $ 75,002
Issuance of shares (Note 7)........... 2,998 30 61,705 61,735
Exercise of stock options and a 991 10 4,208 4,218
warrant (Note 7)......................
Tax benefit arising from exercise of 1,394 1,394
stock options.....................
Net income ........................... 16,286 16,286
-------- -------- -------- -------- -------- -------- --------
Balance at December 1996 ............... 14,989 150 111,867 46,618 158,635
Exercise of stock options............. 73 1 661 662
Tax benefit arising from exercise of 298 298
stock options.......................
Issuance of a warrant (Note 2)........ 10,625 10,625
Purchase of CONMED common stock
(Note 7)........................... $ (419) (419)
Net loss.............................. (7,065) (7,065)
-------- -------- -------- -------- -------- -------- --------
Balance at December 1997 .............. 15,062 151 123,451 39,553 (419) 162,736
Exercise of stock options............. 121 1 1,087 1,088
Tax benefit arising from exercise of 501 501
stock options.....................
Comprehensive income..................
Translation adjustments............ $ 35
Net income......................... 17,808
Total comprehensive income............ 17,843
-------- -------- -------- -------- -------- -------- --------
Balance at December 1998 .............. 15,183 $ 152 $125,039 $ 57,361 $ 35 $ (419) $182,168
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
CONMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ 16,286 $ (7,065) $ 17,808
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Depreciation............................................... 3,670 3,880 8,098
Amortization............................................... 2,740 3,074 15,503
Extraordinary item, net of income taxes (Note 5) .......... - - 1,569
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................................... (1,552) (1,499) (19,614)
Inventories........................................... 360 6,295 (19,303)
Prepaid expenses and other current assets............. (264) (228) (1,180)
Accounts payable...................................... 82 (73) 10,028
Income tax receivable/payable......................... 195 521 (1,348)
Income tax benefit of stock option exercises.......... 1,394 298 501
Accrued payroll and withholdings...................... (245) 263 2,834
Accrued interest...................................... - - 6,069
Other current liabilities............................. 21 1,627 (1,347)
Deferred income taxes................................. 3,713 (10,809) 7,039
Other assets/liabilities, net......................... (492) 1,476 (5,695)
---------- ---------- ---------
9,622 38,825 3,154
---------- ---------- ---------
Net cash provided by operations....................... 25,908 31,760 20,962
---------- ---------- ---------
Cash flows from investing activities:
Payments related to business acquisitions (Note 2)............. (31,672) (395,273) (31,909)
Acquisition of property, plant and equipment................... (4,946) (8,178) (12,924)
---------- ---------- ---------
Net cash used by investing activities................. (36,618) (403,451) (44,833)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds of long-term debt..................................... 32,660 365,000 130,000
Borrowings under revolving credit facility (Note 5) ........... - - 23,000
Proceeds from issuance of common stock......................... 65,953 662 1,088
Purchase of treasury stock (Note 7)............................ - (419) -
Payments related to issuance of long-term debt................. - - (4,635)
Payments on long-term debt and other obligations............... (69,269) (273) (133,128)
---------- ---------- ---------
Net cash provided by financing activities............. 29,344 364,970 16,325
---------- ---------- ---------
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents................ 18,634 (6,721) (7,546)
Cash and cash equivalents at beginning of year...................... 1,539 20,173 13,452
---------- ---------- ---------
Cash and cash equivalents at end of year............................ $ 20,173 $ 13,452 $ 5,906
========== ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................... $ 941 $ - $ 24,078
Income taxes............................................... 5,347 6,079 4,121
Supplemental non-cash investing and financing activities:
As more fully described in Note 2, the Company issued a warrant for the
purchase of 1,000,000 common shares with a value of $10,625,000 in connection
with a 1997 acquisition.
</TABLE>
<PAGE>
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.
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 $6,468,000 and $10,996,000 at
December 31, 1997 and 1998, 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.
<PAGE>
Translation of foreign currency financial statements
Assets and liabilities of foreign subsidiaries have been translated
into United States dollars at the applicable rates of exchange in effect at the
end of the period reported. Revenues and expenses have been translated at the
applicable weighted average rates of exchange in effect during the period
reported. Translation adjustments are reflected as a separate component of
shareholders' equity. Any transaction gains and losses are included in net
income.
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>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Shares used in the calculation of Basic EPS (weighted average
shares outstanding)........................................ 14,045 14,997 15,085
Effect of dilutive potential securities........................ 451 - 236
------ ------ ------
Shares used in the calculation of Diluted EPS.................. 14,496 14,997 15,321
====== ====== ======
</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 diluted EPS exclude warrants and options to purchase shares
where the exercise price was greater than the average market price of common
shares for the year. Such shares aggregated 218,000, 1,395,000 and 1,440,000 at
December 31, 1996, 1997 and 1998, respectively.
Comprehensive income
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
130, "Reporting Comprehensive Income", effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires companies to report another
measure of operations called comprehensive income. This measure, in addition to
"net income" includes as income or loss, the following items, which if present
are included in the equity section of the balance sheet: 1) unrealized gains and
losses on certain investments in debt and equity securities; 2) foreign currency
translation; and 3) minimum pension liability adjustments. The Company has
reported comprehensive income within the Consolidated Statement of Shareholders'
Equity.
<PAGE>
Derivative financial instruments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from the changes in the values of the
derivatives would be accounted for depending on whether it qualifies for hedge
accounting. The Company will be required to adopt this standard in the fiscal
year beginning January 1, 2000. Management does not believe that the adoption of
this statement will have a material impact on the financial statements.
The Company uses interest rate swaps to manage the interest risk
associated with its variable rate debt. The Company accounts for interest rate
swaps on the accrual method, whereby the net receivable or payable is recognized
on a periodic basis and included as a component of interest expense. The Company
does not trade in derivative securities.
The estimated fair value of cash and cash equivalents, accounts
receivable, and accounts payable, approximate their carrying amount. The
estimated fair values and carrying amounts of long-term borrowings and interest
rate swaps are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Swap agreements.................................... $ - $ - $ - $ (443)
Long-term debt (including current maturities)...... (365,000) (365,000) (384,872) (384,872)
Fair values were determined from quoted market prices or discounted cash flows.
</TABLE>
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.
Reclassifications
Certain amounts previously reported have been reclassified to conform
to current year classifications.
<PAGE>
Note 2 -- Business Acquisitions
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 $31,600,000 and the assumption of $3,300,000 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
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 $28,600,000 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.
<PAGE>
This acquisition is being accounted for using the purchase method. The
allocation of purchase price resulted in identifiable intangible assets,
including patents and technology ($9,000,000), trademarks and tradenames
($96,000,000) and customer relationships ($108,000,000), aggregating
$213,000,000, which will be amortized over periods from 5 to 40 years. Goodwill
associated with the Linvatec acquisition approximated $89,300,000 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. The value assigned to
purchased in-process R&D, based on a valuation prepared by an independent
third-party appraisal company, was determined by identifying research projects
in areas for which technological feasibility had not been established, including
arthroscopic resection and procedure specific surgical instruments
($10,112,000), imaging technology for minimally invasive surgical procedures
($11,706,000), specialty surgical powered instruments ($8,386,000) and other
($3,796,000). The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value using a discount rate of 13%. At the date of
acquisition, remaining costs to complete these projects were $162,000 for
arthroscopic resection and procedure specific, $281,000 for imaging technology,
$424,000 for specialty surgical powered instruments and $840,000 for other
projects. During 1998, these projects were either completed or abandoned. These
projects ranged from 60% to 90% complete at the date of acquisition. Costs to
complete these projects consist primarily of direct salaries and wages. Revenues
from certain of these projects began in 1998.
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 up to three years.
During 1998 goodwill for the Davol and Linvatec acquisitions increased
by $1.7 million and $28.9 million, respectively. The Davol increase reflects
severance ($1.5 million) and other costs associated with the 1998 closure of the
former Davol manufacturing operation located in Kansas. The significant
components of the increase in Linvatec goodwill include the finalization of
unfunded employee benefit obligations assumed at the acquisition date ($7.5
million), payments for investment banking fees and professional fees related to
the acquisition ($6.3 million), payments and the writedown of fixed assets in
connection with the closure of Linvatec's San Dimas. California facility which
was completed in 1998 ($4.0 million), and payments and accruals related to
contingent liabilities assumed with the acquisition ($4.5 million).
On November 16, 1998, the Company acquired the assets related to an
arthroscopy product line from Minnesota Mining and Manufacturing Company for a
cash purchase price of $17,500,000. This acquisition is being accounted for
using the purchase method. Accordingly, the results of operation 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.
The allocation of the purchase price for the arthroscopy product line
acquisition referred to in the preceding paragraph is 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.
<PAGE>
On an unaudited pro forma basis, assuming the completed 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
1997 1998
<S> <C> <C>
Pro forma net sales.................................................. $351,395 $345,192
======== ========
Pro forma income (loss) before extraordinary item.................... $ (8,624) $ 19,505
======== ========
Pro forma income (loss) per share before extraordinary item:
Basic............................................................ $ (.58) $ 1.29
======== ========
Diluted.......................................................... $ (.58) $ 1.27
======== ========
</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.
Note 3 -- Inventories
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Raw materials........................................................ $ 28,097 $ 35,204
Work in process...................................................... 6,569 7,429
Finished goods....................................................... 27,305 35,425
-------- --------
$ 61,971 $ 78,058
======== ========
</TABLE>
<PAGE>
Note 4 -- Property, Plant and Equipment
Details of property, plant and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land and improvements................................................ $ 2,011 $ 2,011
Building and improvements............................................ 22,319 27,966
Machinery and equipment.............................................. 51,963 57,801
Construction in progress............................................. 314 2,416
----------- -----------
76,607 90,194
Less: Accumulated depreciation......................... (21,268) (29,407)
----------- -----------
$ 55,339 $ 60,787
=========== ===========
</TABLE>
<PAGE>
Rental expense on operating leases was approximately $327,000, $489,000
and $2,650,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The aggregate future minimum lease commitments for operating
leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31 (in thousands):
<S> <C>
1999........................... $ 2,559
2000........................... 2,568
2001........................... 2,588
2002........................... 2,314
2003........................... 2,280
Thereafter..................... 12,963
</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 0.5% per annum on the unused
portion of the revolving credit facility. A covenant under the credit facility
required the Company to complete a senior subordinated note offering, which was
completed in March 1998 with the net proceeds of $126.1 million being used to
reduce the term loans under the credit facility. Deferred financing fees related
to the portion of the term loans repaid amounting to $2.5 million ($1.6 million
net of income taxes) were written off in March 1998 as an extraordinary item.
As of December 31, 1998, the Company had $127,733,000, $89,139,000 and
$38,000,000 outstanding under the five-year term loan, the seven-year term loan
and the revolving credit facility, respectively. The borrowings under the credit
facility carry interest rates based on a spread over LIBOR or an alternative
base interest rate. The covenants of the credit facility provide for increase
and decrease to this interest rate spread based on the operating results of the
Company. Additionally, certain events of default under the credit facility limit
interest rate options available to the Company. The weighted average interest
rates at December 31, 1998 under the five-year term loan, the seven-year term
loan and the revolving credit facility were 7.19%, 7.46% and 7.39%,
respectively. The Company has entered into two interest rate swaps expiring in
June 2001 which convert $100 million of floating rate debt under the Company's
credit facility into fixed rate debt at rates ranging from 7.18% to 8.25%.
Provisions in one of the interest rate swaps cancels such agreement when LIBOR
exceeds 7.35%.
<PAGE>
The term debt and revolving credit facility are collateralized by all
the Company's personal property. The agreement contains covenants and
restrictions which, among other things, require maintenance of certain working
capital levels and financial ratios, prohibit dividend payments and restrict the
incurrence of certain indebtedness and other activities, including acquisitions
and dispositions. The 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 in the credit agreement. Mandatory prepayments
will be applied first to the prepayment of the term loans and then to reduce
borrowings under the revolving credit facility. The Company's 1998 operating
results will meet excess cash flow provisions of the credit agreement and,
accordingly, the Company expects to make mandatory prepayments on the term loans
of approximately $16 million by March 31, 1999. Such amounts are classified as
long-term, consistent with the maturity date of the revolving credit facility.
The significant portion of the prepayment amount will be borrowed under the
Company's revolving credit facility. Coincident with this mandatory repayment,
it is expected that the interest rate on the term loans and revolving credit
facility will be reduced by 0.25%.
As discussed above, the Company issued $130,000,000 of 9% Senior
Subordinated Notes ("Notes"). The Notes mature on March 15, 2008, unless
previously redeemed by the Company. Interest on the Notes is payable
semi-annually on March 15 and September 15 of each year. The Notes are
redeemable for cash at anytime on or after March 15, 2003, at the option of the
Company, in whole or in part, at the redemption prices set forth therein, plus
accrued and unpaid interest to the date of redemption. In addition, on or before
March 15, 2001, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Notes originally issued with the net proceeds
of one or more offerings of common stock of the Company for cash at a redemption
price of 109% of the principal amount thereof plus accrued and unpaid interest
to the date of redemption; provided that at least 65% of the aggregate principal
amount of the Notes remain outstanding after giving effect to any such
redemption.
The scheduled maturities of long-term debt outstanding at December 31,
1998 are as follows: 1999 -- $23,000,000; 2000 -- $32,600,000; 2001 --
$35,800,000; 2002 -- $76,900,000; 2003 -- $41,700,000; thereafter --
$174,900,000.
The credit facility (including the term loans and the revolving credit
facility) is guaranteed on a secured basis, and the Notes are guaranteed (the
"Subsidiary Guarantees") by 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 and the Notes on a joint and several basis. Each Subsidiary
Guarantor is wholly-owned by the Company.
<PAGE>
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,
1997 1998
-------- --------
<S> <C> <C>
Current assets......................................................... $ 54,799 $ 96,434
Non-current assets..................................................... 327,751 359,499
Current liabilities.................................................... 15,339 30,367
Non-current liabilities................................................ 345,826 354,063
</TABLE>
<TABLE>
<CAPTION>
Year Ended December
1996 1997 1998
---------- --------- --------
<S> <C> <C> <C>
Revenues..................................................... $53,015 $51,376 $239,491
Operating income (loss)...................................... 16,731 (16,452) 45,529
Net income (loss)............................................ 10,708 (10,529) 7,639
</TABLE>
<PAGE>
Note 6 -- Income Taxes
The provision for income taxes consists of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- --------- --------
Current tax expense:
Federal....................................................... $ 6,398 $ 6,677 $ 1,652
State......................................................... 311 492 258
Foreign ...................................................... -- -- 210
---------- --------- --------
6,709 7,169 2,120
Deferred income tax expense (benefit)............................. 2,452 (10,809) 8,779
---------- --------- --------
Provision (benefit) for income taxes.......................... $ 9,161 $ (3,640) $10,899
========= ======== =======
A reconciliation between income taxes computed at the statutory federal
rate and the provision for income taxes follows (in thousands):
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Tax provision at statutory rate based on income before
Income taxes and extraordinary item........................... $ 8,906 $ (3,747) $ 10,899
Foreign sales corporation......................................... (318) (300) (313)
State taxes....................................................... 202 313 165
Nondeductible intangible amortization............................. 280 224 243
Other, net........................................................ 91 (130) (95)
--------- -------- --------
$ 9,161 $ (3,640) $ 10,899
========= ======== ========
</TABLE>
<PAGE>
The tax effects of the significant temporary differences which comprise
the deferred tax assets and liabilities at December 31, 1997 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Assets:
Receivables..................................................... $ 315 $ 290
Inventory....................................................... 518 1,002
Deferred compensation........................................... 432 511
Employee benefits............................................... 210 181
Other........................................................... 682 1,056
Leases.......................................................... 928 373
Goodwill and intangible assets.................................. 12,168 4,400
Birtcher net operating losses................................... 5,105 4,681
Valuation allowance for deferred tax assets..................... (5,105) (4,681)
--------- ---------
15,253 7,813
--------- ---------
Liabilities:
Depreciation.................................................... 1,745 1,044
Interest charge DISC............................................ 57 28
Other...........................................................
770 65
--------- ---------
2,572 1,137
--------- ---------
$ 12,681 $ 6,676
========= =========
</TABLE>
Net operating losses of the Company's Birtcher Medical Systems, Inc.
subsidiary are subject to certain limitations and expire over the period 2008 to
2010. Management has established a valuation allowance of $4,681,000 to reflect
the uncertainty of realizing the benefit of certain of these carryforwards.
Further utilization of Birtcher operating loss carryforwards will serve to
decrease goodwill associated with the Birtcher acquisition.
<PAGE>
Note 7 -- 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, 1998,
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 was authorized to repurchase 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 market value of
the stock at the date of grant. Stock options are non-transferable other than on
death and generally become exercisable over a five year period from date of
grant and expire ten years from date of grant.
<PAGE>
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 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
Granted during 1998................................................ 509 23.64
Forfeited.......................................................... (93) 24.44
Exercised.......................................................... (121) 8.99
------------ ------------
Outstanding at December 1998 1,500 $ 17.90
============ ============
Exercisable:
December 1996...................................................... 559 $ 9.96
December 1997...................................................... 690 10.12
December 1998...................................................... 856 14.24
</TABLE>
At December 31, 1998, the number of stock options outstanding with
exercise prices less than $10, between $10 and $20, and greater than $20 were
152,000, 601,000 and 747,000, respectively. The weighted average price per share
and remaining life for options in these categories were $5.74 and 3 years,
$12.63 and 5 years, and $24.62 and 9 years, respectively. The number of shares
exercisable at December 31, 1998 and the related weighted average price per
share for options in these categories were 148,000 shares at $5.75, 506,000
shares at $12.00 and 202,000 shares at $26.09, respectively.
<PAGE>
In October 1995, the FASB 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 ("APB") No. 25,
"Accounting for Stock Issued to Employees", where compensation cost is measured
at the date of grant based on the excess of the market value of the underlying
stock over the exercise price. The Company has elected to continue to account
for its stock-based compensation plans under the provisions of APB No. 25. 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 net income (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 1996, 1997 and
1998 was $12.95, $11.87 and $11.57, 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 options granted in
1996, 1997 and 1998, respectively: Risk-free interest rates of 6.45%, 5.96% and
5.41%; volatility factors of the expected market price of the Company's common
stock of 54.31%, 51.31% and 48.72%; 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>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss)-- as reported............................... $16,286 $(7,065) $17,808
Net income (loss)-- pro forma................................. 15,299 (7,427) 15,420
EPS -- as reported:
Basic.................................................... 1.16 (0.47) 1.18
Diluted.................................................. 1.12 (0.47) 1.16
EPS -- pro forma:
Basic.................................................... 1.09 (0.50) 1.02
Diluted.................................................. 1.06 (0.50) 1.01
The pro-forma disclosures include only options granted after January 1, 1995.
</TABLE>
<PAGE>
Note 8 -- Business Segments, Geographic Areas and major Customers
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." CONMED's
business is organized, managed and internally reported as a single segment
comprised of medical instruments and systems used in surgical and other medical
procedures. The Company believes its various product lines have similar
economic, operating and other related characteristics.
Information in the table below is presented on the basis the Company
uses to manage its business. Export sales are reported within the geographic
area where the final sales to customers are made (in thousands).
<TABLE>
<CAPTION>
Latin America
Europe and Asia Africa and Total
United States Middle East Pacific Canada Company
------------- ----------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
1998 $266,668 $ 31,134 $ 26,974 $ 11,666 $336,442
1997 118,673 8,000 8,521 3,076 138,270
1996 107,626 7,850 7,632 2,522 125,630
</TABLE>
There were no significant investments in long-lived assets located outside the
United States at December 31, 1997 and 1998.
The Company uses medical supply distributors to distribute certain
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 12.2% of the Company's sales in 1996.
Note 9 -- 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 1996, 1997 and 1998 included the following
components (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Service cost-- benefits earned during the period.................. $ 766 $ 925 $2,324
Interest cost on projected benefit obligation..................... 402 436 1,143
Expected return on plan assets.................................... (336) (395) (1,046)
Net amortization and deferral..................................... 32 44 27
------ ------- ------
Net pension cost.................................................. $ 864 $ 1,010 $2,448
====== ======= ======
</TABLE>
<PAGE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Change in benefit obligation
Projected benefit obligation at beginning of year....... $ 6,112 $17,050
Service cost............................................ 925 2,324
Interest cost........................................... 436 1,143
Actuarial loss (gain)................................... 148 (195)
Acquisition............................................. 9,557 -
Benefits paid........................................... (128) (786)
------- -------
Projected benefit obligation at end of year............. $17,050 $19,536
------- -------
Change in plan assets
Fair value of plan assets at beginning of year.......... $ 4,405 $13,514
Actual return on plan assets............................ 536 773
Acquisition............................................. 7,552 -
Employer contribution................................... 1,149 -
Benefits paid........................................... (128) (786)
------- -------
Fair value of plan assets at end of year................ $13,514 $13,501
------- -------
Change in funded status
Funded status........................................... $ 3,536 $ 6,035
Unrecognized net actuarial loss......................... (806) (872)
Unrecognized transition liability....................... (72) (68)
Unrecognized prior service cost......................... (184) (173)
------- -------
Accrued pension cost.................................... $ 2,474 $ 4,922
------- -------
</TABLE>
For 1996, 1997 and 1998 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%.
<PAGE>
Note 10 -- 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 11 -- 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.
<PAGE>
Note 12 -- Selected Quarterly Financial Data ( Unaudited)
Selected quarterly financial data for 1997 and 1998 are as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
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 per share:
Basic......................... 0.16 0.23 0.30 (1.17)
Diluted....................... 0.16 0.23 0.30 (1.17)
</TABLE>
<TABLE>
<CAPTION>
March June September December
----- ---- --------- --------
<S> <C> <C> <C> <C>
1998
Net sales........................ $ 80,242 $ 80,513 $ 85,714 $ 89,973
Gross profit..................... 35,860 39,639 44,593 46,751
Net income....................... 882 4,547 5,921 6,458
Earnings per share:
Basic......................... 0.06 0.30 0.39 0.43
Diluted....................... 0.06 0.30 0.39 0.42
</TABLE>
As discussed in Note 11, the Company recorded several unusual items in the first
and fourth quarters of 1997. As discussed in Note 5, the Company recorded an
extraordinary charge in March 1998 related to the write-off of deferred
financing fees of approximately $2.5 million (10 cents per share).
<PAGE>
SCHEDULE VIII--Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Column C
--------------------------
Additions
Column B -------------------------- Column E
-------- (1) (2) Balance at End
Column A Balance at Charged to Charged to Column D ---------------
---------- Beginning of Costs and Other ----------- Balance at End
Description Period Expenses Accounts Deductions of Period
----------- ------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1998
Allowance for bad debts.. $ 2,708 $ 459 $ (954) $2,213
Inventory reserves....... $ 7,411 $ 918 $ (61) $(1,650) $6,618
Deferred tax asset
Valuation allowance...... $5,105 $ (424) $4,681
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
</TABLE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of this 8th day of October, 1998 by and between Linvatec
Corporation, a Florida corporation (the "Linvatec"), and Minnesota Mining and
Manufacturing Company, a Delaware corporation ("3M").
WHEREAS, 3M, through its Medical Surgical Division (the
"Division"), engages in the business of manufacturing and selling certain
arthroscopic fluid control products and directly associated arthroscopic
instruments (the manufacture and sale of such products through such Division
being herein called the "Business"). Arthroscopy is the endoscopic examination
of the interior of a joint, and a joint is the articulating surfaces between
bones. Obviously, arthroscopic products do not include the so-called carpal
tunnel release system or similar products, which are not used in joints.
WHEREAS, 3M now desires to exit the Business without
interrupting the availability of products and customer support and Linvatec
desires to purchase and acquire the assets of the Business, all on the terms and
conditions set forth in this Agreement.
WHEREAS, Linvatec wishes to purchase the Business in a manner
that causes as little disruption as possible to customers of and the
profitability of the Business.
WHEREAS, 3M now desires to sell and Linvatec desires to
purchase and acquire certain assets of the Business, all on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the parties agree as follows:
ARTICLE I
Definitions
1.01 Purchased Assets. The term "Purchased Assets" or any
variation thereof as used in this Agreement shall mean the assets to be sold,
assigned, transferred and conveyed by 3M to Linvatec pursuant to Article II
hereof.
1.02 3M Products. The term "3M Products" or "3M Product Line"
or any variation thereof as used in this Agreement shall mean those 3M products
manufactured or sold through the Division described in the attached Schedule
1.02. .
<PAGE>
1.03 Assumed Liabilities. The term "Assumed Liabilities" or
any variation thereof as used in this Agreement shall mean the liabilities and
obligations to be assumed by Linvatec pursuant to Article IV hereof.
1.04 Purchased Intellectual Property. The term "Purchased
Intellectual Property" means patents, patent applications, utility model
registrations, design patents, trademarks (if any), trade secrets and know-how
owned by 3M on the Closing Date that directly and solely relate to the Business
as conducted on the Closing Date and are listed in Schedule 1.04, but excluding
components and materials supplied to the Business by other businesses of 3M.
1.05 Licensed Intellectual Property. The term "Licensed
Intellectual Property" means patents, patent applications, utility model
registrations, design patents, trade secrets and know-how owned by 3M on the
Closing Date that are used directly in both the Business as conducted on the
Closing Date and 3M's cardiovascular perfusion/surgical business, but excluding
Components and Materials supplied to the Business by other businesses of 3M.
1.06 IP Agreements. The term "IP Agreements" means those
agreements licensing patents to or from 3M that directly and solely relate to
the Business as conducted on the Closing Date and are listed in Schedule 1.06,
excluding however supplier, distribution, consulting and confidentiality
agreements.
1.07 Sublicensed IP Agreement. The term "Sublicensed IP
Agreement" means the Automotive Supplier Agreement dated 22nd September 1998
between the Lemelson Medical, Education and Research Foundation, Limited
Partnership and 3M.
1.08 Adverse Material Change. The term "Adverse Material
Change" shall mean any change that significantly affects the valuation of the
Business.
ARTICLE II
Sale of Assets
2.01 Purchased Assets. Subject to the terms and conditions
hereof, 3M agrees to sell, assign, transfer and convey to Linvatec, and Linvatec
agrees to purchase and acquire from 3M, at the Closing (as hereinafter defined)
on the Closing Date (as hereinafter defined), all of 3M's right, title and
interest, if any, immediately prior to the effective time of the Closing in and
to the following assets wherever located:
(a) the fixed assets, machinery, manufacturing equipment, laboratory
and test equipment and 3M Product specifications, drawings and
manufacturing processes documents and office equipment used in
the Business as specified in Schedule 2.01(a).
<PAGE>
(b) [intentionally deleted]
(c) Purchased Intellectual Property as provided in Article VI; and
(d) the records directly and solely related to the 3M Product Line and the
Purchased Assets.
(e) the purchase orders directly and solely related to the 3M Product Line,
the Purchased Assets or the Business issued by or to 3M in the
ordinary course of business;
(f) Subject to Section VI (Intellectual Property), the leases, contracts
and written agreements related to the 3M Product Line, the
Purchased Assets or the Business as conducted on the Closing
Date to the extent transferable (all non-assignable contracts
are identified in Schedule 2.01(f) (Non-assignable
contracts)), with 3M being required to secure the assignment
or transfer of all such agreements pursuant to Section 8.03.
2.02 Excluded Assets. It is understood and agreed that the
following assets of the Business are excluded from the Purchased Assets: (i)
cash; (ii) accounts receivable; and (iii) any items listed in Schedule 2.02
(Excluded Assets).
2.03 [Intentionally excluded]
2.04 Retention of Certain Records. It is understood and agreed
that 3M reserves the right to retain copies or written records of the items
referred to in Sections 2.01(c) and (d) for the purpose of defending any claims,
losses, causes of action or lawsuits, including those related to the sale of the
3M Product Line by 3M, and for the purpose of preparing any tax returns or
financial statements or reports, provided that 3M shall maintain the
confidentiality of such documents and shall promptly notify Linvatec of any
lawsuit or claim served upon 3M relating to the Business and/or records or
documents.
ARTICLE III
Purchase Price
3.01 Purchase Price and Payment. ln consideration for the
Purchased Assets, Linvatec agrees to pay to 3M seventeen million five hundred
thousand Dollars ($17,500,000.00) (the "Purchase Price"). The Purchase Price
shall be payable in cash at the Closing by wire transfer of immediately
available federal funds to 3M at Norwest Bank, Minnesota, N.A., Minneapolis,
Minnesota, ABA #091 000 019, credit to 3M General Account #30103.
<PAGE>
3.02 Allocation of Total Purchase Price. It is understood and
agreed by the parties that, except as hereinafter provided, the Purchase Price
shall be allocated among the Purchased Assets in accordance with the attached
Exhibit A, and that said allocation will be used for state and federal tax
purposes. Each party acknowledges that such allocation is consistent with the
requirements of Section 1060 of the Internal Revenue Code 1986, as amended, and
the regulations thereunder. Each party agrees (i) to jointly complete and
separately file Form 8594 with its federal income tax return for the tax year in
which the Closing Date occurs, and (ii) that such party will not take a position
on any income, transfer or gains tax return before any governmental agency
charged with the collection of any such tax or in any judicial proceeding, that
is in any manner inconsistent with the terms of such allocation without the
written consent of the other party. Notwithstanding anything to the contrary
provided herein, neither party shall be bound by such allocation in the event
the Internal Revenue Service or another tax authority successfully challenges
the allocation. In the event of any challenge to such allocation by the Internal
Revenue Service or another tax authority, the parties will give each other
notice of the challenge and advise each other periodically of the status of such
challenge and reasonably cooperate with each other with respect to such
challenge.
3.03 Sales, Use and Transfer Taxes. Linvatec shall be
responsible for all sales, use and transfer taxes, deed taxes and recording
fees, if any, in each case applicable to the sale and transfer of the Purchased
Assets hereunder. Linvatec will furnish 3M at the Closing with properly executed
exemption certificates, dated the Closing Date, relating to the supplies and
manufacturing equipment being transferred pursuant to this Agreement as to which
Linvatec is claiming an exemption from sales, use or other transfer taxes.
ARTICLE IV
Assumption of Liabilities
4.01 Assumption of Liabilities. Subject to the terms and
conditions hereof and subject to Article VI (Intellectual Property), at the
Closing, Linvatec shall assume and agree to carry out and perform all of the
following liabilities and obligations which have not been paid, performed or
discharged prior to the effective time of the Closing by 3M:
(a) all obligations of 3M payable or performable after the Closing Date
under any of the licenses, purchase orders, leases, contracts,
or written agreements included in the Purchased Assets, but
excluding raw material and component parts purchases made by
3M in connection with 3M's performance under the Supply
Agreement, (collectively, the "Contracts"), the Sublicensed IP
Agreement and the IP Agreements;
<PAGE>
(b) all warranty obligations of 3M with respect to 3M Products sold on or
prior to the Closing Date, as set forth in the attached
Schedule 4.01(b); and
(c) such other liabilities of the Business related to the 3M Product Line,
the Purchased Assets or the Business arising after the
Closing.
(d) the language of Section 4.01(a)-(c) notwithstanding, Linvatec shall not
be responsible for any taxes or liens upon the Purchased
Assets that arise from pre-Closing facts or circumstances.
ARTICLE V
Representations and Warranties
5.01 3M Representations. 3M hereby represents and warrants as
follows:
(a) Organization of 3M. 3M is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware
(b) Authority of 3M. 3M has full corporate power and authority to execute,
deliver and perform this Agreement and each of the Transaction
Documents (as hereinafter defined) to be entered into by it at
the Closing, and such execution, delivery and performance have
been duly authorized by all necessary and proper corporate
action of 3M. This Agreement has been duly executed and
delivered by 3M, and (assuming due authorization, execution
and delivery hereof by Linvatec) is the valid and binding
obligation of 3M enforceable against 3M in accordance with its
terms (except as such enforceability may be limited by
bankruptcy, reorganization, insolvency, moratorium and other
similar laws affecting creditors' rights generally or by
general principles of equity.) Upon execution and delivery
thereof by 3M at the Closing (and assuming due authorization,
execution and delivery thereof by Linvatec, to the extent
applicable), each of the Transaction Documents to be entered
into by 3M at the Closing will be the valid and binding
obligation of 3M enforceable against 3M in accordance with its
terms (except as such enforceability may be limited by
bankruptcy, reorganization, insolvency, moratorium or other
similar laws affecting creditors' rights generally or by
general principles of equity).
(c) Title to Purchased Assets. Except as set forth in Schedule 5.01(c),
Article VI (Intellectual Property) or elsewhere in this
Agreement, 3M has or will have at the Closing title to the
Purchased Assets, free and clear of all mortgages, liens,
security interests, claims, tax liabilities, charges and
encumbrances.
<PAGE>
(d) Contracts. The attached Schedule 5.01(d) lists, as of the date of this
Agreement, all leases, contracts, agreements and commitments
related to the 3M Product Line, other than those IP agreements
listed on Schedule 1.06, the Purchased Assets or the Business
to which 3M is a party or by which 3M is bound and which
involve payments of more than $10,000 per annum, excluding
purchase orders issued by or to 3M in the ordinary course of
business.
(e) No Brokers. With respect to the transactions contemplated by this
Agreement, 3M has not dealt with or been contacted by any
finder or broker and is not in any way obligated to compensate
such persons.
(f) Compliance with Law. To 3M's knowledge, the Business is not in
violation of any law, ordinance or regulation of any
governmental entity, which violations would have Adverse
Material Change. To 3M's knowledge, all governmental
approvals, permits, licenses and other authorizations required
in connection with the conduct of any material aspect of the
Business (collectively, "Governmental Authorizations") have
been obtained and are in full force and effect and are being
complied with in all material respects. However, 3M has the
authorization to CE mark only model 83100 tubesets. 3M has not
received any written notification of any asserted past or
present violation in connection with the conduct of the
Business of any law, ordinance or regulation, which violation
would have a Adverse Material Change, or any written
complaint, inquiry or request for information from any
governmental entity relating thereto. 3M represents that to
3M's knowledge none of the 3M Products are subject to a
recall, or need to be recalled.
(g) FDA Approval Status. 3M warrants that to 3M's knowledge, all 3M
Products including any accessories currently are being
marketed in compliance with all Food and Drug Act and other
legal requirements.
(h) Completeness of Purchased Assets. The Purchased Assets constitute all
assets necessary for 3M, or used by 3M in, the conduct of the
Business, particularly the manufacture of the 3M Products,
except those assets identified on Schedule 2.02 as the
Excluded Assets or intellectual property, which is governed by
Article VI.
(i) Financials. The financial statements provided by 3M and attached hereto
as Schedule 5.01(i) are true and accurate in all material
respects, have been derived from the books and records of 3M
that have been prepared and maintained in accordance with
Generally Accepted Accounting Principles (GAAP).
<PAGE>
(j) Claims Status. 3M is unaware of any claims that are being asserted
other than those already disclosed, with respect to product
liability, regulatory or other claims.
(k) Intellectual Property. 3M's disclaims any representation or warranty
provided in this Agreement as it might be construed to apply
to intellectual property except as provided in Article VI
(Intellectual Property).
5.02 Linvatec Representations. Linvatec hereby represents and
warrants as follows:
(a) Organization of Linvatec. Linvatec is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Florida.
(b) Authority of Linvatec. Linvatec has full corporate power and authority
to execute, deliver and perform this Agreement and each of the
Transaction Documents to be entered into by it at the Closing,
and such execution, delivery and performance have been duly
authorized by all necessary and proper corporate action of
Linvatec. This Agreement has been duly executed and delivered
by Linvatec, and (assuming due authorization, execution and
delivery hereof by 3M) is the valid and binding obligation of
Linvatec enforceable against Linvatec in accordance with its
terms (except as such enforceability may be limited by
bankruptcy, reorganization, insolvency moratorium and other
similar laws affecting creditors' rights generally or by
general principles of equity). Upon execution and delivery
thereof by Linvatec at the Closing (and assuming due
authorization, execution and delivery thereof by 3M, to the
extent applicable), each of the Transaction Documents to be
entered into by Linvatec at the Closing will be the valid and
binding obligation of Linvatec enforceable against Linvatec in
accordance with its terms (except as such enforceability may
be limited by bankruptcy, reorganization, insolvency,
moratorium or other similar laws affecting creditors' rights
generally or by general principles of equity).
(c) Financial Ability of Linvatec. Linvatec has available cash and/or
existing committed borrowing facilities sufficient to enable
it to consummate the transactions contemplated by this
Agreement.
(d) No Brokers. With respect to the transactions contemplated by this
Agreement, Linvatec has not dealt with or been contacted by
any finder or broker and is not in any way obligated to
compensate such persons.
<PAGE>
ARTICLE VI
Intellectual Property
6.01 Intellectual Property Recitals. The transfer of
intellectual property, and any representations or warranties regarding
intellectual property by 3M, are exclusively controlled by this Article. 3M
disclaims any warranty or representation provided elsewhere in this Agreement as
it might be construed to apply to intellectual property owned, licensed or
controlled by 3M or any third party intellectual property right. Except as
provided in this Article, intellectual property is being transferred or licensed
on an "AS IS" basis. The general intent of this Article is to transfer or
license to Linvatec sufficient intellectual property rights (to the extent
transferable) that are owned or licensed to 3M to allow Linvatec to conduct the
Business in the same manner it was conducted by 3M on the Closing Date,
excluding however intellectual property rights relating to components or
materials supplied to the Business by other businesses of 3M. This also means,
however, that if 3M has or is infringing any third party intellectual property
right on or before the Closing Date, Linvatec does not expect to be put into a
better position relative to such third party intellectual property right than 3M
is on the Closing Date, and that Linvatec will be responsible for any
infringement of third party intellectual property rights on products sold after
the Closing Date.
6.02 Purchased Intellectual Property. Subject to the terms and
conditions hereof, 3M agrees to sell, assign, transfer and convey to Linvatec,
and Linvatec agrees to purchase and acquire from 3M, at the Closing on the
Closing Date, all of 3M's right, title and interest, if any, immediately before
the effective time of the Closing in and to the following assets:
(a) The technology and know-how within Purchased Intellectual Property to
the extent transferable by 3M, subject to a worldwide,
non-exclusive, royalty-free, assignable license, with the
right to sublicense, from Linvatec back to 3M of any
technology and know-how within the field of cardiovascular
perfusion products and equipment and cardiovascular surgical
products and equipment;
(b) The patents, applications for patents, utility model registrations and
design patents within Purchased Intellectual Property, subject
to a worldwide, non-exclusive, royalty-free, assignable
license, with the right to sublicense, from Linvatec back to
3M of any such rights within the field of cardiovascular
perfusion products and equipment and cardiovascular surgical
products and equipment, and subject to any agreement listed in
Schedule 1.06 (If any royalties are due to a third party under
an IP Agreement due to 3M's sales under its license provided
herein, however, 3M will pay those royalties to Linvatec so
that they may be passed through to the third party);
<PAGE>
(c) Any unregistered trademarks (and the goodwill of the business in which
any such trademarks are used and which is symbolized by said
trademarks), if any, and copyrights within Purchased
Intellectual Property to the extent transferable by 3M,
subject to any agreement listed in Schedule 1.06.
(d) Any IP Agreement to the extent transferable by 3M. 3M's obligation with
respect to transferability of any IP Agreement are provided in
Section 8.03 (Unassignable Contracts) to the extent the
mechanism provided in Section 8.03 would not constitute a
breach of the IP Agreement.
6.03 Licensed Intellectual Property. Effective on the Closing
Date, 3M hereby grants to Linvatec a fully-paid up, non-cancelable, worldwide,
non-exclusive license under Licensed Intellectual Property to use such rights
within the field of orthopedic devices, including without limitation the right
to make, have made, use, sell, offer for sale, lease, import, export or
otherwise dispose of products, and the right to sublicense to customers or
suppliers as part of the manufacture or sale of products, or assign such license
to any assignee or successor of the Business. It is believed that there are no
patents, patent applications, utility model registrations, or design patents
within Licensed Intellectual Property, and thus this Section shall be construed
to grant the described license to the extent that the parties discover that this
belief is incorrect. Various products of the Business are manufactured or
assembled at a common site with 3M's cardiovascular perfusion/surgical products
business, and there may be trade secrets and know-how within Licensed
Intellectual Property that apply or are applicable to both the Business and 3M's
cardiovascular perfusion/surgical products business. This Section will be
construed to allow Linvatec and 3M to use such trade secrets and know-how within
their respective fields without breaching this Agreement or being sued for
misappropriation or infringement by the other party.
6.04 Trade Name and Trademark Restrictions. It is understood
and agreed that this Agreement does not constitute an agreement to transfer to
Linvatec the right to use: (i) the name 3M, (ii) any 3M corporate logo alone, or
(iii) any combination of any other mark or symbol with any of the marks
identified in Sections 6.04(i) or 6.04(ii), except as provided in Section 6.05.
6.05 Removal of 3M Trade Names. Within a reasonable period of
time not to exceed 120 days after expiration or termination of the Supply
Agreement but in no event longer than eighteen months after the Closing Date,
Linvatec shall remove all trade names and trademarks of 3M not included in the
Purchased Assets from all assets transferred to Linvatec hereunder; provided,
however, that it is understood and agreed that with respect to product
literature and other assets where removal of such trade names or trademarks
would result in damage to such asset, Linvatec may instead relabel such assets
to conceal such trade names or trademarks.
<PAGE>
6.06 Intellectual Property Agreement Assumptions. Linvatec
agrees to assume all of 3M's obligations, duties, liabilities and commitments
pursuant to the IP Agreements including but not limited to any obligation for 3M
to pay any royalty. Linvatec agrees to forever hold 3M harmless, defend 3M and
indemnify 3M for any damages, penalties or expenses incurred, including
reasonable attorney expenses, with respect to any claim or cause of action of
any description (regardless of the theory of liability) related to the alleged
breach of Linvatec's or 3M's or assumed obligations under the IP Agreements.
Without limiting the generality of the previous portion of this section,
Linvatec agrees to forever hold 3M harmless, defend 3M and indemnify 3M for any
damages with respect to a) any cause of action alleging that any third party is
entitled to a royalty for sales after the Closing Date pursuant to the IP
Agreements, or b) any cause of action for a breach of any of the IP Agreements
arising out of this Agreement or the assignment of any IP Agreement to Linvatec.
The consideration paid by Linvatec for the transfer of the IP Agreements shall
include the assumption by Linvatec of the duties, liabilities, obligations and
commitments relating to the Intellectual Property Agreements as set forth in
this Section of the Agreement.
6.07 Warranties. 3M hereby warrants and represents, to its
knowledge, as follows:
(a) 3M has title to the patents, patent applications, design patents and
utility model registrations listed in Schedule 1.04. In
addition, such title is subject to or encumbered by the
agreements listed in Schedule 1.06;
(b) Neither 3M's Office of Intellectual Property Counsel nor 3M senior
executive management have received any unresolved written
claim since October 1, 1992 from any third party charging 3M
with infringement of any intellectual property right in
connection with 3M's conduct of the Business, except as
provided in Schedule 6.07(b);
(c) Schedule 1.04 represents a complete list of patents, patent
applications, design patents and utility model registrations
for which 3M has title that directly and solely relate to the
Business as conducted on the Closing Date, except for any
patent, patent application, design patent and utility model
registration for which 3M requested an outside counsel or
International patent firm to abandon more than six (6) months
before the Closing Date;
(d) Schedule 1.06 represents a complete list of IP Agreements; and
(e) 3M's Office of Intellectual Property Counsel has not received any
unresolved written claim since October 1, 1996 from any third
party claiming 3M is in breach of any IP Agreement in
connection with 3M's conduct of the Business, except as
provided in Schedule 6.07(e).
<PAGE>
6.08 Notice, Correction of Schedules. Linvatec will provide 3M
with prompt written notice identifying any item not listed on Schedule 1.04,
1.06, 6.07(b) or 6.07(e) that Linvatec comes to believe belongs on Schedule
1.04, 1.06, 6.07(b) or 6.07(e) along with an explanation as to why such missing
item belongs on Schedule 1.04, 1.06, 6.07(b) or 6.07(e). If 3M and Linvatec
agree that such item should have been listed, then 3M will use its best efforts
to provide a revised Schedule listing the missing item, subject to Section 8.03
(Unassignable Contracts) to the extent Section 8.03 would not constitute a
breach of any agreement that belongs on Schedule 6.07(b). At any time before the
Closing Date, 3M will have the unilateral right to add items to Schedules 1.04,
1.06, 6.07(b) or 6.07(e), although Linvatec will have the right to terminate
this Agreement pursuant to Section 11.01(e) if such addition constitutes an
Adverse Material Change.
6.09 Disclaimers. LINVATEC ACKNOWLEDGES THAT 3M HAS DISCLAIMED
(i) ANY REPRESENTATION OR WARRANTY OF INVENTORSHIP, TRANSFERABILITY, VALIDITY,
ORIGINALITY, ENFORCEABILITY, RELATIONSHIP TO ANY OTHER INTELLECTUAL PROPERTY
(E.G., WHETHER PATENTS ARE COUNTERPARTS OR EQUIVALENTS), NON-INFRINGEMENT,
RIGHT-TO-PRACTICE, SCOPE, STATUS (PENDING OR ISSUED) OR PRIORITY OF ANY
INTELLECTUAL PROPERTY RIGHT AND ANY AGREEMENT RELATING TO INTELLECTUAL PROPERTY;
(ii) ANY REPRESENTATION OR WARRANTY WITH RESPECT TO RIGHT TO PRACTICE AND
WHETHER ANY THIRD PARTY INTELLECTUAL PROPERTY RIGHT IS OR WOULD BE INFRINGED BY
THE BUSINESS, 3M PRODUCTS OR 3M PRODUCT LINE, AND (iii) ANY REPRESENTATION OR
WARRANTY REGARDING THE STATUS OF ANY IP AGREEMENT (FOR EXAMPLE, WHETHER THE
AGREEMENT IS BEING BREACHED).
6.10 Assignment Documents. Linvatec agrees to deliver to 3M at
the Closing assignment or transfer documents consistent with this Agreement and
reasonably acceptable to 3M of patents, patent applications, utility model
registrations, design patents, patent licenses assigned in this Article.
6.11 No Implied IP Transfers. It is expressly understood and
agreed that, other than the intellectual property expressly identified in
Article VI of this Agreement (and related Schedules thereof), this Agreement
does not transfer to Linvatec any interest in any intellectual property rights.
6.12 Dispute Resolution. Any dispute regarding the terms or
conditions of this Article or either party's performance or alleged breach of
any term or condition of this Article will be subject to the dispute resolution
provisions of section 11.02 except that 3M's Medical Markets Group Intellectual
Property Counsel will be substituted for the Medical Markets Group Counsel in
section 11.02(a).
6.13 Indemnity, Notice. This Article will be subject to the
provisions of Article X. In addition, effective eighteen months after the
Closing Date, Linvatec hereby releases 3M from any claim (whether known or
unknown) relating to intellectual property or this Article that is not the
subject of written notice provided to: Chief Intellectual Property Counsel, 3M
Office of Intellectual Property Counsel, P.O. Box. 33427, St. Paul, Minnesota
55133-3427, before eighteen months after the Closing Date.
6.14. Sublicensed Intellectual Property. Effective on the
Closing Date, 3M grants to Linvatec a non-exclusive, fully paid-up sublicense
under the Sublicensed IP Agreement with respect to the 3M Product Line to the
extent permitted in the provisions of such Sublicensed IP Agreement relating to
3M's sale of a product line to a third party. 3M will make the payment due under
section 5.b. of the Sublicensed IP Agreement on or before January 15, 1999.
<PAGE>
6.15 Other 3M Patent. Effective on the Closing Date, 3M agrees
and covenants not to sue Linvatec with respect to Linvatec's use (if any) of the
method claimed in US Patent No. 4,806,730 in Linvatec's conduct of the Business.
This covenant will also cover suppliers of Linvatec to the extent they practice
this method to supply Linvatec's needs with respect to the Business. This
covenant will be transferable by Linvatec to any assignee or successor of the
Business.
ARTICLE VII
Conditions to Closing
7.01 Conditions to Linvatec's Obligations. The obligations of
Linvatec to be performed at the Closing shall be subject to the satisfaction or
the waiver in writing by Linvatec at or prior to the Closing of the following
conditions:
(a) Each of the representations and warranties of 3M contained in this
Agreement shall be true in all material respects as of the
Closing with the same effect as though such representations
and warranties have been made as of the Closing, except for
any variations therein resulting from actions contemplated or
permitted by this Agreement, and each of the covenants to be
performed by 3M at or before the Closing pursuant to the terms
hereof shall have been duly performed in all material
respects. Linvatec shall have been furnished with a
certificate of 3M, executed on its behalf by an appropriate
officer of 3M and dated the Closing Date, certifying to the
foregoing effects.
(b) No action, suit or proceeding by any governmental authority shall be
pending against Linvatec or 3M which seeks to prevent the
consummation of the transactions contemplated by this
Agreement, and no injunction or order for any court or
administrative agency of competent jurisdiction shall be in
effect which restricts or prohibits the consummation by
Linvatec or 3M of the transactions contemplated by this
Agreement.
(c) Any waiting period (and any extension thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), applicable to the acquisition of the
Purchased Assets contemplated hereby shall have expired or
been terminated.
(d) 3M and Linvatec shall have executed a supply agreement in the form of
Exhibit B ("Supply Agreement") to ensure a smooth transition
during that period between the Closing and the commencement of
manufacturing by Linvatec.
<PAGE>
(e) Linvatec shall have received from 3M:
(i) A Bill of Sale in the form of Exhibit C.
(ii) Certificate of Good Standing.
(iii) Certified copies of 3M's corporate resolutions
authorizing the transaction contemplated hereby and
by the Supply Agreement.
(f) 3M shall have completed Schedule 2.02 (Excluded Assets). Any items
added by 3M to Schedule 2.02 between the signing of this
Agreement and the Closing must be approved by Linvatec, which
will not withhold its approval unreasonably.
7.02 Conditions to Obligations of 3M. The obligations of 3M to
be performed at the Closing shall be subject to the satisfaction or the waiver
in writing by 3M at or prior to the Closing of the following conditions:
(a) Each of the representations and warranties of Linvatec contained in
this Agreement shall be true in all material respects as of
the Closing with the same effect as though such
representations and warranties had been made as of the
Closing, except for any variations therein resulting from
actions contemplated or permitted by this Agreement, and each
of the covenants to be performed by Linvatec at or before the
Closing pursuant to the terms hereof shall have been duly
performed in all material respects. 3M shall have been
furnished with a certificate of Linvatec, executed on its
behalf by an appropriate officer of Linvatec and dated the
Closing Date, certifying to the foregoing effects.
(b) No action, suit or proceeding by any governmental authority shall be
pending against Linvatec or 3M which seeks to prevent the
consummation of the transactions contemplated by this
Agreement, and no injunction or order of any court or
administrative agency of competent jurisdiction shall be in
effect which restricts or prohibits the consummation by
Linvatec of 3M of the transactions contemplated by this
Agreement.
(c) Any waiting period (and any extension thereof) under the HSR Act
applicable to the acquisition of the Purchased Assets
contemplated hereby shall have expired or been terminated.
<PAGE>
ARTICLE VIII
Certain Agreements
8.01 Linvatec Investigation: No Representations or Warranties:
Exclusivity of Remedies.
(a) LINVATEC HEREBY ACKNOWLEDGES THAT IT HAS EVALUATED AND CONDUCTED
THOROUGH DUE DILIGENCE WITH RESPECT TO THE 3M PRODUCT LINE.
THE PURCHASED ASSETS AND THE BUSINESS (INCLUDING THE
OPERATIONS, CONTRACTS, CUSTOMER FILES, MANUFACTURING PROCESS,
INTELLECTUAL PROPERTY, FINANCIAL INFORMATION AND PROSPECTS OF
THE BUSINESS (INCLUDING BUT NOT LIMITED TO ANY DOCUMENTS
PROVIDED TO LINVATEC BY 3M), AND HAS BEEN REPRESENTED BY, AND
HAD THE ASSISTANCE OF, COUNSEL (INCLUDING BUT NOT LIMITED TO
INTELLECTUAL PROPERTY COUNSEL) IN THE CONDUCT OF SUCH DUE
DILIGENCE, THE PREPARATION AND NEGOTIATION OF THIS AGREEMENT
AND THE TRANSACTION DOCUMENTS, AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
(b) 3M HAS MADE AVAILABLE TO LINVATEC AND ITS REPRESENTATIVES CERTAIN
INFORMATION AND RECORDS RELATING TO THE 3M PRODUCT LINE, THE
PURCHASED ASSETS AND THE BUSINESS. IT IS UNDERSTOOD AND AGREED
BY THE PARTIES THAT NO REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, HAS BEEN MADE BY 3M OR ITS AGENTS REGARDING THE
ACCURACY OR COMPLETENESS OF ANY SUCH INFORMATION OR RECORDS,
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR ANY OF THE
TRANSACTION DOCUMENTS, AND THAT 3M WILL NOT HAVE OR BE SUBJECT
TO ANY LIABILITY TO LINVATEC OR ANY OTHER PERSON RESULTING
FROM THE DISTRIBUTION TO LINVATEC, OR LINVATEC'S USE, OF ANY
SUCH INFORMATION OR RECORDS, EXCEPT AS EXPRESSLY PROVIDED IN
THIS AGREEMENT. FURTHERMORE, LINVATEC AGREES THAT IT IS
ACCEPTING POSSESSION OF THE PURCHASED ASSETS AT THE CLOSING
"AS IS, WHERE IS, WITH ALL FAULTS," WITH NO RESULTING RIGHT OF
SET-OFF OR REDUCTION IN THE PURCHASE PRICE, AND THAT, EXCEPT
AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR ANY OF THE
TRANSACTION DOCUMENTS, THE SALE OF THE PURCHASED ASSETS IS
BEING MADE WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF INCOME
POTENTIAL, OPERATION EXPENSE, USE, MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, ALL OF WHICH REPRESENTATIONS AND
WARRANTIES ARE HEREBY DISCLAIMED AND RENOUNCED BY 3M.
(c) LINVATEC ACKNOWLEDGES AND AGREES THAT, EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN SECTION 5, ITS SOLE AND EXCLUSIVE REMEDY WITH
RESPECT TO ANY AND ALL CLAIMS RELATING TO THE SUBJECT MATTER
OF THIS AGREEMENT (INCLUDING CLAIMS FOR BREACHES OF
REPRESENTATIONS, WARRANTIES AND COVENANTS CONTAINED IN THIS
AGREEMENT) SHALL BE PURSUANT TO THE INDEMNIFICATION PROVISIONS
SET FORTH IN ARTICLE XI.
(d) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, NO CLAIMS RELATING TO
THE SUBJECT MATTER OF THIS AGREEMENT MAY BE BROUGHT BY
LINVATEC AGAINST ANY DIRECTOR, OFFICER OR EMPLOYEE 3M IN HIS
OR HER INDIVIDUAL CAPACITY.
<PAGE>
8.02 Conduct of Business. Except as expressly contemplated by
this Agreement, from the date hereof until the Closing, 3M will conduct the
Business in the usual and ordinary course. 3M specifically agrees that it will
not (i) enter into any agreements with respect to the Business that are less
favorable than contracts currently in place, (ii) enter into new contracts
without the prior written consent of Linvatec, (iii) give away any products or
services associated with the Business without the prior written consent of
Linvatec (iv) offer or provide its products to customers, distributors or others
in any special incentive pricing packages, including any bundled sales of the
Products with other medical or other products, except as may be necessary to
meet competitive pricing in the markets for the Product being sold as part of
the Business and only then after receiving proof of approval from Linvatec; and
(v) offer discounted pricing or free products in connection with any effort to
sell other 3M products.
8.03 Unassignable Contracts. Notwithstanding anything to the
contrary stated in this Agreement, but subject to Article VI (Intellectual
Property), if any Contract cannot be assigned to or assumed by Linvatec without
the approval, consent or waiver of another party thereto, and such approval,
consent or waiver has not been obtained at or prior to the Closing, then (i)
such Contract shall not be assigned to or assumed by Linvatec at the Closing,
(ii) 3M and Linvatec shall, if such approval, consent or waiver is obtained
following the Closing, promptly thereafter execute all documents necessary to
complete the assignment and assumption of such Contract (at Linvatec's expense),
and (iii) unless and until such approval, consent or waiver is obtained and such
assignment and assumption occurs, 3M shall hold the benefits and privileges of
such Contract arising after the Closing Date in trust for Linvatec and Linvatec
will indemnify and hold harmless 3M against and with respect to all obligations
of 3M payable or performable after the Closing Date under such Contract. Each of
3M and Linvatec agrees to use reasonable efforts to promptly obtain all
approvals, consents and waivers from third parties to the Contracts which are
necessary to permit the Contracts to be assigned to and assumed by Linvatec,
provided that neither 3M nor Linvatec shall be obligated to make any payment or
offer or grant any accommodation (financial or otherwise) in exchange for any
such approval, consent or waiver.
8.04 Bulk Transfer Laws. 3M and Linvatec mutually waive
compliance with the provisions of any applicable state bulk transfer laws,
including any state tax laws relating to the obligations of buyers of assets in
bulk transfers.
8.05 Removal of Assets. Linvatec agrees to assume
responsibility for, and pay all expenses in connection with transporting and
relocating those Purchased Assets which at the Closing are located at any of
3M's facilities. Such removal shall be completed within thirty (30) days after
the termination of the Supply Agreement. 3M agrees to give Linvatec, its agents
and employees access to such facilities at reasonable times and upon reasonable
notice, and reasonable assistance for purposes of removing such Purchased
Assets. 3M shall have no liability to Linvatec in connection with the removal
from, such facilities of the Purchased Assets after the Closing, and risk of
loss with respect to such Purchased Assets shall pass to Linvatec on the
Closing. Linvatec shall be responsible for the costs of repairing any damage to
such facilities resulting from the removal of the Purchased Assets therefrom.
<PAGE>
8.06 [Intentionally omitted]
8.07 Record Retention. Linvatec shall retain all business
files and documents included in the Purchased Assets and so specified in
Schedule 8.07 (Record Retention) for a period of ten years after the Closing
Date, and Linvatec shall make available to 3M any such records for inspection
and copying, upon reasonable notice from 3M.
8.08 Governmental Filings. Unless such Notification and Report
Form has already been filed, Linvatec and 3M agree to make or cause their
affiliates to make an appropriate filing of a Notification and Report Form
pursuant to the HSR Act with respect to the transactions contemplated hereby
within five business days of the date hereof, to supply promptly any additional
information and documentary material that may be requested pursuant to the HSR
Act, and to use all reasonable efforts to obtain an early termination of any
applicable waiting period under the HSR Act.
8.09 Further Assurances. For a period of one (1) year
following the Closing Date, 3M shall promptly execute, acknowledge and deliver
any further assignments, conveyances and other instruments of transfer
reasonably requested by Linvatec and necessary to effectuate the transfer of
title to the Purchased Assets to Linvatec and, at Linvatec's expense, will take
any other action consistent with the terms of this Agreement that may be
reasonably be requested by Linvatec for the purpose of assigning, transferring,
granting, and confirming ownership in or to Linvatec, or reducing to Linvatec's
possession, any or all of the Purchased Assets.
8.10 Further Assistance. For a period of one (1) year, 3M
agrees to complete any documents necessary to show that Linvatec did not assume
assets with liens or outstanding tax obligations.
8.11 No Adverse Material Change. 3M agrees that it will make
all commercially reasonable efforts to maintain the Business at its current
levels up to and through Closing, and that there will be no Adverse Material
Change in the Business prior to and up to the Closing.
8.12 Product Liability Assistance. 3M will assist Linvatec
with the defense of any and all future product liability actions brought within
one (1) year after Closing, and will make reasonably available any retained
employees to assist in the defense of any such actions, with Linvatec being
responsible only for out-of-pocket travel expenses, if any, incurred by such 3M
employees therewith. Linvatec will similarly assist 3M with the defense of any
and all product liability actions brought prior to Closing or against which 3M
is obligated to defend according to Section 10.02(b).
<PAGE>
8.13 Non-Competition Agreement. For a period of five (5) years
following the Closing Date, neither 3M, nor any of the Affiliates of 3M shall
sell directly or indirectly anywhere within the United States or U.S. territory
and any foreign country any 3M Products being sold in this Agreement. If at the
time of enforcement of this Section 8.13, the court shall hold that the
duration, scope or area restrictions stated herein are unreasonable under
circumstances then existing, the parties agree that the maximum duration, scope
or area reasonable under such circumstances shall be substituted for the stated
duration, scope or area, but in no event in excess of the stated duration, scope
or area. In an action in law or in equity for breach or enforcement of this
Section 8.13 brought in any court having competent jurisdiction over the parties
to such an action, the prevailing party shall be entitled to recover from the
other party or parties its reasonable attorneys fees, costs and expenses
associated with prosecuting or defending such an action to its final disposition
(including final dispositions by summary adjudication, judge or jury verdict or
final appeal).
8.14 [Intentionally omitted]
8.15 Misdirected Payments. The parties anticipate that certain
third parties, including customers and vendors, may misdirect payments or goods
to 3M rather than to Linvatec, or to Linvatec rather than 3M. 3M and Linvatec
agree to notify and to forward to the other promptly any such misdirected
payments or goods.
8.16 Transition Agreement. 3M will assist Linvatec in the
transition of the business. 3M and Linvatec will send a joint letter to
customers of the Business informing them that Linvatec has purchased the
Business. 3M will introduce the appropriate Linvatec represesentative to the
customers. If, at any time within eighteen (18) months after Closing, customers
contact 3M to purchase 3M Products sold through this Agreement, 3M will notify
those customers that the 3M Products are available from Linvatec.
8.17 Vendor Assignments or Assistance. 3M shall assist
Linvatec in transferring or assigning, or entering into supply agreements with
vendors or with 3M or its affiliates, as Linvatec may require.
8.18 Independent Sales Representatives. Linvatec will pay 50%
of all commissions and incentive payments that 3M is obligated to pay to
independent sales representatives for sales of 3M Products occurring from
Closing through December 31, 1998. 3M will pay the full amount of the
commissions and incentive payments to the independent sales representatives and
deduct the amount owed by Linvatec from the prepayment stated in the Supply
Agreement.
8.19 3M Materials and Components. "3M Materials and
Components" are materials and components that 3M uses in the 3M Products but are
not included in the Purchased Assetsand for which there are no substitutes
available from another supplier. 3M will supply 3M Materials and Components to
Linvatec for the manufacture of 3M Products by Linvatec for one year from the
end of the Supply Agreement at prices it charges to similar customers who
purchase like quantities of the 3M Materials and Components.
<PAGE>
ARTICLE VIIIA
Employees
8A.1 In the event Buyer offers employment to 3M employees and
3M employees accept this offer of employment at the time of closing, they shall
be referred to as "Transferred Employees".
8A.2 Benefits. Buyer will provide coverage and benefits to the
Transferred Employees under same pension and welfare benefit plans covering its
salaried employees, and 3M will have no responsibility therefor on and after
such date. 3M shall remain responsible to the Transferred Employees for all
benefits accrued pursuant to 3M benefit plans prior to the closing date and
payable under the provisions of such plans. Buyer assumes no liability or
obligation therefor.
8A.3 Service Credit. Buyer shall cause each of its pension and
welfare benefit plans to recognize all of the service that the Transferred
Employees completed with 3M for purposes of determining their eligibility to
participate in, eligibility for benefits under, vesting in accrued benefits, and
accrual of benefits under such plans (except for Buyer's Defined Benefit Pension
Plan.)
8A.4 Group Health Plans. Buyer will cause its group health
benefit plans to (i) waive any exclusions for pre-existing conditions affecting
Transferred Employees and their eligible family members, and (ii) recognize any
out of pocket medical and dental expenses incurred by Transferred Employees and
their eligible family members during 1998, but prior to the Closing Date, for
purposes of determining their deductibles and out of pocket maximums under
Buyer's plans.
8A.5 Vacation Benefits. Transferred Employees will be covered
by and begin accruing benefits under Buyer's vacation plan covering its salaried
employees. Buyer's vacation plan shall recognize all of the Transferred
Employees' years of service with 3M for the purpose of determining their future
vacation benefits.
ARTICLE IX
Closing
9.01 Closing Date. The closing of the purchase and sale of the
Purchased Assets and the assumption of the Assumed Liabilities pursuant to this
Agreement (the "Closing") shall take place on November 5, 1998, at the offices
of 3M, at 10:00 a.m., or, if the conditions to Closing set forth in Article V
shall not have been satisfied or waived by the appropriate party by such time of
day on such date, at the same time of day on the first business day to occur
following the date on which all of the conditions to Closing set forth in
Article VII shall have been satisfied or waived as provided therein (subject to
the provisions of Section 11.01), or at such other date, place or time as
Linvatec and 3M may agree upon in writing. The date on which the Closing shall
be required to occur, as determined in accordance with this Section 9.01, is
herein referred to as the "Closing Date". The Closing shall be deemed to have
become effective as of the start of business on the Closing Date.
<PAGE>
9.02 Closing Deliveries.
(a) 3M agrees to deliver to Linvatec at the Closing such bills of
sale, assignments and other instruments of transfer (excluding
transfer of Intellectual Property or IP Agreements), in form
and substance reasonably satisfactory to Linvatec, as shall be
necessary or appropriate to effect the conveyance to Linvatec
of the Purchased Assets (without representation or warranty
except as expressly provided in this Agreement), duly executed
by 3M.
(b) Linvatec agrees to pay or deliver, as the case may be, to 3M at the Closing
the following:
(i) An assumption agreement, in form of Exhibit D, effecting the
assumption by Linvatec of the Assumed Liabilities, duly
executed by Linvatec;
(ii) The Purchase Price paid in the manner provided in Section
3.01; and
(iii) Intellectual property assignment or transfer documents as
provided in Article VI.
(c) The certificates, instruments and documents executed and delivered by
the parties at the Closing pursuant to this Agreement are
herein collectively referred to as the "Transaction
Documents".
9.03 Post-Closing Deliveries. Each of Linvatec and 3M will, at
the request and sole cost and expense of the other such party, do, make,
execute, acknowledge and deliver after the Closing all such other and further
acts and instruments of conveyance, assignment, transfer, consent and assumption
as Linvatec may reasonably require to confirm conveyance and transfer to
Linvatec of any of the Purchased Assets or as 3M may reasonably required to
confirm assumption by Linvatec of any of the Assumed Liabilities. Nothing
contained herein shall be construed to require 3M to acquire any intellectual
property license from any third party.
ARTICLE X
Indemnity
10.01 Survival. The representations and warranties of Linvatec
and 3M herein or in any of the Transaction Documents shall survive the Closing,
but, as to any claim, only for so long as the indemnification obligations under
this Agreement with respect to such claim remain in force as provided in
Sections 8.09, 8.10, 8.12, 8.13, 8.16, , 10.02(d) or 10.03(b), as the case may
be.
<PAGE>
10.02 Indemnity by 3M.
(a) 3M hereby agrees to indemnify and hold harmless Linvatec against and
with respect to any and all claims, losses, injuries, damages,
deficiencies, liabilities, obligations, assessments,
judgments, costs and expenses, including (except as otherwise
expressly provided in this Agreement) costs and expenses of
litigation and reasonable attorneys' fees ("Losses"), suffered
or incurred by Linvatec to the extent caused proximately by:
(i) any material breach of any representation or warranty
of 3M contained in this Agreement;
(ii) any material non-fulfillment of any covenant or
agreement of 3M contained in this Agreement;
(iii) any failure of the parties, in connection with the
transactions contemplated hereby, to comply fully
with the provisions of any applicable state bulk
transfer laws, including any state tax laws relating
to the obligations of Linvatecs of assets in bulk
transfers (provided that in no event shall 3M be
required to indemnify Linvatec hereunder with respect
to any liability for which Linvatec would have been
obligated even had such laws been fully complied
with, including any Assumed Liabilities or any other
liabilities or obligations that Linvatec has
expressly agreed to pay or be responsible for
pursuant to this Agreement);
(iv) with respect to any claim of infringement of third
party intellectual property rights, any sales of 3M
Products by 3M before the Closing Date.
(b) 3M hereby agrees to indemnify and defend Linvatec against any and all
claims, suits, actions or proceedings for personal injuries
alleged to have been caused by 3M Products prior to Closing.
<PAGE>
(c) 3M hereby agrees to pay Linvatec's actual expenses incurred in
recalling 3M Products sold prior to Closing if a recall is
required within six months after Closing. `Actual expenses'
include Linvatec's actual costs of collecting the recalled
product (if required), repairing or replacing the recalled
product, or refunding the appropriate proportional amount of
the purchase price. Linvatec will give 3M prompt notice of any
recall for which 3M is obligated to pay the actual expenses.
Linvatec will choose the least costly among repairing,
replacing or refunding the appropriate proportional amount of
the purchase price of the recalled products. 3M is not
obligated to pay for expenses associated with identifying the
cause of the problem creating the need to recall or with
developing the appropriate correction.
(d) Notwithstanding anything to the contrary provided elsewhere in this
Agreement, the obligations of 3M under this Agreement to
indemnify Linvatec with respect to any claim pursuant to
clause (i) of Section 10.02(a) shall be of no force unless
Linvatec has given 3M written notice of such claim prior to
the eighteen (18) months after the Closing Date.
(e) Notwithstanding anything to the contrary provided elsewhere in this
Agreement, in no event shall 3M be liable to Linvatec for
amounts payable under clause (i) of Section 10.02(a) until
such amounts exceed in the aggregate $50,000.
(f) Notwithstanding anything to the contrary provided in this Agreement, in
no event shall 3M be liable to Linvatec for amounts payable
under clauses (i) and (ii) of Section 10.02(a) and Section
10.02(c) to the extent such amounts exceed in the aggregate
fifty percent (50%) of the Purchase Price.
10.03 Indemnity by Linvatec.
(a) Linvatec hereby agrees to indemnify and hold harmless 3M against and
with respect to any and all Losses suffered or incurred by 3M
to the extent caused proximately by:
(i) Any material breach of any representation or warranty
of Linvatec contained in this Agreement or in any of
the Transaction Documents; or
(ii) Any material non-fulfillment of any covenant or
agreement of Linvatec contained in this Agreement or
in any of the Transaction Documents; or
(iii) Any claims which are brought against 3M as a result
of the retention by Linvatec after the Closing on any
assets transferred to Linvatec hereunder of any trade
names or trademarks of 3M not included in the
Purchased Assets, as permitted by Article VI
(Intellectual Property); or
(iv) The Assumed Liabilities; or
(v) With respect to any claim of infringement of third
party intellectual property rights, any sales of
products by Linvatec after the Closing Date.
<PAGE>
(b) Notwithstanding anything to the contrary provided elsewhere in this
Agreement the obligation of Linvatec under this Agreement to
indemnify 3M with respect to any claim pursuant to Section
10.03(a) shall be of no force unless 3M has given Linvatec
written notice of such claim within eighteen (18) months after
the Closing Date.
(c) Notwithstanding anything to the contrary provided elsewhere in this
Agreement, in no event shall Linvatec be liable for amounts
payable under Section 10.03(a) until such amounts exceed
$50,000.
10.04 Third Party Claims. In order for a party (the
"indemnified party") to be entitled to any indemnification provided for under
this Agreement in respect of, arising out of or involving a claim or demand made
by any third party against the indemnified party (a "Third Party Claim"), such
indemnified party shall notify the other party (the "indemnifying party") in
writing of the Third Party Claim, and deliver to the indemnifying party copies
of all notices and documents accompanying or constituting the Third Party Claim,
within ten business days after obtaining notice thereof; 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 and except that the indemnifying party
shall have been actually prejudiced as a result of such failure and 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, within five
business days 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; provided, however that failure to deliver
such copies 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. If a Third Party Claim is made against an indemnified
party, the indemnifying party will be entitled to participate in the defense
thereof and, if it so chooses, to assume the defense thereof with counsel
selected by the indemnifying party and reasonably satisfactory to the
indemnified party. Should the indemnifying party so elect to assume the defense
of a Third Party Claim, which election must be made within 30 days after the
indemnifying party receives notice of the Third Party Claim from the indemnified
party, the indemnifying party will not be liable to the indemnified party for
legal expenses incurred by the indemnified party in connection with the defense
thereof. If the indemnifying party assumes such defense, the indemnified party
shall have the right, but not the obligation, to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the indemnifying party, it being understood that the indemnifying
party shall control such defense. If the indemnifying party has not assumed the
defense of a Third Party Claim, the indemnifying party shall be liable for the
fees and expenses of counsel employed by the indemnified party. If the
indemnifying party chooses to defend or prosecute any Third Party Claim, the
indemnified party shall cooperate in the defense or prosecution thereof with
reimbursement by the indemnifying party only of reasonable out-of-pocket
expenses of the indemnified party incurred in connection therewith. 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.
<PAGE>
ARTICLE XI
Miscellaneous
11.01 Termination. This Agreement may be terminated and the
transactions contemplated hereby abandoned prior to the Closing:
(a) By Linvatec giving written notice to 3M, if 3M shall be in breach in
any material respect of any representation, warranty or
covenant contained in this Agreement (provided that no such
termination shall occur unless Linvatec shall have given
notice to 3M of such breach, specifying in reasonable detail
the nature of such breach, and such breach shall not have been
cured in all material respects within 30 days after such
notice is given), or if the conditions set forth in Section
7.01 shall become impossible to fulfill other than for reasons
totally within the control Linvatec and shall not have been
waived in writing by Linvatec;
(b) By 3M giving written notice to Linvatec, if Linvatec shall be in breach
in any material respect of any representation, warranty or
covenant contained in this Agreement (provided that no such
termination shall occur unless 3M shall have given notice to
Linvatec of such breach, specifying in reasonable detail the
nature of such breach, and such breach shall not have been
cured in all material respects within 30 days after such
notice is given), or in the conditions set forth in Section
7.02 shall have become impossible to fulfill other than for
reasons totally within the control of 3M and shall not have
been waived in writing by 3M;
(c) By mutual agreement of 3M and Linvatec; and
(d) By Linvatec or 3M giving written notice to the other such party, if the
purchase and sale of the Purchased Assets and the assumption
of the Assumed Liabilities contemplated hereby shall not have
been consummated by December 15, 1998, unless such failure
shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe any covenants contained
in this Agreement required to be performed or observed by such
party at or before the Closing.
(e) By Linvatec, if there is any Adverse Material Change in the Business.
<PAGE>
(f) If this Agreement is terminated pursuant to any of the provisions
hereof, each of the parties hereto shall thereupon be released from all
liabilities hereunder, except:
(i) Liabilities for any default under this Agreement which shall
have occurred prior to the effective date of such termination,
(ii) All confidentiality obligations pursuant to the Agreement
dated July 27, 1998, and
(iii) Obligations set forth in Sections 11.03 and 11.13.
11.02 Dispute Resolution
(a) Any disagreement or dispute between the parties arising out of or
related to this Agreement or the breach or making hereof (a
"Dispute") shall be resolved in the manner provided in this
Section 11.02. Should there develop any Dispute, either party
may, by written notice to the other party, request that such
Dispute be referred to the Medical Markets Group Counsel of 3M
or Medical Markets Intellectual Property Counsel (for
intellectual property issues) and the General Counsel of
Linvatec (the "Principals"), who shall negotiate in good faith
to attempt to resolve the Dispute. No settlement reached under
this Section 11.02(a) shall be binding on the parties until
reduced to a writing signed on behalf of the parties by the
Principals.
(b) Should the procedure outlined in Section 11.02(a) fail to bring about a
resolution of each outstanding Dispute within 30 days
following the giving of the notice referred to therein, then
the parties shall promptly initiate a voluntary, non-binding
mediation conducted by a mutually-agreed mediator. Should the
parties for any reason be unable to agree upon a mediator,
they shall request the clerk of court of the Hennepin County
District Court in the State of Minnesota to appoint a capable
mediator for them. Linvatec and 3M shall each bear one-half of
the costs and expenses of the mediation and shall endeavor in
good faith to resolve therein each outstanding Dispute. No
settlement reached under this Section 11.02(b) shall be
binding on the parties until reduced to a writing signed on
behalf of the parties by the Principals.
(c) In the event the parties are unable to resolve any outstanding
Dispute as provided above within 60 days following
commencement of mediation, then either party may initiate
legal action as provided in Section 11.09.
<PAGE>
(d) Notwithstanding anything to the contrary provided in this
Section 11.02, and without prejudice to the above procedures,
either party may at any time, in connection with any Dispute,
apply to a court of competent jurisdiction for temporary
injunctive or other provisional judicial relief if in such
party's sole judgment such action is necessary to avoid
irreparable damage or to preserve the status quo until such
time as the arbitration award is rendered or the Dispute is
otherwise resolved in accordance with this Section 11.02.
11.03 Expenses. Except as otherwise expressly provided herein,
each party hereto shall pay its own legal, accounting and other expenses
incident to the preparation of, and consummation of the transactions
contemplated by, this Agreement. Each party shall pay its own filing fees under
the HSR Act.
11.04 Titles. The titles of the Articles and Sections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
11.05 Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof,
superseding all negotiations, prior discussions and preliminary agreements.
11.06 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be considered an original and all of
which shall constitute one and the same instrument.
11.07 Waivers, Consents and Amendments. Any failure of either
of the parties to comply with any obligation, covenant, agreement or condition
herein may be waived by the other party only by a written instrument signed by
such other party, but such waiver or failure to insist upon strict compliance
with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
Whenever this Agreement requires or permits consent by or on behalf of either
party hereto, such consent shall be given in writing in a manner consistent with
the requirements for a waiver of compliance as set forth herein. This Agreement
may be amended only by an agreement, in writing, signed by the parties hereto.
11.08 Governing Law. This Agreement shall be governed in all
respects by, and construed under, the laws of the State of Minnesota.
<PAGE>
11.09 Jurisdiction. Subject to the provisions of Section
11.02, each of 3M and Linvatec (i) irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in Minnesota for the
purposes of any suit, action or other proceeding arising out of this Agreement
or the transactions contemplated hereby (and agrees not to commence any action,
suit or proceeding relating hereto except in any such court), (ii) agrees that
service of any process, summons, notice or document by United States registered
mail to such party's respective address set forth in Section 11.12 shall be
effective service of process for any action, suit or proceeding in Minnesota
with respect to which it has submitted to jurisdiction as set forth above, and
(iii) irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in any state or federal courts sitting in
Minnesota and agrees not to plead or claim in any such court that any such
action, suit or proceeding brought therein has been brought in an inconvenient
forum. Each of 3M and Linvatec acknowledges that the time and expense required
for trial by jury exceed the time and expense required for a bench trial and
hereby waive, to the extent permitted by law, trial by jury.
11.10 SPECIAL DAMAGES. LINVATEC AND 3M HAVE EACH AGREED TO
WAIVE ANY RIGHT TO RECEIVE PUNITIVE, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES
RELATING IN ANY WAY TO THIS AGREEMENT OR THE PURCHASE/SALE OF THE BUSINESS
AND/OR THE PURCHASED ASSETS, IRRESPECTIVE OF THE LEGAL THEORY ASSERTED.
11.11 Severability of this Agreement. In case any provision of
this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
11.12 Assignment. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of the parties hereto, provided
that this Agreement may not be assigned by either party without the prior
written consent of the other party. Except as expressly provided herein, this
Agreement is for the sole benefit of the parties hereto and nothing herein shall
give or be construed to give to any person other than the parties any legal or
equitable rights under this Agreement.
11.13 Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given upon delivery in person, or one day after the same shall have been
sent by overnight messenger service, or three days after the same shall have
been mailed by registered or certified mail, postage prepaid, return receipt
requested, to the respective parties at the following addresses:
If to Linvatec: Linvatec Corporation
11311 Concept Boulevard
Largo, Florida 33773
Attention: President
with a copy: CONMED Corporation
310 Broad St.
Utica, New York 13501
Attention: President
If to 3M: Minnesota Mining and Manufacturing Company
Post Office Box 33428
Saint Paul, Minnesota 55133
Attention: John Ursu
<PAGE>
11.14 Public Announcements. No press releases or public
announcements regarding the terms of this Agreement shall be made by either
party without the prior written approval of the other party (which approval
shall not be unreasonably withheld), except as may be necessary, in the opinion
of counsel for such party, to meet the requirements of any law or governmental
regulation or any applicable exchange regulation (in which event the other party
will be notified before, if practical under the circumstances, and after any
action is taken thereon).
11.15 Tax Treatment. It is expressly understood and agreed
that none of 3M, Linvatec or any of their respective officers or agents have
made any warranty or agreement, express or implied, as to the tax consequences
of the transactions contemplated hereby.
11.16 Specific Performance. Each of the parties hereto
acknowledges and agrees that the other party would be damaged irreparably in the
event any of the covenants contained in this Agreement are not performed in
accordance with their specific terms or otherwise are breached. Accordingly,
each of the parties hereto agrees that the other party shall be entitled to an
injunction or injunctions to prevent breaches of the covenants contained in this
Agreement and to enforce specifically this Agreement and the covenants contained
herein in any action properly instituted, in addition to any other remedy to
which such other party may be entitled under this Agreement or at law or in
equity.
11.17 Disclosures.
(a) Matters disclosed by 3M to Linvatec in this Agreement or the Schedules
hereto are not necessarily limited to matters required to be
disclosed by this Agreement. Any such additional matters are
set forth for informational purposes and do not necessarily
include other matters of a similar nature. Matters disclosed
by 3M to Linvatec in any provision of this Agreement or any
Schedule hereto shall be deemed to be disclosed with respect
to each provision of this Agreement to the extent such
provision requires such disclosure.
(b) From time to time prior to the Closing, 3M will promptly supplement or
amend the Schedules hereto with respect to any matter
hereafter arising which would make any representation or
warranty set forth in Sections 5.01 or 6.07 inaccurate if not
updated as of the Closing, or as is otherwise necessary to
correct any information in such Schedules or in any
representation or warranty of 3M made in Sections 5.01 or 6.07
(subject to Section 6.08). For purposes of determining the
satisfaction of the condition set forth in Section 7.01(a) at
or prior to the Closing and the accuracy of the
representations and warranties contained in Sections 5.01 or
6.07 if the Closing does not occur, the Schedules hereto shall
be deemed to include boththat information contained therein on
the date of this Agreement and any information contained in
any subsequent supplement or amendment thereto. Moreover, for
purposes of determining the accuracy of the representations or
warranties of 3M contained in Sections 5.01 or 6.07 or the
liability of 3M with respect thereto under Section 11.02(a)
should the Closing occur, the Schedules hereto shall be deemed
to include all information contained in any subsequent
supplement or amendment thereto.
<PAGE>
11.18 Interpretation. In this Agreement:
(a) words denoting the singular include the plural and vice versa and words
denoting any gender include all genders;
(b) the word "including" shall mean "including without limitation";
(c) the word "affiliate" shall have the meaning set forth in Rule 12b-2 of
the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended;
(d) the word "person" shall mean and include an individual, a partnership,
a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency
thereof;
(e) the word "business day" shall mean any day other than a Saturday,
Sunday or a day which is a statutory holiday under the laws of
the United States or the State of Minnesota;
(f) when calculating the period of time within which or following which any
act is to be done or step taken, the date which is the
reference day in calculating such period shall be excluded
and, if the last day of such period is not a business day, the
period shall end on the next day which is a business day; and
(g) all dollar amounts are expressed in United States funds.
[Remainder of page intentionally left blank].
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above written.
ATTEST: MINNESOTA MINING AND
MANUFACTURING COMPANY
________________________ By:
Its
ATTEST: LINVATEC CORPORATION
________________________ By:
Its
EXHIBIT 11
CONMED Corporation
Computation of Weighted Average Number of Shares of Common Stock
<TABLE>
<CAPTION>
Year Ended December,
(in thousands)
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Shares outstanding at beginning of period................................. 11,000 14,989 15,062
Weighted average shares issued............................................ 3,045 8 23
------ ------ ------
Shares used in the calculation of basic EPS
(weighted average shares outstanding)................................ 14,045 14,997 15,085
Effect of dilutive potential securities........................................ 451 - 236
------ ------ ------
Shares used in the calculation of diluted EPS............................. 14,496 14,997 15,321
====== ====== ======
</TABLE>
EXHIBIT 12
CONMED Corporation
Statement Showing Computations of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes
and extraordinary item $ 8,306 $ 16,763 $ 25,447 $ (10,705) $ 30,276
Interest expense 628 1,991 217 - 30,891
Portion of rentals representative of
interest factor 146 146 108 147 875
--------- --------- --------- --------- ---------
Total earnings available for fixed
charges $ 9,080 $18,900 $25,772 $(10,558) $ 62,042
========= ========= ========= ========= =========
Interest expense $ 628 $ 1,991 $ 217 $ - $ 30,891
Portion of rentals representative of
interest factor 146 146 108 147 875
--------- --------- --------- --------- ---------
Total fixed charges $ 774 $ 2,137 $ 325 $ 147 $ 31,766
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 11.73 8.84 79.30 (A) 1.95
========= ========= ========= ========= =========
</TABLE>
(A) As a result of the loss incurred in 1998, the Company was unable to fully
cover the indicated fixed charges.
EXHIBIT 21
CONMED Corporation
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name State of Incorporation
<S> <C>
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
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-23514, 33-48693, 33-49422, 33-49526, and
33-74497) of CONMED Corporation of our report dated February 9, 1999 appearing
on page F-1 of the 1998 Annual Report on Form 10-K.
Pricewaterhouse Coopers LLP
Syracuse, New York
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,906
<SECURITIES> 0
<RECEIVABLES> 69,032
<ALLOWANCES> (2,213)
<INVENTORY> 78,058
<CURRENT-ASSETS> 159,620
<PP&E> 90,194
<DEPRECIATION> (29,407)
<TOTAL-ASSETS> 628,784
<CURRENT-LIABILITIES> 66,196
<BONDS> 384,872
0
0
<COMMON> 152
<OTHER-SE> 182,016
<TOTAL-LIABILITY-AND-EQUITY> 628,784
<SALES> 336,442
<TOTAL-REVENUES> 336,442
<CGS> 169,559
<TOTAL-COSTS> 169,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,891
<INCOME-PRETAX> 30,276
<INCOME-TAX> 10,899
<INCOME-CONTINUING> 19,377
<DISCONTINUED> 0
<EXTRAORDINARY> (1,569)
<CHANGES> 0
<NET-INCOME> 17,808
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.16
</TABLE>
